NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2018
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Business
Overview
True
Drinks
Holdings, Inc. (the “
Company
,” “
us
” or “
we
”) was incorporated in the state of Nevada
in January 2001 and is the holding company for True Drinks, Inc.
(“
True Drinks
”), a company incorporated in the state of
Delaware in January 2012 that specialized in all-natural,
vitamin-enhanced drinks. Previously, our primary business was the
development, marketing, sale and distribution of AquaBall®
Naturally Flavored Water. We distributed AquaBall® nationally
through select retail channels, such as grocery stores, mass
merchandisers, drug stores and online.
Although, as noted below, we have discontinued the
production, distribution and sale of AquaBall®, we
continue to market and distribute
Bazi® All Natural Energy, a liquid nutritional supplement
drink, which is currently distributed online and through our
existing database of customers.
Our principal place of business is 2 Park Plaza,
Suite 1200, Irvine, California 92614. Our telephone number is (949)
203-3500. Our corporate website address is
http://www.truedrinks.com. Our common stock, par value $0.001 per
share (“
Common
Stock
”), is currently
listed for quotation on the OTC Pink Marketplace under the symbol
“TRUU.”
Recent Developments
Food Labs Promissory Note
On
September 18, 2018, the Company and Food Labs, Inc.
(“
Food Labs
”)
entered into an agreement, pursuant to which the Company sold and
issued to Food Labs a promissory note in the principal amount of
$50,000 (the “
Food Labs
Note
”). The Food Labs Note (i) accrues interest at a
rate of 5% per annum, (ii) includes an additional lender’s
fee equal to $500, or 1% of the principal amount, and (iii) matures
on December 31, 2019. Food Labs is controlled by Red Beard
Holdings, LLC (“
Red
Beard
”), the Company’s largest stockholder and a
related party.
The
Company has reduced its staff to one employee, has taken other
steps to minimize general, administrative and other operating
costs, while maintaining only those costs and expenses necessary to
maintain sales of Bazi
®
and otherwise continue operations while the Board of Directors and
the Company’s principal stockholder explore corporate
opportunities, as more particularly described below. Management has
also worked to reduce accounts payable by negotiating settlements
with creditors, including Disney, utilizing advances from Red Beard
aggregating approximately $50,000 since September 30, 2018, and is
currently negotiating with its remaining creditors to settle
additional accounts payable.
Management is
currently exploring, together with its largest shareholder,
available options to maximize the value of AquaBall® as well
as Bazi®. In addition, although no assurances can be given,
management is actively exploring, together with its largest
shareholder, opportunities to engage in one or more strategic or
other transactions that would maximize the value of the Company as
a fully reporting public operating company with a focus on
developing consumer brands
, as well as
restructuring its preferred capital and indebtedness in order to
position the Company as an attractive candidate for such
transactions.
Termination of Bottling Agreement and Issuance of
Notes
On
April 5, 2018 (the “
Effective Date
”), True Drinks
settled all amounts due the Bottler under the terms of the Bottling
Agreement (the “
Settlement
”). As of the Effective
Date, the damage amount claimed by the Bottler under the Bottling
Agreement was $18,480,620, which amount consisted of amounts due to
the Bottler for product as well as amounts due for True
Drink’s failure to meet certain minimum requirements under
the Bottling Agreement (the “
Outstanding Amount
”).
Concurrently, an affiliate of Red Beard and the Bottler agreed to
terminate a personal guaranty of Red Beard’s obligations
under the Bottling Agreement in an amount not to exceed $10.0
million (the “
Affiliate
Guaranty
”) (the Bottling Agreement and the Affiliate
Guaranty are hereinafter referred to as the “
2015 Agreements
”).
Under
the terms of the Settlement, in exchange for the termination of the
2015 Agreements, the Bottler agreed to accept, among other things:
(i) a promissory note in the principal amount of $4,644,906 (the
“
Principal
Amount
”), with a 5% per annum interest rate, to be
compounded, annually (“
Note
One
”), (ii) a promissory note with a principal amount
equal to the Outstanding Amount (“
Note Two
”), and (iii) a cash
payment of $2,185,158 (the “
Cash Payment
”).
The
Principal Amount and all interest payments due under Note One shall
be due and payable to the Bottler in full on or before the December
31, 2019 (the “
Note
Payment
”). True Drinks, the Company and Red Beard are
each jointly and severally responsible for all amounts due under
Note One;
provided,
however
, that in the event of a Change in Control
Transaction, as defined in Note One, Red Beard will be the sole
obligor for any amounts due under Note One.
Note
Two shall have no force or effect except under certain conditions
and shall be reduced by any payments made to the Bottler under the
terms of the Settlement. True Drinks and the Company shall be
jointly and severally responsible for all amounts due, if any,
under Note Two, which shall automatically expire and terminate on
December 31, 2019.
In
consideration for the guarantee of the Company’s obligations
in connection with the Settlement, including as a joint and several
obligor under the terms of Note One, the Company is obligated to
issue Red Beard 348,367,950 shares of the Company’s Common
Stock (the “
Shares
”), which Shares shall be
issued at such time as the Company has amended its Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 300.0 million to at least 2.0 billion (the
“
Amendment
”),
but in no event later than September 30, 2018. As a condition to
the Company’s obligation to issue the Shares, Red Beard
shall, and shall cause its affiliates to, execute a written consent
of shareholders to approve the Amendment, and to take such other
action as reasonably requested by the Company to effect the
Amendment.
In
connection with the Settlement, and in order to make the Cash
Payment described above, the Company issued the Red Beard Note to
Red Beard, which Red Beard Note accrues interest at a rate of 5%
per annum. In May 2018, as a result of the sale to Red Beard of the
Company’s remaining AquaBall® inventory, the principal
amount of the Red Beard Note was reduced by the Purchase
Price.
Pursuant to the
terms of the Red Beard Note, Red Beard shall have the right, at its
sole option, to convert the outstanding balance due into that
number of fully paid and non-assessable shares of the
Company’s Common Stock equal to the outstanding balance
divided by $0.005 (the “
Conversion Option
”);
provided, however
, that the Company
shall have the right, at its sole option, to pay all or a portion
of the accrued and unpaid interest due and payable to Red Beard
upon its exercise of the Conversion Option in cash.
Pursuant to the terms of the Red Beard Note, such
Conversion Option shall not be exercisable unless and until such
time as the Company has filed the Amendment with the Nevada
Secretary of State, which the Company did on November 15,
2018.
