10.24 | | Employment Agreement, by and between True Drinks Holdings, Inc. and Kevin Sherman, dated November 25, 2015, incorporated by reference from Exhibit 10.4 to the Current Report on Form 8-K, filed December 1, 20152015. | | | Form of Note Exchange Agreement, incorporated by reference to the Annual Report on Form 10-K, filed herewith.March 31, 2017. | | | Form of Securities Purchase Agreement, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed April 19, 2016. | | | Form of Warrant, incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K, filed April 19, 2016. | | | Debt Conversion Agreement by and between True Drinks Holdings, Inc. and Red Beard, LLC, dated April 26, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed April 30, 2019. | | | Form of Amendment No. 1Exchange Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed April 30, 2019. | | | Form of Registration Rights Agreement, dated April 26, 2019, incorporated by reference fromto Exhibit 10.3 to the Current Report on Form 8-K, filed April 19, 2016.30, 2019. | 10.29 | | Form of Amendment No.1 toEngagement Letter by and between True Drinks Holdings, Inc., Charlie’s Chalk Dust LLC and Katalyst Securities Purchase Agreement,LLC, dated July 14, 2016,February 15, 2019, incorporated by reference fromto Exhibit 10.4 to the Current Report on Form 8-K, filed April 30, 2019. | | | Amendment to Engagement Letter, dated April 16, 2019, incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K, filed April 30, 2019. |
| | Subscription Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K, filed April 30, 2019. | | | Employment Agreement by and between True Drinks Holdings, Inc. and Brandon Stump, dated April 26, 2019, incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K, filed April 30, 2019. | | | Employment Agreement by and between True Drinks Holdings, Inc. and Ryan Stump, dated April 26, 2019, incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K, filed April 30, 2019. |
| | License Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed July 20, 2016.June 11, 2019. | 10.30
| | Form of Securities PurchaseServices Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference fromto Exhibit 10.2 to the Current Report on Form 8-K, filed June 11, 2019. | | | Commercial Lease Agreement, by and between Charlie’s Chalk Dust, LLC and Brandon Stump, Ryan Stump and Keith Stump, dated November 19, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed February 15, 2017.November 22, 2019. | 10.3110.39
| | Form of Warrant, incorporatedPromissory Note issued to Red Beard Holdings, LLC dated April 8, 2020 (incorporated by reference fromto Exhibit 10.210.1 filed with Form 8-K on April 14, 2020). | 10.40
| | Security Agreement by and among the Company and Red Beard Holdings, LLC dated April 8, 2020 (incorporated by reference to the Current ReportExhibit 10.2 on Form 8-K filed February 15, 2017.on April 14, 2020). | 10.32 | | Form of Warrant Exchange Agreement, incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K, filed February 15, 2017. | | | Code of Ethics filed with Form 10-K on March 31, 2011 and incorporated herein by reference. | | | Board Charter filed with Form 10-K on March 31, 2011 and incorporated herein by reference. | | | Subsidiaries of True Drinks Holdings, Inc., incorporated by reference from Exhibit 21.1 to the Annual Report on Form 10-K, filed April 2, 20152015. | | | Consent of Squar Milner LLP, dated June 26, 2018, filed herewith. | | | Certification of CEOPrincipal Executive Officer as Required by Rule 13a-14(a)/15d-14, filed herewith. | | | Certification of CFOPrincipal Financial Officer as Required by Rule 13a-14(a)/15d-14, filed herewith. | | | Certification of CEOPrincipal Executive Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith. | | | Certification of CFOPrincipal Financial Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith. | | | | 101.INS | | XBRL Instance Document | 101.SCH | | XBRL Taxonomy Extension Schema | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase | 101.LAB | | XBRL Taxonomy Extension Label Linkbase | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
ITEM 16. FORM 10-K SUMMARY None.
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized. Registrant
Date: March 31, 2017 April 14, 2020 | | CHARLIE’S HOLDINGS, INC. | | | | | | | By: | /s/ Brandon Stump | | | | True Drinks Holdings, Inc.Brandon Stump
Chief Executive Officer and Chair of the Board /s/ Kevin Sherman(Principal Executive Officer)
| | | Kevin Sherman | | | | Chief Executive Officer (Principal Executive Officer), Chief Marketing Officer, Director |
Date: March 31, 2017 | | /s/ Daniel KerkerDavid Allen | | | Daniel Kerker | David Allen Chief Financial Officer (Principal Financial and Accounting Officer) | | | Chief Financial Officer (Principal Financial Officer) |
In accordance with the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Date: March 31, 2017Signature | | /s/ Kevin Sherman | Title | | Kevin ShermanDate | /s/ Brandon Stump Brandon Stump | | Chief Executive Officer Chief Marketing Officer,and Director |
Date: March 31, 2017(Principal Executive Officer) | | /s/ Ramona Cappello | | | Ramona Cappello | | | ChairApril 14, 2020 | | | | Date: March 31, 2017 | | /s/ Scot Cohen | | | Scot Cohen | /s/ David Allen David Allen | | DirectorChief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) | | April 14, 2020 | | | | | | Date: March 31, 2017/s/ Ryan Stump Ryan Stump | | /s/ Neil LeVeckeChief Operating Officer and Director | | April 14, 2020 | | | Neil LeVecke | | | /s/ Scot Cohen Scot Cohen | | Director | | April 14, 2020 | | | | | | /s/ Jeffrey Fox Jeffrey Fox | | Director | | April 14, 2020 | | | | | | /s/ Keith Stump Keith Stump | | Director | | April 14, 2020 |
REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Charlie’s Holding, Inc. and Shareholders True Drinks Holdings, Inc.
