Form 10-Q for TRUE DRINKS HOLDINGS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We intend to identify forward-looking statements in this report by using words such as "believes," "intends," "expects," "may," "will," "should," "plan," "projected," "contemplates," "anticipates," "estimates," "predicts," "potential," "continue," or similar terminology. These statements are based on our beliefs as well as assumptions we made using information currently available to us. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. These risks include changes in demand for our products, changes in the level of operating expenses, our ability to expand our network of customers, changes in general economic conditions that impact consumer behavior and spending, product supply, the availability, amount, and cost of capital to us and our use of such capital, and other risks discussed in this report. Additional risks that may affect our performance are discussed under "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
The following discussion of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements included elsewhere within this Quarterly Report. Fluctuations in annual and quarterly results may occur as a result of factors affecting demand for our products such as the timing of new product introductions by us and by our competitors and our customers' political and budgetary constraints. Due to such fluctuations, historical results and percentage relationships are not necessarily indicative of the operating results for any future period.
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 beverage company incorporated in the state of Delaware in January 2012 that specializes in 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 the AquaBall� nationally through select retail channels, such as grocery stores, mass merchandisers, drug stores and online. We also 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 18662 MacArthur Boulevard, Suite 110, Irvine, California, 92612. Our telephone number is (949) 203-2500. Our corporate website address is http://truedrinks.biz. 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."
Critical Accounting Polices and Estimates
Discussion and analysis of our financial condition and results of operations are based upon financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates; including those related to collection of receivables, inventory obsolescence, sales returns and non-monetary transactions such as stock and stock options issued for services. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no changes to our critical accounting policies subsequent to the filing of our annual report on Form 10-K for the year ended December 31, 2015.
Comparison of the Three Months Ended March 31, 2016 to the Three Months Ended March 31, 2015.
Net sales for the three months ended March 31, 2016 were $583,298, compared with sales of $764,975 for the three months ended March 31, 2015, a 24% decrease. The decrease in sales for the three months ended March 31, 2016 is principally attributable to two factors. First, we are shifting away from shipping directly to retailers in favor of building a direct store distribution network. This network is currently being built out. Second, we are phasing out our current formula of AquaBall in anticipation of our new preservative-free formula for which production is beginning in May 2016 with Niagara Bottling. Many of our new direct store distributors are waiting for the new formulation rather than taking in our current formulation and then transitioning to the new formula. 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.
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The percentage that each product category represented of our net sales is as follows:
Three Months Ended March 31, 2016 Product Category (% of Sales) AquaBall� 91 % Bazi� 9 %
Gross Profit (Loss) and Gross Margin
Gross loss for the three months ended March 31, 2016 was $150,113, compared to gross profit of $144,247 for the three months ended March 31, 2015. Gross profit as a percentage of revenue (gross margin) during three months ended March 31, 2016 was negative 26%. Our negative margin is the result of discounts given on our product as we transition out of our current cold-fill formulation to our new preservative-free, hot-fill formulation. We recorded an inventory reserve of $110,000 which accounted for 19% of the negative margin for the quarter.
Gross margin will likely remain at current or below current levels through the second quarter of 2016, during the transition from our current bottling facilities to Niagara. We anticipate an increase in 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�. At that time, Niagara will provide finished goods to the Company and bill the Company for the product as it is shipped to customers. Our costs will be much more stable upon commencing production with Niagara.
Sales, General and Administrative Expense
Sales, general and administrative expenses were $2,137,263 for the three months ended March 31, 2016, as compared to $2,071,633 for the three months ended March 31, 2015. These expenses remained relatively consistent from last year, including employee-related expenses. Additionally, we recorded approximately $184,000 in bad debt expense in the three months ended March 31, 2016, but had lower non-cash consulting expenses than the three months ended March 31, 2015.
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 March 31, 2016 of $1,139,365.
Interest expense for the three months ended March 31, 2016 was $12,214, as compared to $207,737 for the three months ended March 31, 2015. Interest expense consists of interest and fees due on promissory notes generated in the third quarter of 2015, most of which were converted into shares of Series C Preferred the January Note Exchange during the first quarter of 2016.
There is no income tax expense recorded for the three months ended March 31, 2016 and 2015, due to the Company's net losses. As of March 31, 2016, 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 March 31, 2016 was $1,179,148 as compared to a net loss of $2,278,045 for the three months ended March 31, 2015. This year-over-year decrease in net loss is primarily attributable to the difference in the change in fair value of derivative liabilities. On a per share basis, our loss was $0.01 per share for the three months ended March 31, 2016, as compared to a loss of $0.05 per share for the three months ended March 31, 2015.
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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, 2015, indicating that there is substantial doubt as to the ability of the Company to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. For the three months ended March 31, 2016, the Company incurred a net loss of $1,179,148. At March 31, 2016, the Company has negative working capital of $5,138,912 and an accumulated deficit of $31,527,792. Although, during the year ended December 31, 2015 and the three-months ended March 31, 2016 the Company raised approximately $15.5 million from the sale of shares of Series C Preferred and $800,000 from the issuance of Secured Notes, 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. Management's plans are to continue to contain expenses, expand distribution and sales of its AquaBall� 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�. 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� sales are insufficient to fund our operating requirements for the next twelve months. As a result we will 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.
Series C Offerings, Note Payments, Note Exchange and Issuance of Secured Notes
November 2015 Series C Offering. On November 25, 2015, the Company and certain accredited investors entered into securities purchase agreements to purchase up to 30,000 shares of Series C Preferred for $100 per share over the course of three separate closings. The Company issued an aggregate total of 10,000 shares of Series C Preferred and five-year warrants to purchase 2,333,333 shares of Common Stock, exercisable at $0.15 per share, on November 25, 2015, 10,000 shares of Series C Preferred and five-year warrants to purchase 2,333,333 shares of Common Stock, exercisable at $0.15 per share, on December 16, 2015, and 10,000 shares of Series C Preferred and five-year warrants to purchase 2,333,333 shares of Common Stock, exercisable at $0.15 per share, on January 19, 2016. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all such warrants issued was recorded to derivative liabilities with $548,022 being recorded between November and December 2015, and $210,275 recorded in January 2016.
January 2016 Note Exchange. On January 20, 2016, the Company and holders of Secured Notes from the September 2015 Secured Note Offering 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 1,029,413 shares of Common Stock for $0.17 per share. Neither holder received warrants to purchase shares of the Company's Common Stock in connection with their respective Secured Notes, and agreed to waive any unpaid interest accrued under the Secured Notes prior to the execution of the Note Exchange Agreement.
April 2016 Series C Offering. On April 13, 2016, the Company and Red Beard entered into a securities purchase agreement, pursuant to which Red Beard agreed to purchase an aggregate total of 50,000 shares of Series C Preferred for $100 per share over the course of two closings. The Company issued 25,000 shares of Series C Preferred to Red Beard on April 13, 2016, and anticipates issuing the remaining 25,00 shares of Series 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 Red Beard warrants to purchase approximately 16.7 million shares of Common Stock.
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 March 31, 2016, the total outstanding on the line-of-credit approximated $78,000 and the Company did not have any availability to borrow. The line-of-credit bears interest at Prime rate 3.25% as of March 31, 2016 plus 4.50% 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.
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Off-Balance Sheet Items
We had no off-balance sheet items as of March 31, 2016.
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