All
outstanding principal and interest due under the terms of the Red
Beard Note shall be due and payable to Red Beard in full on or
before December 31, 2019 and is secured by a continuing security
interest in substantially all of the Company’s
assets.
Basis of
Presentation and
Going
Concern
The accompanying condensed consolidated balance
sheet as of December 31, 2017, which has been derived from audited
financial statements included in the Company’s Form 10-K for
the year ended December 31, 2017, and the accompanying interim
condensed consolidated financial statements have been prepared by
management pursuant to the rules and regulations of the Securities
and Exchange Commission (“
SEC
”) for interim financial reporting. These
interim condensed consolidated financial statements are unaudited
and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments and accruals)
necessary to fairly present the Company’s financial
condition, results of operations and cash flows as of and for the
periods presented in accordance with accounting principles
generally accepted in the United States of America
(“
GAAP
”). Operating results for the nine-month
period ended September 30, 2018 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2018, or for any other interim period during such year. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been omitted in
accordance with the rules and regulations of the SEC, although the
Company believes that the disclosures made are adequate to make the
information not misleading. The accompanying condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in
the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2017, filed with the SEC on June 26,
2018.
The
accompanying condensed consolidated financial statements have been
prepared in conformity with GAAP, which contemplates continuation
of the Company as a going concern. As of and for the nine months
ended September 30, 2018, the Company had a net loss of $3,240,836,
negative working capital of $5,551,538, and an accumulated deficit
of $51,482,185. The Company had $23,254 in cash at September 30,
2018. The Company currently requires additional capital to execute
its business plan, marketing and operating plan, and therefore
sustain operations, which capital may not be available on favorable
terms, if at all. The accompanying condensed consolidated financial
statements do not include any adjustments that will result if the
Company is unable to secure the capital necessary to execute its
business, marking or operating plan.
Cessation of Production of AquaBall®, and Management’s
Plan
During
the first quarter of 2018, due to the weakness in the sale of the
Company’s principal product, AquaBall® Naturally
Flavored Water, and continued substantial operating losses, the
Company’s Board of Directors determined to discontinue the
production of AquaBall®, and, as set forth below, terminate
the bottling agreement by and between Niagara Bottling LLC, the
Company’s contract bottling manufacturer (“
Bottler
” or “
Niagara
”), and True Drinks (the
“
Bottling
Agreement
”). In addition, the Company notified Disney
Consumer Products, Inc. (“
Disney
”) of the Company’s
desire to terminate its licensing agreement with Disney
(“
Disney
License
”), pursuant to which the Company was able to
feature various Disney characters on each AquaBall® bottle. As
a result of these decisions and the Company’s failure to pay
certain amounts due Disney under the terms of the Disney License,
the Disney License terminated, and Disney claimed amounts due of
approximately $178,000, net of $378,000 drawn from an irrevocable
letter of credit posted in connection with the execution of the
Disney License. In addition, Disney sought additional payments for
minimum royalty amounts required to be paid Disney through the
remainder of the term of the Disney License. On July 17, 2018 the
Company and Disney entered into a settlement and release whereby in
exchange for a payment to Disney of $42,000, the parties agreed to
release each other from any and all claims related to the Disney
License.
In
April 2018, the Company sold its remaining AquaBall® inventory
to Red Beard for an aggregate purchase price of approximately $1.44
million (the “
Purchase
Price
”). As payment for the Purchase Price, the
principal amount of the senior secured convertible promissory note
issued to Red Beard by the Company in the principal amount of $2.25
million (the “
Red Beard
Note
”) was reduced by the Purchase Price, resulting in
approximately $814,000 owed to Red Beard under the terms of the Red
Beard Note as of April 5, 2018.
Principles of Consolidation
The
accompanying condensed consolidated 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 condensed consolidated financial
statements.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during
the reporting period. Significant estimates made by management
include, among others, derivative liabilities, provision for losses
on accounts receivable, allowances for obsolete and slow-moving
inventory, stock compensation, deferred tax asset valuation
allowances, and the realization of long-lived and intangible
assets, including goodwill. Actual results could differ from those
estimates.
Revenue Recognition
In May 2014, the
Financial Accounting Standards Board (“
FASB
”)
issued Accounting Standards Update (“
ASU
”)
2014-09, Revenue from Contracts with Customers (Topic 606), (ASC
606). The underlying principle of ASC 606 is to recognize revenue
to depict the transfer of goods or services to customers at the
amount expected to be collected. ASC 606 creates a five-step model
that requires entities to exercise judgment when considering the
terms of contract(s), which includes (1) identifying the
contract(s) or agreement(s) with a customer, (2) identifying our
performance obligations in the contract or agreement, (3)
determining the transaction price, (4) allocating the transaction
price to the separate performance obligations, and (5) recognizing
revenue as each performance obligation is satisfied. The Company
adopted ASC 606 effective January 1, 2018, and adoption of such
standard had no effect on previously reported
balances.
Recognition of sales of the products sold by the Company
since the adoption of the new standard has had no quantitative
effect on the financial statements. However, the guidance requires
additional disclosures to help users of financial statements better
understand the nature, amount, timing, and uncertainty of revenue
that is recognized.
The Company previously recognized and continues to recognize
revenue when risk of loss transferred to our customers and
collection of the receivable was reasonably assured, which
generally occurs when the product is shipped. A product is not
shipped without an order from the customer and credit acceptance
procedures performed.
Under the new guidance, revenue is recognized when control of
promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those goods or services. The Company does not have
any significant contracts with customers requiring performance
beyond delivery. All orders have a written purchase order that is
reviewed for credit worthiness, pricing and other terms before
fulfillment begins. Shipping and handling activities are performed
before the customer obtains control of the goods and therefore
represent a fulfillment activity rather than a promised service to
the customer. Revenue and costs of sales are recognized when placed
under the customer’s control. Control of the products that we
sell, transfers to the customer upon shipment from our facilities,
and the Company’s performance obligations are satisfied at
that time.
All products sold by the Company are beverage products. The
products are offered for sale as finished goods only, and there are
no performance obligations required post-shipment for customers to
derive the expected value from them. Contracts with customers
contain no incentives or discounts that could cause revenue to be
allocated or adjusted over time.