Irvine, CASubsidiaries
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of True DrinksCharlie’s Holdings, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of operations, stockholders'changes in stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company is required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of Coronavirus in March 2020 has had a negative impact on the global economy and markets which could impact the Company’s supply chain and/or sales. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Basis for Opinion These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding 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 also includes Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. 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 financial position of True Drinks Holdings, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Reverse Recapitalization
AsA discussed in Note 1 to the accompanying consolidated financial statements, have been prepared assuming thaton April 26, 2019, the Company will continueentered into a securities exchange agreement with the former members of Charlie’s Chalk Dust, LLC (“CCD”) (a predecessor entity) and changed its name to Charlie’s Holdings, Inc. Such agreement was accounted for as a going concern. Asreverse recapitalization, and, accordingly, the historical financial statements of and for the year ended December 31, 2016, the Company incurred a net lossreflect those of $5,445,562, has negative working capital of $6,162,213, and an accumulated deficit of $35,794,206. A significant amount of additional capital will be necessary to advance the marketability of the Company's productsCCD prior to the point at whichsecurities exchange agreement, and 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.combined company for all periods following such agreement.
/s/ Squar Milner LLP March 31, 2017
Newport Beach, CaliforniaWe have served as the Company’s auditor since 2018.
TRUE DRINKS
CHARLIE’S HOLDINGS, INC. CONSOLIDATED BALANCEBALANCE SHEETS December 31, 2016(in thousands, except share and 2015per share amounts)
| | | ASSETS | | | Current Assets: | | | Cash and cash equivalents | $15,306 | $376,840 | Accounts receivable, net | 536,817 | 1,843,415 | Inventory, net
| 318,912 | 1,558,719 | Prepaid expenses and other current assets | 127,258 | 75,923 | Total Current Assets | 998,293 | 3,854,897 | | | | Restricted Cash | 209,570 | 209,360 | Property and Equipment, net | 11,064 | 4,530 | Patents, net | 250,000 | 1,070,588 | Goodwill | 3,474,502 | 3,474,502 | Total Assets | $4,943,429 | $8,613,877 | | | | LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | | | Current Liabilities: | | | Accounts payable and accrued expenses | $1,258,252 | $1,623,046 | Debt | 109,682 | 1,336,819 | Derivative liabilities | 5,792,572 | 6,199,021 | Total Current Liabilities | 7,160,506 | 9,158,886 | | | | Commitments and Contingencies (Note 7) | | | | | | Stockholders’ Deficit: | | | Common Stock, $0.001 par value, 300,000,000 and 120,000,000 shares authorized, 119,402,009 and 111,434,284 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively | 119,402 | 111,434 | Preferred Stock – Series B (liquidation preference of $4 per share), $0.001 par value, 2,750,000 shares authorized, 1,292,870 and 1,317,870 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively | 1,293 | 1,318 | Preferred Stock – Series C (liquidation preference $100 per share), $0.001 par value, 200,000 and 150,000 shares authorized, 109,352 and 48,853 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively | 109 | 49 | Additional paid in capital | 33,456,325 | 29,690,834 | Accumulated deficit | (35,794,206) | (30,348,644) | | | | Total Stockholders’ Deficit | (2,217,077) | (545,009) | | | | Total Liabilities and Stockholders’ Deficit | $4,943,429 | $8,613,877 |
| | | | | | ASSETS | | | Current assets: | | | Cash | $2,448 | $304 | Accounts receivable, net | 918 | 711 | Inventories, net | 1,516 | 658 | Prepaid expenses and other current assets | 729 | 427 | Total current assets | 5,611 | 2,100 | | | | Non-current assets: | | | Property, plant and equipment, net | 543 | 45 | Right-of-use asset, net | 1,623 | - | Other assets | 71 | 42 | Total non-current assets | 2,237 | 87 | | | | TOTAL ASSETS | $7,848 | $2,187 | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | Current liabilities: | | | Accounts payable and accrued expenses | $2,516 | $1,216 | Derivative liability | 4,144 | - | Lease liabilities | 426 | - | Deferred revenue | 91 | 180 | Total current liabilities | 7,177 | 1,396 | | | | Non-current liabilities: | | | Lease liabilities, net of current portion | 1,218 | - | Total non-current liabilities | 1,218 | - | | | | Total liabilities | 8,395 | 1,396 | | | | COMMITMENTS AND CONTINGENCIES (see Note 12) | | | | | | Stockholders' equity (deficit): | | | Convertible preferred stock ($0.001 par value); 1,800,000 shares authorized | | | Series A, 300,000 shares designated, 204,561 and 0 shares issued and outstanding as of December 31, 2019 and 2018, respectively | - | - | Series B, 1.5 million shares designated, 0 and 1.4 million shares issued and outstanding as of December 31, 2019 and 2018, respectively | - | 1 | Common stock ($0.001 par value); 50 billion shares authorized; 18.974 billion shares and 141 million shares issued and outstanding as of December 31, 2019 and 2018, respectively | 18,974 | 141 | Additional paid-in capital | (17,045) | - | Retained earnings (accumulated deficit) | (2,476) | 649 | Total stockholders' equity (deficit) | (547) | 791 | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $7,848 | $2,187 |
The accompanying notes are an integral part of these consolidated financial statements.
CHARLIE’S HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) | | | | | | | Revenues: | | | Product revenue, net | $22,740 | $20,841 | Total revenues | 22,740 | 20,841 | Operating costs and expenses: | | | Cost of goods sold - product revenue | 10,071 | 8,515 | General and administrative | 15,017 | 3,158 | Sales and marketing | 2,314 | 1,968 | Research and development | 1,102 | - | Total operating costs and expenses | 28,504 | 13,641 | (Loss) income from operations | (5,764) | 7,200 | Other income: | | | Change in fair value of derivative liabilities | 3,618 | - | Total other income | 3,618 | - | Net (loss) income | (2,146) | 7,200 | Deemed dividend on Series A preferred stock | (1,650) | - | Net (loss) earnings applicable to common stockholders | $(3,796) | $7,200 | | | | Net (loss) earnings per share applicable to common stockholders | Basic | $(0.00) | $0.05 | Diluted | $(0.00) | $0.00 | Weighted average shares used in computing basic earnings per share | 10,648,129,286 | 141,040,886 | Weighted average shares used in computing diluted earnings per share | 10,648,129,286 | 14,104,089,886 |
The accompanying notes are an integral part of these consolidated financial statements.