The Company does not allow for returns, although it does for
damaged products, if support for the damage that occurs
pre-fulfillment is provided, returns are permitted. Damage product
returns have been insignificant. Due to the insignificant amount of
historical returns as well as the standalone nature of the
Company’s products and assessment of performance obligations
and transaction pricing for its sales contracts, the Company does
not currently maintain a contract asset or liability balance for
obligations. The Company assess its contracts and the
reasonableness of its conclusions on a quarterly basis
Cash and Cash Equivalents
The Company considers all highly liquid
investments with original maturities of three months or less, to be
cash equivalents. The Company maintains cash with high credit
quality financial institutions. At certain times, such amounts may
exceed Federal Deposit Insurance Corporation
(“
FDIC
”) insurance limits. The Company has not
experienced any losses on these amounts.
Accounts Receivable
The
Company records its trade accounts receivable at net realizable
value. This value includes an appropriate allowance for estimated
sales returns and allowances, and uncollectible accounts to reflect
any losses anticipated and charged to the provision for doubtful
accounts. Credit is extended to the Company' customers based on an
evaluation of their financial condition; generally, collateral is
not required. An estimate of uncollectible amounts is made by
management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, the
customer’s financial condition and current economic trends,
all of which are subject to change. Actual uncollected amounts have
historically been consistent with the Company’s expectations.
Receivables are charged off against the reserve for doubtful
accounts when, in management’s estimation, further collection
efforts would not result in a reasonable likelihood of receipt, or
later as proscribed by statutory regulations.
Concentrations
The
Company has no significant off-balance sheet concentrations of
credit risk, such as foreign exchange contracts, options contracts
or other foreign hedging arrangements. The Company maintains the
majority of its cash balances with two financial institutions.
There are funds in excess of the federally insured amount, or that
are subject to credit risk, and the Company believes that the
financial institutions are financially sound and the risk of loss
is minimal.
Prior to the termination of the Bottling Agreement
in early 2018, all production of AquaBall® was done by
Niagara. Niagara handled all aspects of production, including the
procurement of all raw materials necessary to produce
AquaBall®. We utilized two facilities to handle any necessary
repackaging of AquaBall® into six packs or 15-packs for club
customers.
During
the third quarter of 2018, we relied significantly on one supplier
for 100% of our purchases of certain raw materials for Bazi®.
Bazi, Inc. has sourced these raw materials from this supplier since
2007 and does not anticipate any issues with the supply of these
raw materials.
No
customer made up more than 10% of accounts receivable at September
30, 2018 or December 31, 2017.
A significant portion of our revenue during the
quarter ended September 30, 2017 came from sales of
AquaBall
®
Naturally Flavored Water.
For the
three months ended September 30,
2017
, sales of
AquaBall® accounted for 92% of the Company’s total
revenue. The Company discontinued its production and sales of
AquaBall® prior to the beginning of the quarter ended
September 30, 2018, and therefore did not generate any revenue from
sales of AquaBall® during that period.
For the nine months
ended September 30,
2018 and
2017
, sales of
AquaBall® accounted for 92% and 96% of the Company’s
total revenue, respectively.
Inventory
As of September 30, 2018, the Company purchased
for resale a liquid dietary supplement. Prior to the termination of
the Bottling Agreement and the discontinued production of
AquaBall
® in the quarter
ended June 30, 2018, the Company also purchased for resale a
vitamin-enhanced flavored water beverage.
Inventories
are stated at the lower of cost (based on the first-in, first-out
method) or net realizable value. Cost includes shipping and
handling fees and costs, which are subsequently expensed to cost of
sales. The Company provides for estimated losses from obsolete or
slow-moving inventories and writes down the cost of inventory at
the time such determinations are made. Reserves are estimated based
on inventory on hand, historical sales activity, industry trends,
the retail environment and the expected net realizable
value.
The
Company maintained inventory reserves of $0 and $93,000 as of
September 30, 2018 and December 31, 2017, respectively. The
inventory reserve is related to our current inventory as of
September 30, 2018 and December 31, 2017 against our forecasted
inventory movement until such inventory must be retired due to
aging.
Inventory
is comprised of the following:
|
|
|
|
|
Purchased
materials
|
$
-
|
$
29,012
|
|
Finished
goods
|
2,035
|
1,240,089
|
|
Allowance
for obsolescence reserve
|
-
|
(93,000
)
|
|
Total
|
$
2,035
|
$
1,176,101
|
Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows estimated to be
generated by the asset. No impairment was deemed necessary during
the quarter ended September 30, 2018.
Goodwill and Identifiable Intangible Assets
As
a result of acquisitions, we have goodwill and other identifiable
intangible assets. In business combinations, goodwill is generally
determined as the excess of the fair value of the consideration
transferred, plus the fair value of any noncontrolling interests in
the acquiree, over the fair value of the net assets acquired and
liabilities assumed as of the acquisition date. Accounting for
acquired goodwill in accordance with GAAP requires significant
judgment with respect to the determination of the valuation of the
acquired assets and liabilities assumed in order to determine the
final amount of goodwill recorded in business combinations.
Goodwill is not amortized, rather, it is evaluated for impairment
on an annual basis, or more frequently when a triggering event
occurs between annual tests that would more likely than not reduce
the fair value of the reporting unit below its carrying value. Such
impairment evaluations compare the reporting unit’s estimated
fair value to its carrying value.
Identifiable
intangible assets consist primarily of customer relationships
recognized in business combinations. Identifiable intangible assets
with finite lives are amortized over their estimated useful lives,
which represent the period over which the asset is expected to
contribute directly or indirectly to future cash flows.
Identifiable intangible assets are reviewed for impairment whenever
events and circumstances indicate the carrying value of such assets
or liabilities may not be recoverable and exceed their fair value.
If an impairment loss exists, the carrying amount of the
identifiable intangible asset is adjusted to a new cost basis. The
new cost basis is amortized over the remaining useful life of the
asset. Tests for impairment or recoverability require significant
management judgment, and future events affecting cash flows and
market conditions could adversely impact the valuation of these
assets and result in impairment losses.
Beneficial Conversion Feature of Convertible Debt
The Company accounts for convertible debt in
accordance with the guidelines established by FASB ASC 470-20,
“Debt with Conversion and Other Options.” The
Beneficial Conversion Feature (“
BCF
”) gives the debt holder the ability to
convert debt into common stock at a price per share that is less
than the trading price to the public on the date of the debt. The
beneficial value is calculated as the intrinsic value (the market
price of the stock at the commitment date in excess of the
conversion rate) of the beneficial conversion feature of the debt,
and is recorded as a discount to the related debt and an addition
to additional paid in capital. The discount is amortized over the
remaining outstanding period of related debt using the interest
method.
Income Taxes
As
the Company’s calculated provision (benefit) for income tax
is based on annual expected tax rates, no income tax expense was
recorded for the three-month or nine-month periods ended September
30, 2018 and 2017. At September 30, 2018, the Company had tax net
operating loss carryforwards and a related deferred tax asset,
which had a full valuation
allowance.
Stock-Based Compensation
For
the nine-month periods ended September 30, 2018 and 2017, general
and administrative expense included stock based compensation
expense of $277,915 and $480,043, respectively.
The Company uses a Black-Scholes option-pricing
model (the “
Black-Scholes
Model
”) to estimate the
fair value of outstanding stock options and warrants not accounted
for as derivatives. The use of a valuation model requires the
Company to make certain assumptions with respect to selected model
inputs. Expected volatility is calculated based on the historical
volatility of the Company’s stock price over the contractual
term of the option or warrant. The expected life is based on the
contractual term of the option or warrant and expected exercise
and, in the case of options, post-vesting employment termination
behavior. Currently, our model inputs are based on the simplified
approach provided by Staff Accounting Bulletin
(“
SAB
”) 110. The risk-free interest rate is based
on U.S. Treasury zero-coupon issues with a remaining term equal to
the expected life assumed at the date of the
grant.
The
fair value for restricted stock awards is calculated based on the
stock price on the date of grant.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts
receivable, accounts payable and accrued expense, and debt.
Management believes that the carrying amount of these financial
instruments approximates their fair values, due to their relatively
short-term nature.
Derivative Instruments
A derivative is an instrument whose value is
“derived” from an underlying instrument or index such
as a future, forward, swap, option contract, or other financial
instrument with similar characteristics, including certain
derivative instruments embedded in other contracts
(“
embedded
derivatives
”) and for
hedging activities. As a matter of policy, the Company does not
invest in financial derivatives or engage in hedging transactions.
However, the Company has entered into complex financing
transactions that involve financial instruments containing certain
features that have resulted in the instruments being deemed
derivatives or containing embedded derivatives. Derivatives and
embedded derivatives, if applicable, are measured at fair value
using the binomial lattice- (“
Binomial
Lattice
”) pricing model
and marked to market and reflected on our consolidated statement of
operations as other (income) expense at each reporting
period.
Basic and Diluted Income (Loss) Per Share
Our computation of earnings per share
(“
EPS
”) includes basic and diluted EPS. Basic EPS
is measured as the income (loss) available to common stockholders
divided by the weighted average common shares outstanding for the
period. Diluted (loss) income per share reflects the potential
dilution, using the treasury stock method, that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of
common stock that then shared in the income (loss) of the Company
as if they had been converted at the beginning of the periods
presented, or issuance date, if later. In computing diluted income
(loss) per share, the treasury stock method assumes that
outstanding options and warrants are exercised and the proceeds are
used to purchase common stock at the average market price during
the period. Options and warrants may have a dilutive effect under
the treasury stock method only when the average market price of the
common stock during the period exceeds the exercise price of the
options and warrants. Potential common shares that have an
antidilutive effect (i.e., those that increase income per share or
decrease loss per share) are excluded from the calculation of
diluted EPS.
Income (loss) per common share is computed by
dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the respective periods. Basic
and diluted income (loss) per common share is the same for periods
in which the Company reported an operating loss because all
converted preferred shares, warrants and stock options outstanding
are anti-dilutive. At September 30, 2018 and 2017, we excluded
116,674,110 and 119,187,105 shares of Common Stock
equivalents
, respectively,
as their effect would have been
anti-dilutive.
The
following is a reconciliation of the shares used in the computation
of basic and diluted EPS for the three and nine-month periods ended
September 30, 2018 and 2017, respectively:
|
|
Three
months ended
September
30
|
Nine
months ended
September
30
|
|
|
|
|
|
|
|
Basic EPS –
weighted-average number of common shares outstanding
|
233,540,542
|
208,056,810
|
223,147,165
|
186,111,074
|
|
Effect of dilutive
potential shares
|
116,674,110
|
-
|
-
|
-
|
|
Diluted EPS –
weighted-average number of common shares and potential common
shares outstanding
|
350,214,652
|
208,056,810
|
223,147,165
|
186,111,074
|
Recent Accounting Pronouncements
Except
as noted below, the Company has reviewed all recently issued, but
not yet effective accounting pronouncements and has concluded that
there are no recently issued, but not yet effective pronouncements
that may have a material impact on the Company’s future
financial statements.
On February 25, 2016, the FASB issued ASU
2016-2, “Leases” (Topic 842), which is intended to
improve financial reporting for lease transactions. This ASU will
require organizations that lease assets, such as real estate,
airplanes and manufacturing equipment, to recognize on their
balance sheet the assets and liabilities for the rights to use
those assets for the lease term and obligations to make lease
payments created by those leases that have terms of greater than
12 months. The recognition, measurement, and presentation of
expense and cash flows arising from a lease by a lessee primarily
will depend on its classification as finance or operating lease.
This ASU will also require disclosures to help investors and other
financial statement users better understand the amount and timing
of cash flows arising from leases. These disclosures will include
qualitative and quantitative requirements, providing additional
information about the amounts recorded in the financial statements.
The ASU is effective for the Company for the year ending December
31, 2019 and interim reporting periods within that year, and early
adoption is permitted. Management has not yet determined the effect
of this ASU on the Company’s financial
statements.
In August 2016, FASB issued ASU No.
2016-15, “Statement of Cash Flows: Classification of
Certain Cash Receipts and Cash
Payments” (“
ASU 2016-15
”), which eliminates the diversity in
practice related to the classification of certain cash receipts and
payments. ASU 2016-15 designates the appropriate cash flow
classification, including requirements to allocate certain
components of these cash receipts and payments among operating,
investing and financing activities. The retrospective transition
method, requiring adjustment to all comparative periods presented,
is required unless it is impracticable for some of the amendments,
in which case those amendments would be prospectively adopted as of
the earliest date practicable. The new guidance was effective for
us in the first quarter of 2018. The adoption of ASU 2016-15 did
not have a material impact on the Company’s financial
statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“
ASU
2016-18
”). ASU 2016-18
requires that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents.