CHARLIE’S HOLDINGS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
TRUE DRINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSFor the Years Ended December 31, 2016 and 2015 | | | | | | | | | Convertible Preferred Stock | Convertible Preferred Stock | | | | | | | | | | | | | | | | Balance at January 1, 2018 | - | $- | 1,396 | $1 | 141,041 | $141 | $- | $1,401 | $1,543 | Cash distributions to CCD Members | - | - | - | - | - | - | - | (7,952) | (7,952) | Net income | - | - | - | - | - | - | - | 7,200 | 7,200 | Balance at December 31, 2018 | - | - | 1,396 | 1 | 141,041 | 141 | - | 649 | 791 | Effect of reverse merger | - | - | - | - | 2,377,530 | 2,378 | (2,378) | - | - | Conversion of Series A convertible preferred stock | (2) | - | - | - | 38,081 | 38 | (38) | - | - | Conversion of Series B convertible preferred stock | - | - | (1,396) | (1) | 13,963,048 | 13,963 | (13,962) | - | - | Issuance of preferred stock, common stock and warrants in a private offering, net of $7,762 warrant liability | 206 | - | - | - | 1,551,466 | 1,551 | 18,186 | - | 19,737 | Offering cost related to private offering | - | - | - | - | - | - | (4,339) | - | (4,339) | Cash distributions to CCD Members | - | - | - | - | - | - | (17,430) | (979) | (18,409) | Stock compensation | - | - | - | - | 902,662 | 903 | 2,916 | - | 3,819 | Net income | - | - | - | - | - | - | - | (2,146) | (2,146) | Balance at December 31, 2019 | 204 | $- | - | $- | 18,973,828 | $18,974 | $(17,045) | $(2,476) | $(547) |
| | | Net Sales | $2,575,448 | $6,121,097 | | | | Cost of Sales | 2,253,585 | 6,282,087 | | | | Gross Profit (Loss) | 321,863 | (160,990) | | | | Operating Expenses | | | Selling and marketing | 3,782,941 | 5,073,211 | General and administrative | 4,825,017 | 5,475,673 | Total operating expenses | 8,607,958 | 10,548,884 | | | | Operating Loss | (8,286,095) | (10,709,874) | | | | Other Income (Expense) | | | Change in fair value of derivative liabilities | 3,566,170 | 1,262,329 | Interest expense | (39,789) | (257,389) | Other expense | (685,848) | (2,285,629) | | 2,840,533 | (1,280,689) | | | | Net Loss | $(5,445,562) | $(11,990,563) | | | | Dividends on Preferred Stock | $263,588 | $271,838 | | | | Net loss attributable to common stockholders | $(5,709,150) | $(12,262,401) | | | | Net loss per common share | | | Basic and diluted | $(0.05) | $(0.16) | | | | Weighted average common shares | | | outstanding, basic and diluted | 115,292,366 | 75,346,961 |
The accompanying notes are an integral part of these consolidated financial statements. TRUE DRINKSCHARLIE’S HOLDINGS, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS STOCKHOLDERS’ EQUITY (DEFICIT)For the Years Ended December 31, 2016 and 2015(in thousands)
| Common Stock | | | Additional Paid-In | Accumulated | Total Stockholders' Equity | | Shares | Amount | | | | | | | | 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 | (173,125) | (173) | (79,766) | (79) | (55,695) | - | - | Issuance of Preferred Stock Series C 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 Common Stock to Employees | 750,000 | 750 | - | - | - | - | (750) | - | - | Net Loss | - | - | - | - | - | - | - | (11,990,563) | (11,990,563) | Balance – December 31, 2015 | 111,434,284 | $111,434 | 1,317,870 | 1,318 | 48,853 | $49 | $29,690,834 | $(30,348,644) | $(545,009) | Conversion of Preferred Stock to Common Stock | 3,009,335 | 3,009 | (25,000) | (25) | (3,914) | (4) | (2,980) | - | - | Issuance of Preferred Stock Series C for debt conversions, net of warrants issued | - | - | - | - | 4,413 | 4 | 407,228 | - | 407,232 | Issuance of Common Stock for services | 200,000 | 200 | - | - | - | - | 17,800 | | 18,000 | Issuance of Preferred Stock Series C for cash, net of warrants issued | - | - | - | - | 60,000 | 60 | 2,932,987 | - | 2,933,047 | Stock-based compensation | - | - | - | - | - | - | 370,695 | - | 370,695 | Dividends declared on Preferred Stock | - | - | - | - | - | - | (265,009) | - | (265,009) | Issuance of Common Stock for cash exercise of warrants | 300,000 | 300 | - | - | - | - | 44,700 | - | 45,000 | Issuance of Common Stock for dividends on Preferred Stock | 1,838,390 | 1,839 | - | - | - | | 262,690 | - | 264,529 | Issuance of Restricted Common Stock to Employees | 2,620,000 | 2,620 | | | - | - | (2,620) | - | - | Net Loss | - | - | - | - | - | - | - | (5,445,562) | (5,445,562) | Balance – December 31, 2016 | 119,402,009 | $119,402 | 1,292,870 | $1,293 | 109,352 | $109 | $33,456,325 | $(35,794,206) | $(2,217,077) |
| | | | | | | Cash Flows from Operating Activities: | | | Net (loss) income | $(2,146) | $7,200 | Reconciliation of net (loss) income to net cash (used in) provided by operating activities: | | | Bad debt expense | 573 | 93 | Depreciation and amortization | 73 | 18 | Change in fair value of derivative liabilities | (3,618) | - | Amortization of operating lease right-of-use asset | 190 | - | Stock based compensation | 3,819 | - | Subtotal of non-cash charges | 1,037 | 111 | Changes in operating assets and liabilities: | | | Accounts receivable | (780) | 129 | Inventories | (858) | (291) | Prepaid expenses and other current assets | (302) | 14 | Other assets | (29) | (5) | Accounts payable and accrued expenses | 1,300 | 394 | Deferred revenue | (89) | 65 | Lease liabilities | (169) | - | Net cash (used in) provided by operating activities | (2,036) | 7,617 | Cash Flows from Investing Activities: | | | Purchase of property, plant and equipment | (571) | (16) | Net cash used in investing activities | (571) | (16) | Cash Flows from Financing Activities: | | | Proceeds from issuance of common stock and warrants in a private offering, net | 23,160 | - | Cash distributions to CCD Members | (18,409) | (7,952) | Net cash provided by (used in) financing activities | 4,751 | (7,952) | Net increase (decrease) in cash | 2,144 | (351) | | | | Cash, beginning of the year | 304 | 655 | Cash, end of the year | $2,448 | $304 | | | | Supplemental disclosure of cash flow information | | | Cash paid for interest | $- | $- | Cash paid for income taxes | $- | $- | | | | Supplemental disclosure of cash flow information | | | Effect of reverse merger | $2,378 | $- | Conversion of Series B convertible preferred stock | $13,963 | $- |