ASU 2016-18 was effective for us as of January 1, 2018.
The adoption of this update did not have a material impact on the
Company’s financial statements.
NOTE 2 — SHAREHOLDERS’ EQUITY
Securities
As of September 30,
2018, our authorized capital stock consisted of 300.0 million
shares of Common Stock, and 5.0 million shares of preferred stock,
$0.001 par value per share, of which 2.75 million shares have
been designated as Series B Convertible Preferred Stock
(“
Series
B Preferred
”),
200,000 shares have been designated as Series C Convertible
Preferred Stock (“
Series
C Preferred
”) and 50,000
shares have been designated as Series D Convertible Preferred Stock
(“
Series
D Preferred
”). Subsequent to
the quarter ended September 30, 2018, the number of shares of
Common Stock authorized for issuance under our Articles of
Incorporation was increased to 7.0 billion shares. See Note 9
–
Subsequent
Events
for additional
information regarding the increase in our authorized shares of
Common Stock.
Below is a summary of the rights and preferences associated with
each type of security.
Common
Stock
. The holders of Common
Stock are entitled to receive, when and as declared by the Board of
Directors, dividends payable either in cash, in property or in
shares of Common Stock of the Company. Dividends have no cumulative
rights and dividends will not accumulate if the Board of Directors
does not declare such dividends.
Series B
Preferred
. Each share of the
Company’s
Series B Preferred
Convertible Stock (“
Series
B Preferred
”)
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 is 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.
During
the three months ended September 30, 2018, the Company declared
$64,279 in dividends on outstanding shares of its Series B
Preferred. During the nine months ended September 30, 2018, the
Company declared $193,551 in dividends on outstanding shares of its
Series B Preferred. As of September 30, 2018, there remained
$193,551 in cumulative unpaid dividends on the Series B
Preferred.
Series
C Preferred
. Each share of Series
C Preferred has a stated value of $100 per share, and as of the
quarter ended September 30, 2018, was convertible, at the option of
each respective holder, into that number of shares of Common Stock
equal to $100, divided by $0.025 per share (the
“
Series
C Conversion Shares
”). The Company
also 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, 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 day.
Series D
Preferred
. Each share of Series
D Preferred has a stated value of $100 per share, and, following
the expiration of the 20 day calendar day period set forth in Rule
14c-2(b) under the Exchange Act, commencing upon the distribution
of an Information Statement on Schedule 14C to the Company’s
stockholders, each share of Series D Preferred is convertible, at
the option of each respective holder, into that number of shares of
the Company’s Common Stock equal to the stated value, divided
by $0.025 per share (the “
Series D Conversion
Shares
”). The Certificate
of Designation also gives the Company the option to require the
conversion of the Series D Preferred into Series D Conversion
Shares in the event: (i) there are sufficient authorized shares of
Common Stock reserved as Series D Conversion Shares; (ii) the
Series D Conversion Shares are registered under the Securities Act,
or the Series D 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 of Securities
Between February 8, 2017 and August 21, 2017, the
Company issued an aggregate total of 45,625 shares of Series D
Preferred for $100 per share in a series of private placement
transactions (the “
Series D
Financing
”). As
additional consideration, investors in the Series D Financing
received warrants to purchase up to 60,833,353 shares of Common
Stock, an amount equal to 200% of the Series D Conversion Shares
issuable upon conversion of shares of Series D Preferred purchased
under the Series D Financing, exercisable for $0.15 per share. In
accordance with the terms and conditions of the Securities Purchase
Agreement executed in connection with the Series D Financing, all
warrants issued were exchanged for shares of Common Stock pursuant
to the Warrant Exchange Program (defined below). During the year
ended December 31, 2017, 6,875 shares of Series D Preferred were
converted to Common Stock.
Beginning on February 8, 2017 the Company and
holders of outstanding Common Stock purchase warrants (the
“
Outstanding
Warrants
”) entered into
Warrant Exchange Agreements, pursuant to which each holder agreed
to cancel their respective Outstanding Warrants in exchange for
one-half of a share of Common Stock for every share of Common Stock
otherwise issuable upon exercise of Outstanding Warrants (the
“
Warrant Exchange
Program
”). As of the date
of this Quarterly Report on Form 10-Q, the Company has issued
79,040,135 shares of Common Stock, in exchange for the cancellation
of 158,080,242 Outstanding Warrants.
NOTE 3 — WARRANTS
AND STOCK BASED
COMPENSATION
Warrants
On July 26, 2017, the Company commenced an
offering of Senior Secured Promissory Notes (the
“
Secured
Notes
”) in the aggregate principal amount of up
to $1.5 million to certain accredited investors (the
“
Secured
Note
Financing
”). The amount
available was subsequently raised to $2.3 million. As additional
consideration for participating in the Secured Note Financing,
investors received five-year warrants, exercisable for $0.15 per
share, to purchase that number of shares of the Company’s
Common Stock equal to 50% of the principal amount of the Secured
Note purchased, divided by $0.15 per share. Between July 26, 2017
and September 30, 2018, the Company offered and sold Secured Notes
in the aggregate principal amount of $2,465,000 and issued Warrants
to purchase up to 8,216,671 shares of Common Stock to participating
investors.
A
summary of the Company’s warrant activity for the nine
months ended September 30, 2018 is presented
below:
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding, December 31, 2017
|
11,982,864
|
$
0.17
|
|
Granted
|
1,383,334
|
0.15
|
|
Exercised
|
-
|
-
|
|
Expired
|
(1,474,436
)
|
0.32
|
|
Outstanding, March 31, 2018
|
11,891,762
|
$
0.15
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Expired
|
(914,149
)
|
0.15
|
|
Outstanding, June 30, 2018
|
10,977,613
|
$
-
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Expired
|
(85,454
)
|
0.15
|
|
Outstanding, September 30, 2018
|
10,892,159
|
$
0.15
|
As
of September 30, 2018, the Company had the following outstanding
warrants to purchase shares of its Common Stock:
|
|
Weighted Average
Exercise Price Per Share
|
Weighted Average
Remaining Life (Yrs.)
|
|
10,464,526
|
$
0.15
|
3.22
|
|
427,633
|
0.19
|
1,97
|
|
10,892,159
|
$
0.15
|
3.17
|
Stock-Based Compensation
Non-Qualified Stock Options
During
the nine months ended September 30, 2018, the Company granted
options to a certain employee to purchase a total of 200,000 shares
of Common Stock with an exercise price of $0.025, which expire five
years from the date of issuance. Also, during the nine months ended
September 30, 2018, the Company granted options to certain
employees to purchase a total of 70,424,891 shares of Common Stock
with an exercise price of $0.015, which expire ten years from the
date of issuance. These options vest upon a change of control
transaction as defined in the Company’s Stock Incentive Plan.