TRUE DRINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended December 31, 2016 and 2015
| | | CASH FLOWS FROM OPERATING ACTIVITIES | | | Net loss | $(5,445,562) | $(11,990,563) | Adjustments to reconcile net loss to net cash used in operating activities | | | Depreciation | 5,241 | 3,087 | Amortization | 141,177 | 148,026 | Impairment of patent | 679,411 | - | Provision for bad debt expense | 8,029 | (51,769) | Change in estimated fair value of derivative liabilities | (3,566,170) | (1,262,329) | Fair value of warrants issued for guaranty | - | 2,263,783 | Fair value of stock issued for services | 18,000 | 487,826 | Fair value of stock issued for bonuses | - | 218,782 | Stock based compensation | 370,695 | 1,055,448 | Changes in operating assets and liabilities: | | | Accounts receivable, net | 1,298,569 | (1,447,937) | Inventory | 1,239,807 | (195,276) | Prepaid expenses and other current assets | (51,335) | 552,752 | Accounts payable and accrued expenses | (365,274) | (214,899) | Net cash used in operating activities | (5,667,412) | (10,433,069) | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | Change in restricted cash | (210) | (76,162) | Purchase of property and equipment | (11,775) | (3,030) | Net cash used in investing activities | (11,985) | (79,192) | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | Proceeds from warrants exercised for cash | 45,000 | - | Proceeds from issuance of Series C Preferred Stock, net | 6,000,000 | 11,999,958 | Net repayments on line-of –credit facility | (377,137) | | Proceeds from notes payable | - | 1,103,817 | Repayments on notes payable | (350,000) | (2,883,000) | Net cash provided by financing activities | 5,317,863 | 10,220,775 | | | | NET DECREASE IN CASH | (361,534) | (291,486) | | | | CASH AND CASH EQUIVALENTS – beginning of year | 376,840 | 668,326 | | | | CASH AND CASH EQUIVALENTS – end of year | $15,306 | $376,840 |
SUPPLEMENTAL DISCLOSURES | | | Cash paid for interest | $41,758 | $179,056 | Non-cash financing and investing activities: | | | Conversion of preferred stock to common stock | $2,980 | $55,695 | Conversion of notes payable and accrued interest to Series C preferred stock | $500,000 | $1,214,207 | Dividends paid in common stock | $264,529 | $288,971 | Dividends declared but unpaid | $265,099 | $271,838 | Warrants issued in connection with Series C offering | $3,066,953 | $3,249,364 | Warrants issued in connection with debt conversions | $92,768 | $378,681 | Issuance of restricted stock | $2,620 | $- |
The accompanying notes are an integral part of these consolidated financial statements. TRUE DRINKSCHARLIE’S HOLDINGS, INC.
NOTESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – ORGANIZATIONDESCRIPTION OF THE BUSINESS AND SUMMARYBASIS OF SIGNIFICANT ACCOUNTING POLICIESPRESENTATION OverviewDescription of the Business
Charlie’s Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada corporation, together with its wholly owned subsidiaries and consolidated variable interest entity (collectively, the “Company”, “we”), currently formulates, markets and distributes branded e-cigarette liquid for use in both open and closed consumer e-cigarette and vaping systems. The Company’s products are produced domestically through contract manufacturers for sale by select distributors, specialty retailers and third-party online resellers throughout the United States, as well as over 80 countries worldwide. The Company’s primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, The Company launched distribution, through Don Polly, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“Don Polly”), of certain premium vapor, tincture and topical products containing hemp-derived cannabidiol (“CBD”). Our CBD based products are produced, marketed and sold through, Don Polly, and the Company currently intends to develop and launch additional products containing hemp-derived CBD in the future. True Drinks Holdings, Inc. (the “Company”, “us” or “In addition to Don Polly, we”) was incorporated in the state of Nevada in January 2001 and is are also the holding company for True Drinks, Inc.two wholly-owned subsidiaries, Charlie’s Chalk Dust, LLC (“True DrinksCharlie’s” or “CCD”), 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,which activity includes production and sale and distribution of our flagship product, AquaBall™ Naturally Flavored Water, a zero-sugar, zero-calorie, preservative-free, vitamin-enhanced, naturally flavored water drink. We distribute AquaBall™ nationally through select retail channels, such as grocery stores, mass merchandisers, drug storesbranded nicotine-based e-cigarette liquid, and online. We also market and distributeBazi, Inc., which activity includes sales of all-natural energy drink Bazi® All Natural Energy, a liquid nutritional supplement drink, which is currently distributed online and through our existing databaseEnergy. At this time, we do not intend to continue sales of customers.the Bazi product in its current form.
Our principal placeAcquisition of business is 18662 MacArthur Boulevard, Suite 110, Irvine, California, 92612. Our telephone number is (949) 203-2500. Our corporate website address is http://www.truedrinks.com. OurTrue Drinks Holdings, Inc.
On April 26, 2019 (the “Closing Date”), we entered into a Securities Exchange Agreement with each of the former members (“Members”) of Charlie’s, and certain direct investors in the Company (“Direct Investors”), pursuant to which we acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units, with such units consisting of an aggregate of (i) 15,655,538,349 shares of common stock on an as-converted basis (which includes the issuance of an aggregate of 1,396,305 shares of a newly created class of Series B Convertible Preferred Stock, par value $0.001 per share (“Common StockSeries B Preferred”), is currently listed for quotation on the OTC Pink Marketplace under the symbol “TRUU". Recent Developments
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 Notesconvertible into an aggregate total of 4,41313,963,047,716 shares of Series C Preferred and five-year warrantscommon stock, issued to purchase up to an aggregate totalcertain individuals in lieu of 1,029,701common stock); (ii) 206,249 shares of Common Stock for $0.17 per share.
Completion of April Series C Offering
On April 13, 2016, the Company and one of the Company’s current shareholders, Red Beard Holdings, LLC (“Red Beard”), entered into a Securities Purchase Agreement, as amended (the “AprilPurchase Agreement”), wherein Red Beard, together with any other signatories to the April Purchase Agreement (collectively, the “Purchasers”), agreed to purchase up to 50,000 sharesnewly created class of Series CA Convertible Preferred Stock, (“Series C Preferred”) for $100 per share over the course of three separate closings (the “AprilSeries C Offering”).
The Company issued an aggregate total of 25,000 shares of Series C Preferred on April 13, 2016, 10,000 shares of Series C Preferred on July 15, 2016 and, between August 31, 2016 and September 13, 2016, the Company issued an aggregate total of 25,000 shares of Series C Preferred. As additional consideration for participating in the April Series C Offering, the Purchasers received five-year warrants to purchase up to an aggregate total of approximately 33.3 million shares of the Company’s Common Stock for $0.15 per share.
Creation of Series D Convertible Preferred Stock
On January 24, 2017, the Company filed the Certificate of Designation, Preferences, Rights and Limitations of the Series D Convertible Preferred Stock (the “Certificate of Designation”) with the Nevada Secretary of State, designating 50,000 shares of the Company's preferred stock, par value $0.001 per share as (“Series D ConvertibleA Preferred Stock”), convertible into an aggregate of 4,654,349,239 shares of common stock; and (iii) warrants to purchase an aggregate of 3,102,899,493 shares of common stock (the “Series D PreferredInvestor Warrants”) (the “ShareExchange”). As a result of the Share Exchange, Charlie’s became a wholly owned subsidiary of the Company.
Each sharemembership interests that resulted in net proceeds to Charlie’s 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 Securities Exchange Act of 1934, as amendedapproximately $27.5 million (the “Exchange ActCharlie’s Financing”), commencing upon. Katalyst Securities LLC (“Katalyst”) acted as the distributionsole placement agent in connection with the Charlie’s Financing pursuant to an Engagement Letter entered into by and between Katalyst, Charlie’s and the Company on February 15, 2019. As consideration for its services in connection with the Charlie’s Financing and the Share Exchange, the Company issued to Katalyst and its designees five-year warrants to purchase an aggregate 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 of930,869,848 shares of the Company’s Common Stock equal to the stated value, divided by $0.15at a price of $0.0044313 per share (the “Conversion SharesPlacement Agent Warrants”). The Certificate of Designation also givesPlacement Agent Warrants have substantially the Company the option to require the conversion of the Series D Preferred into Conversion Sharessame terms as those set forth 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, as amended (the “Securities Act”), 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.Investor Warrants.
Series D OfferingThe Share Exchange resulted in a change of control of the Company, with the Members and Direct Investors owning approximately 86.1% of the Company’s outstanding voting securities immediately after the Share Exchange, and the Company’s current stockholders beneficially owning approximately 13.9% of the issued and outstanding voting securities, which includes the Advisory Shares. Following the Share Exchange, Ryan Stump and Brandon Stump, the founders of Charlie’s and the Company’s Chief Executive Officer and Chief Operating Officer, respectively, held in excess of 50% of the Company’s issued and outstanding voting securities.
On February 8, 2017 (the “The Share Exchange is accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States (“Initial Investment Date”), the Company and certain accredited investors (the “Series D InvestorsU.S. GAAP”) entered into a Securities Purchase Agreement (the “Series D Purchase Agreement”), whereinbecause the primary assets of the Company may offer and sell to Series D Investors up to 50,000 shares of Series D Preferred for $100 per share (the “Series D Offering”). As additional consideration, Series D Investors will also receive five-year warrants (the “Series D Warrants”), to purchase up to 200%were nominal at the consummation of the Conversion Shares issuableShare Exchange. Charlie’s was determined to be the accounting acquirer based upon conversionthe terms of the Share Exchange and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Merger, (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company. Accordingly, the historical financial statements of True Drinks were replaced by the Company's historical financial statements including the comparative prior periods. All references in the consolidated financial statements to the number of shares and per-share amounts of Series D Preferred purchased undercommon stock have been retroactively restated to reflect the Series D Offering for $0.15 per share. In accordance with the terms and conditions of the Series D Purchase Agreement, all Series D Warrants issued in connection with the Series D Offering will be exchanged for shares of Common Stock pursuant to the Warrant Exchange Program, as further described below.exchange rate.