Also, during the nine months ended September 30, 2018, the company
reset the exercise price and extended the expiration date of
options to certain employees and certain members of the
Company’s Board of Directors. The reset options gave the
holders the option to purchase an aggregate total of 19,999,935
shares of Common Stock. The exercise prices were reset to $0.025
per common share, and the expiration dates were extended five years
from the date of the reset. The original exercise prices of these
options were between $0.07 and $0.15 per share, and the original
expiration dates ranged from September 2021 to September
2022.
During
the three months ended September 30, 2018 and 2017, the Company
granted stock options to purchase an aggregate of 70,624,891 and
39,390,782 shares of Common Stock, respectively. The weighted
average estimated fair value per share of the stock options at
grant date was $0.007 and $0.015 per share, respectively. The value
of the options for which the exercise price was reset and the
expiration date was extended in 2018 was also $0.008 per share.
Such fair values were estimated using the Black-Scholes stock
option pricing model and the following weighted average
assumptions.
|
|
|
|
Expected
life
|
|
|
Estimated
volatility
|
75
%
|
|
Risk-free
interest rate
|
1.1
%
|
|
Dividends
|
-
|
Stock
option activity during the nine months ended September 30, 2018 is
summarized as follows:
|
|
|
Weighted Average
Exercise Price
|
|
Options outstanding at December 31, 2017
|
41,770,782
|
$
0.080
|
|
Exercised
|
-
|
-
|
|
Granted
|
70,624,891
|
0.015
|
|
Forfeited
|
(20,635,847
)
|
0.070
|
|
Expired
|
-
|
-
|
|
Options outstanding at September 30, 2018
|
91,759,826
|
$
0.018
|
Restricted Stock Awards
During
the nine months ended September 30, 2018 and 2017, the Company did
not
grant any restricted stock awards
under the Company’s 2013 Stock Incentive Plan, as
amended.
|
|
Restricted Common Stock Awards
|
|
Outstanding, December 31, 2017
|
3,354,061
|
|
Granted
|
-
|
|
Issued
|
-
|
|
Forfeited
|
(1,854,061
)
|
|
Outstanding, September 30, 2018
|
1,500,000
|
NOTE 4 — DEBT
Line-of-Credit Facility
The
Company entered into a line-of-credit agreement with a financial
institution on June 30, 2014. The terms of the agreement allowed
the Company to borrow up to the lesser of $1.5 million or 85% of
the sum of eligible accounts receivables. The line of credit
agreement matured on July 31, 2018 and was not renewed by the
Company. At September 30, 2018, the total outstanding on the
line-of-credit was $0.
Food Labs Note Payable
As
disclosed in Note 1 above, on September 18, 2018, the Company
issued a promissory note to Food Labs in the principal amount of
$50,000. The Food Labs Note (i) accrues interest at a rate of 5%
per annum, (ii) includes an additional lender’s fee equal to
$500, or 1% of the principal amount, and (iii) matures on December
31, 2019.
At September 30, 2018, the
total outstanding on the Food Labs Note was
$50,000
.
Note Payable
In April 2017, the Company converted approximately
$1,088,000 of accounts payable into a secured note payable
agreement with Niagara (the “
Niagara
Note
”). The Niagara Note
called for monthly payments of principal and interest totaling
$25,000 through December 2017, and monthly payments of
approximately $52,000 through maturity. The note bore interest at
8% per annum, was scheduled to mature in April 2019 and was secured
by the personal guarantee which secures the Bottling Agreement. As
of the date of the Niagara Settlement described in Note 1, the
remaining balance on the Niagara Note was $854,366 and was settled
in full in exchange for a new note payable.
As of September 30, 2018, and in connection with
the Niagara Settlement as further discussed in Note 1 above, the
Niagara Note was settled in full, and a new note was issued in the
principal amount of $4,644,906. The note bears interest at 5% per
annum, and matures in December 2019
.
In
April 2018, the Company issued a senior secured convertible
promissory note in the amount of $2,250,000 to Red Beard in order
to pay the initial payment of the Niagara Settlement. Also, in
April 2018, the Company sold its remaining AquaBall® inventory
to Red Beard for the Purchase Price of $1,436,113. As payment for
the Purchase Price, the principal amount of the note was reduced by
the Purchase Price, resulting in approximately $814,000 owed to Red
Beard under the terms of the Red Beard Note as of April 5, 2018.
The note bears interest at 5% per
annum, matures in December 2019
and is secured by a
continuing security interest in substantially all of the
Company’s assets.
Pursuant to the
terms of the Red Beard Note, Red Beard shall have the right, at its
sole option, to convert the outstanding balance due into that
number of fully paid and non-assessable shares of the
Company’s Common Stock equal to the outstanding balance
divided by $0.005 (the “
Conversion Option
”);
provided, however
, that the Company
shall have the right, at its sole option, to pay all or a portion
of the accrued and unpaid interest due and payable to Red Beard
upon its exercise of the Conversion Option in cash. Pursuant to the
terms of the Red Beard Note, such Conversion Option shall not be
exercisable unless and until such time as the Company has filed the
Amendment with the Nevada Secretary of State,
which occurred on November 15, 2018
. During
the nine months ended September 30, 2018, the Company recorded a
beneficial conversion feature of the note in the amount of
$2,250,000. The amount is netted against the note payable balance
as a debt discount with the corresponding entry to additional
paid-in capital. The debt discount is amortized as interest expense
through the maturity date.
During the
three months ended September 30, 2018, a total of
$115,354
of the debt discount was amortized and
recorded as expense.
Secured Note Financing
As
disclosed in Note 3 above, on July 26, 2017, the Company commenced
an offering of Secured Notes in the aggregate principal amount of
up to $1.5 million to certain accredited investors. The amount
available was subsequently raised to $2.3 million. Between July 26,
2017 and September 30, 2018, the Company offered and sold Secured
Notes in the aggregate principal amount of $2,465,000 and issued
warrants to purchase up to 8,216,671 shares of Common Stock to
participating accredited investors. The warrants were valued at
$127,466 and were recorded as a discount to notes payable. During
the three months ended September 30, 2018, a total of $17,862 of
the debt discount was amortized and recorded as
expense.