On the Initial Investment Date, the Company issued to Series D Investors an aggregate total of 31,750 shares of Series D Preferred, as well as Series D Warrants to purchase up to an aggregate total of 42,333,341 shares of Common Stock. Between the Initial Investment Date and the date of this Annual Report, the Company has issued an additional 5,000 shares of Series D Preferred and Series D Warrants to purchase up to an aggregate total of 6,666,669 shares of Common Stock. The issuance of the shares of Series D Preferred to date has resulted in gross proceeds to the Company of approximately $3.7 million.
Warrant Exchange
Beginning on February 8, 2017, the Company and certain holders of outstanding Common Stock purchase warrants (the “Outstanding Warrants”), entered into Warrant Exchange Agreements (each, an “Exchange Agreement”), 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”). The Company expects to issue up to 71.7 million shares of Common Stock in exchange for the cancellation of 143.4 million Outstanding Warrants, including the Warrants issued in connection with the Series D Offering, over the course of the Warrant Exchange Program.
To date the Company has issued 73,106,453 shares of Common Stock, in exchange for the cancellation of 146,212,905 Outstanding Warrants.
Basis of Presentation The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Amounts related to disclosure of December 31, 2018 balances within the consolidated financial statements were derived from the audited 2018 financial statements and notes thereto of Charlie’s. The financial information contained in the consolidated financial statements and footnotes are based on Charlie’s historical financial statements and the Company’s financial activity beginning April 26, 2019, as adjusted, to give effect to Charlie’s reverse recapitalization of the Company and the Charlie’s Financing completed prior to the Share Exchange. In addition, from the period April 26, 2019 until December 31, 2019, there were minimal costs and revenue associated with the Bazi product line which are included in the interim condensed consolidated financial statements. As noted above, we do not intend to continue to produce and sell the Bazi product line in its current form, and these costs and expenses are nominal and will continue to be so in the future. The operating results of Don Polly are also included. Historical financial information presented prior to April 26, 2019 is that of Charlie’s only, while financial information presented after April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and the Company, which includes the transactions associated with the share exchange and private placement transaction along with ongoing corporate costs. Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management’s plan of operation The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in conformity with accounting principles generally acceptedthe normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company is required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United StatesStates. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of America,Coronavirus in March 2020 has had a negative impact on the global economy and markets which contemplates continuation ofcould impact the Company as a going concern.Company’s supply chain and/or sales. For the year ended December 31, 2016,2019 the Company has incurred losses from operations of $5,764,000 and a consolidated net loss of $5,445,562. At December 31, 2016,approximately $2,146,000 and the Company has negative working capitalstockholders’ equity of $6,162,213 and an accumulated deficit of $35,794,206. 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.$547,000. These conditions, among others,factors raise substantial doubt about the Company'sCompany’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 fromto the outcomecarrying amount and classification of this uncertainty.recorded assets and liabilities should the Company be unable to continue operations. Management's plans depend on its ability to increase revenues and continue its business development efforts, including the expenditure of approximately $4,400,000 to complete the PMTA registration process. The Company does not anticipate that its current cash position will be sufficient to meet its working capital requirements, to continue its sales and marketing efforts and complete the PMTA registration process. The Company is currently seeking term debt or other sources of financing in order to ensure that it have sufficient cash to operate for the next 12 months. If in the future the plans or assumptions change or prove to be inaccurate, or there is a significant change in the regulatory environment or the recent outbreak of Coronavirus continues to impact the global economy, the Company will need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in its best interests.
Risks and Uncertainties F-7
TableThe Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of Contentsflavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted.In addition, the Company is presently in the process of submitting PMTA applications for some of its nicotine-based e-liquid products. The applications are due in May 2020, which if approved, will allow the Company to continue to sell its products in the United States. The Company is also seeking additional financing in order to complete the application process. There is no assurance that regulatory approval to sell our products will be granted or that we can raise the additional financing required, and if not, this could have a significant impact on our sales. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying condensed As noted above, the consolidated financial statements include the accounts of the Company, andCharlie’s Holdings, Inc., its two 100% wholly owned subsidiaries, True Drinks,Charlie’s Chalk Dust, LLC and Bazi, Inc.Inc, and GT BeverageDon Polly, LLC, a consolidated variable interest for which the Company LLC.is the primary beneficiary (see Note 7). All inter-company accountsbalances and transactions have been eliminated in the preparation of these condensed consolidated financial statements.consolidation.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesU.S. GAAP 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 datedates of the financial statements and the reported amounts of revenues and expenses 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.periods. Actual results could differ from those estimates. Fair Value of Financial Instruments U.S. GAAP requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. For certain instruments, including cash and cash equivalents, accounts receivable, accounts payable, warrant liability and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments. Revenue Recognition InThe Company recognizes revenues in accordance with Staff Accounting Bulletin ("Standards Codification (“SABASC"”) No. 104 “606 – Contracts with Customers. Revenues are generated from contracts with customers that consist of sales to retailers and distributors. Contracts with customers are generally short term in nature with the delivery of product as a single performance obligation. Revenue Recognition in Financial Statements”, revenuefrom the sale of product is recognized at the point in time when the single performance obligation has been satisfied and control of shipment,the product has transferred to the customer. In evaluating the timing of the transfer of control of products to customers, the Company considers several indicators, including significant risks and rewards of products, the right to payment, and the customer takeslegal title and assumes risk of loss, collection of the relevant receivableproducts. Based on the assessment of control indicators, sales are generally recognized when products are received by customers. Shipping generally occurs prior to the transfer of control to the customer and is reasonably assured, persuasive evidencetherefore accounted for as a fulfillment expense.
In circumstances where shipping and handling activities occur after the customer has obtained control of the product, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than an arrangement existsadditional promised service. Contract durations are generally less than one year, and therefore costs paid to obtain contracts, which generally consist of sales commissions, are recognized as expenses in the period incurred. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is fixedadjusted for estimates of known or determinable. Netexpected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales includereturns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of products, slotting fees, discountssale and freightreduce revenue in the period of the sale. Variable consideration related to incentive offers and handling charges. With approved credit, we provide wholesale customers payment terms of up to net 30 days.Amounts received for unshipped merchandisepromotional programs are recorded as customer depositsa reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations. Amounts billed and due from customers are short term in nature and are includedclassified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in accrued expenses.advance of revenue recognition are recorded as deferred revenue.
Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three monthsninety days 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. Restricted Cash
At December 31, 2016, the Company had $209,570 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 more fully described in Note 9, “Licensing Agreements,” below.
Accounts Receivable The Company records its trade accountsAccounts receivable is recorded at net realizable value. This value includes an appropriatethe invoiced amount and does not bear interest. We determine the allowance for estimated sales returnsdoubtful accounts by regularly evaluating individual customer receivables and allowances, and uncollectible accounts to reflect any losses anticipated and charged to the provision for doubtful accounts. Credit is extended to our 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, theconsidering a customer’s financial condition, credit history 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 reserveconditions and set up an allowance for doubtful accounts when in management’s estimation, further collection efforts would not result in a reasonable likelihoodis uncertain. Customers’ accounts are written off against the allowance when all attempts to collect have been exhausted. Recoveries 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.
All production of AquaBall™ is done by Niagara through the Niagara Agreement. Niagara handles all aspects of production including the procurement of all raw materials necessary to produce AquaBall™. We utilize two facilities currently to handle any necessary repackaging of AquaBall into six packs or 15-packs for club customers.
During 2016, we relied significantly on one supplier for 100% of our purchases of certain raw materials for Bazi®. Bazi, Inc. has sourced these raw materials from this supplier since 2007 and does not anticipate any issues with the supply of these raw materials.
We did not have any significant concentrations in either sales or accounts receivable during the year endedpreviously written off are recorded as income when received. As of December 31, 2016, while one customer represented 79% of2019 and 2018, the Company’s accounts receivableallowance for bad debt totaled $639,000 and 47% of sales during the year ended December 31, 2015. No other customers exceeded 10% of the Company’s sales or accounts receivable during the year ended December 31, 2016 or 2015.
A significant portion of our revenue comes from sales of the AquaBall™ Naturally Flavored Water. For the year ended December 31, 2016 and 2015, sales of AquaBall™ accounted for 92% and 97% of the Company’s total revenue,$151,000, respectively.
Fair Value of Financial Instruments
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.
The carrying amount of the Company’s debt is considered a level 3 liability, based on inputs that are unobservable.
Inventory
The Company purchases for resale a vitamin-enhanced flavored water beverage and a liquid dietary supplement.
Inventories Inventories primarily consist of finished goods and are stated at the lower of cost (based on(determined by the first-in, first-outaverage cost method) or market (netnet realizable value). Cost includes shippingvalue. We calculate estimates of excess 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 ondetermined primarily by reviewing inventory on hand, historical sales activity, industry trends the retail environment, and the expected net realizable value. The Company maintained inventory reserves of $110,000 and $0 as As of December 31, 20162019 and December 31, 2015,2018, the reserve for excess and obsolete inventories totaled $83,000 and $74,000, respectively. This inventory reserve is related to our remaining finished goods inventory of AquaBall prior to the production of our new formulation of AquaBall produced by Niagara. The prior formulation AquaBall is still being sold, but only to select accounts at a reduced price.
InventoryStock-Based Compensation
We account for all stock-based compensation using a fair value-based method. The fair value of equity-classified awards granted to employees is comprisedestimated on the date of the following: | | | Purchased materials | $89,358 | $689,703 | Finished goods | 339,554 | 869,016 | Allowance for obsolescence reserve | (110,000) | - | Total | $318,912 | $1,558,719 |
Property and Equipment
Property and equipment are stated at cost. The Company provides for depreciation of property and equipmentgrant using the straight-line method based on estimated useful lives of between threeBlack-Scholes option-pricing model and ten years. Property and equipmentthe related stock-based compensation expense is not significantrecognized over the vesting period during which an employee is required to the consolidated financial statements as of orprovide service in exchange for the years ended December 31, 2016 and 2015.
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 2016 or 2015.
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 ofaward. We measure the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree,liability-classified awards using a Monte Carlo valuation model. Compensation cost is recognized over the fair value of the net assets acquiredservice period 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 theremeasured at each 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. During the year ended December 31, 2016 we recognized impairment on identifiable intangible assets of $679,411 related to the interlocking spherical bottle patent acquired in the acquisition of GT Beverage Company, Inc. As of December 31, 2015, no impairment had been recognized on identifiable intangible assets.through settlement.
Income Taxestaxes The Company accounts for incomeIncome taxes in accordance with FASB Accounting Standards Codification 740 (“ASC Topic 740”). Underare computed under the asset and liability method. This method requires the recognition of ASC Topic 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable totemporary differences between the financial statement carrying amountsreporting basis and the tax basis of existingour assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enactedliabilities. The impact on deferred taxes of changes in tax rates in effect forand laws, if any, are applied to the year inyears during which those temporary differences are expected to be recovered or settled.settled and are reflected in the consolidated financial statements in the period of enactment. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.