The Secured Notes (i) accrue interest at a rate of
8% per annum, (ii) have a maturity date of 1.5 years from the date
of issuance, and (iii) are subject to a pre-payment and change in
control premium of 125% of the principal amount of the Secured
Notes at the time of pre-payment or change in control, as the case
may be. To secure the Company’s obligations under the Secured
Notes, the Company granted to participating investors a continuing
security interest in substantially all of the Company’s
assets pursuant to the terms and conditions of a Security Agreement
(the “
Security
Agreement
”).
In
addition, during the nine months ended September 30, 2018, Red
Beard advanced the Company $355,000 to be used specifically to
settle certain accounts payable owing to certain creditors,
including Disney, and to provide funds to pay certain operating,
administrative and related costs to continue operations. As of
September 30, 2018, the Company had settled $730,000 in accounts
payable to creditors, including Disney, in consideration for the
payment to such creditors of approximately $152,000. The terms of
the advances to the Company by Red Beard to finance the
settlements, and to allow the Company to continue as a going
concern, are currently being negotiated.
A
summary of the notes payable as of September 30, 2018 and December
31, 2017 is as follows:
|
|
|
|
Outstanding, December 31, 2017
|
$
2,803,610
|
|
Borrowings
on notes payable
|
415,000
|
|
Recording
of debt discount on secured notes
|
(250
)
|
|
Amortization
of debt discount to interest expense
|
17,862
|
|
Outstanding March 31, 2018
|
3,236,222
|
|
Borrowings
on notes payable
|
2,441,350
|
|
Note
payable issued in exchange for accounts payable
|
3,790,540
|
|
Reduction
of note payable for the sale of inventory
|
(1,436,113
)
|
|
Recording
of debt discount on secured notes
|
(2,250,000
)
|
|
Derecognition
of debt discount
|
1,436,113
|
|
Amortization
of debt discount to interest expense
|
128,089
|
|
Outstanding June 30, 2018
|
$
7,346,201
|
|
Borrowings
on notes payable
|
50,000
|
|
Amortization
of debt discount to interest expense
|
133,216
|
|
Outstanding September 30, 2018
|
$
7,529,417
|
NOTE 5 — COMMITMENTS AND CONTINGENCIES
During
the quarter ended September 30, 2017, the Company moved its
corporate headquarters and entered into a new lease for the
facility, which lease was scheduled to expire on March 31, 2019.
Due to the Company’s financial condition and
management’s plan, the lease was terminated on May 11, 2018.
The Company and the lessor recently agreed to settle all amounts
due under the old lease for an aggregate of $15,750 as
consideration for termination of the lease. Total rent expense
related to this and our previous operating lease for the nine
months ended September 30, 2018 was $31,986. Management is
currently occupying office space located at 2 Park Plaza in Irvine
California, which the Company rents for $500 per
month.
Legal Proceedings
From time to time, claims are made against the
Company in the ordinary course of business, which could result in
litigation. Claims and associated litigation are subject to
inherent uncertainties, and unfavorable outcomes could occur. In
the opinion of management, the resolution of these matters, if any,
will not have a material adverse impact on the Company’s
financial position or results of operations.
Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
Delhaize America
Supply Chain Services, Inc. v. True Drinks, Inc
.
On May 8, 2018, Delhaize America
Supply Chain Services, Inc. (“
Delhaize
”) filed a complaint
against the Company in the General Court of Justice Superior Court
Division located in Wake County, North Carolina alleging breach of
contract, among other causes of action, related to contracts
entered into by and between the two parties. Delhaize is seeking in
excess of $25,000 plus interest, attorney’s fees and costs.
We believe the allegations are
unfounded and are defending the case vigorously. We believe the
probability of incurring a material loss to be
remote.
The
Irvine Company, LLC v. True Drinks, Inc.
On September 10, 2018, The Irvine Company, LLC
(“
Irvine
”) filed a complaint against the Company in
the Superior Court of Orange County, located in Newport Beach,
California, alleging breach of contract related to the
Company’s early termination of its lease agreement with
Irvine in May 2018. Pursuant to the Complaint, Irvine sought to
recover approximately $74,000 in damages from the Company. In
November 2018, the Company and Irvine agreed to settle the lawsuit
for an aggregate of $15,750.
NOTE 6 – FAIR VALUE MEASUREMENTS
The
application of fair value measurements may be on a recurring or
nonrecurring basis depending on the accounting principles
applicable to the specific asset or liability or whether management
has elected to carry the item at its estimated fair value. FASB ASC
820-10-35 specifies a hierarchy of valuation techniques based on
whether the inputs to those techniques are observable or
unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the
Company’s market assumptions. These two types of inputs
create the following fair value hierarchy:
-
Level 1: Observable inputs
such as quoted prices in active markets;
-
Level 2: Inputs, other than
the quoted prices in active markets, that are observable either
directly or indirectly; and
-
Level 3: Unobservable inputs
in which there is little or no market data, which require the
reporting entity to develop its own
assumptions.
This
hierarchy requires the Company to use observable market data, when
available, and to minimize the use of unobservable inputs when
estimating fair value.
The Company assesses its recurring fair value
measurements as defined by FASB ASC 810. Liabilities measured at
estimated fair value on a recurring basis include derivative
liabilities. Transfers between fair value classifications occur
when there are changes in pricing observability levels. Transfers
of financial liabilities among the levels occur at the beginning of
the reporting period.
There were no transfers
between Level 1, Level 2 and/or Level 3 during the nine months
ended September 30, 2018. The Company had no Level 1 or 2 fair
value measurements at September 30, 2018 or December 31,
2017.
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
September 30, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
Quoted market prices in active markets
|
Internal Models with significant observable market
parameters
|
Internal models with significant unobservable market
parameters
|
|
Derivative
liabilities – September 30, 2018
|
$
2,621,097
|
$
-
|
$
-
|
$
2,621,097
|
|
Derivative
liabilities – December 31, 2017
|
$
8,337
|
$
-
|
$
-
|
$
8,337
|
The
following table presents the changes in recurring fair value
measurements included in net loss for the nine months ended
September 30, 2018 and 2017:
|
|
Recurring Fair Value Measurements
|
|
|
Changes in Fair Value
Included in Net Income
|
|
|
|
|
|
|
Derivative
liabilities – September 30, 2018
|
$
7,141,543
|
$
-
|
$
7,141,543
|
|
Derivative
liabilities – September 30, 2017
|
$
2,272,697
|
$
-
|
$
2,272,697
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the nine months ended
September 30, 2018:
|
|
|
Recorded New Derivative
Liabilities
|
Reclassification of Derivative Liabilities to Additional Paid in
Capital
|
Change in
Estimated Fair Value Recognized in Results of
Operations
|
|
|
Derivative
liabilities
|
$
8,337
|
$
9,754,303
|
$
-
|
$
(7,141,543
)
|
$
2,621,097
|
The table below sets forth a summary of changes in
the fair value of our Level 3 financial liabilities for
the nine months ended September 30,
2017:
|
|
|
Recorded New Derivative
Liabilities
|
Reclassification of Derivative Liabilities to Additional Paid in
Capital
|
Change in Estimated Fair Value Recognized in Results of
Operations
|
|
|
Derivative
liabilities
|
$
5,792,572
|
$
2,627,931
|
$
(6,080,278
)
|
$
(2,272,697
)
|
$
67,528
|
NOTE 7 – LICENSING AGREEMENTS
We first entered into licensing agreements with
Disney Consumer Products, Inc. (“
Disney
”) and an 18-month licensing agreement with
Marvel Characters, B.V. (“
Marvel
”) (collectively, the
“
Licensing
Agreements
”) in 2012.
Each Licensing Agreement allowed us to feature popular Disney and
Marvel characters on AquaBall
®
Naturally Flavored Water, allowing
AquaBall
®
to stand out among other beverages
marketed towards children.
In March 2017, the Company and Disney entered
into a renewed licensing agreement, which extended the
Company’s license with Disney through March 31, 2019. The
terms of the Disney License entitled Disney to receive a royalty
rate of 5% on sales of AquaBall
®
Naturally Flavored Water adorned with
Disney characters, paid quarterly, with a total guarantee of
$807,000 over the period from April 1, 2017 through March 31, 2019.
In addition, the Company was required to make a ‘common
marketing fund’ contribution equal to 1% of sales due
annually during the Disney License. As discussed in Note 1 above,
in connection with the Company’s discontinued production of
AquaBall
®, the Company
notified Disney of the Company’s desire to terminate the
Disney License in early 2018.
As a result of the Company’s decision to
discontinue the production of AquaBall
® and terminate
the Disney License, and considering amounts due, Disney drew from a
letter of credit funded by Red Beard in the amount of $378,000 on
or about June 1, 2018. Subsequently, Disney and the Company agreed
to a settlement and release of all claims related to the Disney
License in consideration for the payment to Disney of
$42,000.
On August 22, 2015, the
Company and
Marvel
entered
into a renewed Licensing Agreement to extend the Company’s
license t
o feature certain
Marvel characters on bottles of AquaBall® Naturally
Flavored Water through December 31, 2017
. The Marvel Agreement required the Company to pay
to Marvel a
5% royalty rate
on sales of AquaBall® Naturally Flavored Water adorned with
Marvel characters, paid quarterly, through December 31, 2017, with
a total guarantee of $200,000 over the period from January 1, 2016
through December 31, 2017.
The Company decided not to renew the Marvel
Agreement for another term. Thus, the Licensing Agreement expired
by its terms on December 31, 2017.
NOTE 8 – INCOME TAXES
The Company did not
have significant income tax expense or benefit for the nine months
ended September 30, 2018 or 2017. Tax net operating loss
carryforwards have resulted in a net deferred tax asset with a 100%
valuation allowance applied against such asset at September 30,
2018 and 2017. Such tax net operating loss carryforwards
(“
NOL
”) approximated
$51.5 million at September 30, 2018. Some or all of such NOL may be
limited by Section 382 of the Internal Revenue
Code.
The income tax effect of temporary differences between financial
and tax reporting and net operating loss carryforwards gives rise
to a deferred tax asset at September 30, 2018 and 2017 as
follows:
|
|
|
|
|
Deferred
tax asset –NOL’s
|
$
10,900,000
|
$
15,600,000
|
|
Less
valuation allowance
|
(10,900,000
)
|
(15,600,000
)
|
|
Net
deferred tax asset
|
$
-
|
$
-
|
NOTE 9 – SUBSEQUENT EVENTS
Red Beard Line-of-Credit
On November 19, 2018, the Company
entered into a line-of-credit with Red Beard, effective October 25,
2018, pursuant to which the Company may borrow up to $250,000 (the
“
Red Beard
LOC
”)
;
provided, however
, that Red Beard may,
in its sole discretion, decline to provide additional advances
under the Red Beard LOC upon written notice the Company of its
intent to decline to make such advances.
Interest shall accrue on the
outstanding principal of amount of the Red Beard LOC at a rate of
8% per annum;
provided,
however
, upon
the occurrence of an Event of Default, as defined in the Red Beard
LOC, the accrual of interest shall increase to a rate of 10% per
annum. Prior to December 31, 2019 (the “
Maturity
Date”),
Red Beard has the right, at its sole option, to convert the
outstanding principal balance, plus all accrued but unpaid interest
(the “
Outstanding
Balance
”), due under the Red Beard
LOC into that number of shares of Common Stock equal to the
Outstanding Balance divided by $0.005. As of November 19, 2018, the
Company has borrowed a total of $50,000 under the Red Beard LOC,
and intends to borrow an amount under the Red Beard LOC equal to
the principal and accrued interest due under the terms of the Food
Labs Note, totaling approximately $50,000 as of November 19, 2018,
therefore terminating the Food Labs Note.
Increase in Authorized Shares of Common Stock
On November 15, 2018, the Company filed a
Certificate of Amendment to its Articles of Incorporation with the
Secretary of State of the State of Nevada to increase the total
number of shares of Common Stock authorized for issuance thereunder
from 300.0 million to 7.0 billion shares (the
“
Increase in
Authorized
”). As a result
of the Increase in Authorized, Red Beard may now exercise its
Conversion Option under the Red Beard Note at any
time.
Management
has reviewed and evaluated subsequent events and transactions
occurring after the balance sheet date through the filing of this
Quarterly Report on Form 10-Q and determined that, except as
disclosed herein, no subsequent events occurred.