Stock-Based Compensation
Total stock-based compensation expense, for all of the Company’s stock-based awards recognized for the year ended December 31, 2016 and 2015 was $370,695 and $1,055,448, 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 useFinancial statement effects of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatilitytax position are initially recognized when it is calculatedmore likely than not, based on the historical volatilitytechnical merits, that the position will be sustained upon examination by a taxing authority. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that meets the Company’s stock price over the contractual termmore-likely-than-not threshold 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 issuesbeing realized upon ultimate settlement with a remaining term equaltaxing authority. We recognize potential accrued interest and penalties related 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 suchunrecognized tax benefits 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
We compute earnings (loss) per share using the two-class method, as unvested restricted common stock contains nonforfeitable rights to dividends and meets the criteria of a participating security. Under the two-class method, earnings are allocated between common stock and participating securities. The presentation of basic and diluted earnings per share is required only for each class of common stock and not for participating securities. As such, we present basic and diluted earnings per share for our one class of common stock.
The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. A company’s reported net earnings is reduced by the amount allocated to participating securities to arrive at the earnings allocated to common stockholders for purposes of calculating earnings per share. At December 31, 2016 and 2015, the Company had 198,957,185 and 120,573,694 shares of Common Stock equivalents outstanding, respectively.
Unvested restricted common stock, common stock options, and the Warrants are antidilutive and excluded from the computation of diluted earnings per share if the assumed proceeds upon exercise or vesting are greater than the cost to reacquire the same number of shares at the average market price during the period. For the years ended December 31, 2016 and 2015, the impact of all outstanding unvested shares of restricted common stock, common stock options, and the Warrants are excluded from diluted loss per share as their impact would be antidilutive.
The Company has evaluated its business to determine if it has multiple segments and has determined that it operates under a single segment.
Research and Developmentincome tax expense.
Research and development We expense the cost of research and development as incurred. Research and development expenses include costs incurred in funding research and development activities, license fees, and other external costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made. Segments Operating segments are identified as incurred.components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment. The following tabledisaggregates revenue from our single operating segment by geographic market and customer type for the periods ending December 31, 2019 and 2018, respectively:
| | | Geographic Market | | | International | 24.0% | 28.0% | United States | 76.0% | 72.0% | | | | Customer Type | | | Retailers | 36.0% | 45.0% | Distributors | 64.0% | 55.0% |
RecentRecently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09 “RevenueRevenue from Contracts with Customers,” which amended the FASBCustomer
The Financial Accounting Standards CodificationBoard (“ASCFASB”) and created a new Topic ASC 606, “Revenueissued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers” (“Customers (Topic 606).ASC 606”). This amendment prescribes that an entity shouldThe amendments in this update create common revenue recognition guidance for entities reporting revenue under U.S. GAAP and IFRS by requiring entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. Entities should apply the following five steps: (1) identify the contract(s) with a customer, (2) identify performance obligations in the contract, (3) determine transaction price, (4) allocate transaction price to performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Entities should also disclose qualitative and quantitative information about (1) contracts with customers, including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations and related transaction price allocation to remaining performance obligations, (2) significant judgments and changes thereof in determining the timing of performance obligations over time or services.at a point in time and the transaction price and amounts allocated to performance obligations, and (3) assets recognized from the costs to obtain or fulfill a contract. The amendment supersedes the revenue recognition requirementsamendments in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the Codification. For the Company’sthis update were effective for annual and interim reporting periods the mandatory adoption date of ASC 606 isbeginning after December 15, 2017. The Company adopted this guidance on January 1, 2018 and there will be two methods of adoption allowed, either a full retrospective adoption or ausing the modified retrospective adoption. In August 2015,transition method. Prior periods were not adjusted and, based on the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09Company’s implementation assessment, no cumulative-effect adjustment was made to the first quarteropening balance of 2018. retained earnings. The adoption of this standard did not have a material impact on the financial statements other than expanded disclosures. For further description of the Company’s revenue recognition policy refer to the Revenue Recognition section above and for disaggregated revenue information refer to the Segment Reporting section above. Leases In March 2016, April 2016, May 2016, and DecemberFebruary 2016, the FASB issued ASU 2016-08,2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. For public companies, ASU 2016-10,2016-02 was effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption was permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2016-12, and ASU 2016-20, respectively, as clarifications to ASU 2014-09. ASU 2016-08 clarifies how to identify the unit of accounting for the principal versus agent evaluation, how2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the control principle to certain typesguidance under Topic 842 as of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principaladoption date, rather than as an agent.of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Based on the analysis, on January 1, 2019, the Company recorded right of use assets of approximately $81,000 and lease liability of approximately $81,000. Improvements to Non-Employee Share-Based Payment Accounting In June 2018, the FASB issued ASU 2016-10 clarifies2018-07 “Improvements to Non-employee Share-Based Payment Accounting”, which simplifies the existingaccounting for share-based payments granted to non-employees for goods and services. Under the ASU, most of the guidance on identifying performance obligations and licensing implementation. ASU 2016-12 adds practical expedients relatedsuch payments to non-employees would be aligned with the transitionrequirements for contract modifications and further defines a completed contract, clarifies the objective of the collectability assessment and how revenue is recognized if collectability is not probable, and when non-cash considerations should be measured. ASU 2016-20 corrects or improves guidance in thirteen narrow focus aspects of the guidance.share-based payments granted to employees. The amendments are effective dates for these ASUs are the same as the effective date for ASU No. 2014-09, for the Company’s annualfiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning January 1, 2018. These ASU’s also require enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows. The Company will adopt the new revenue standards in its first quarter of 2018.after December 15, 2020. The Company has not selected a transition method. The Company is still completingearly adopted the assessment of the impact of these ASUs on its consolidated financial statements; however at the current time the Company does not expect thatnew standard effective January 1, 2019 and the adoption of these ASUs willthis standard did not have a material impact on itsthe Company’s condensed consolidated financial statements, financial condition or results of operations.statements.
Income Taxes In July 2015,December 2019, the FASB issued ASU No. 2015-11, “Inventory2019-12, “Income Taxes (Topic 330)740): Simplifying the Measurement of Inventory”Accounting for Income Taxes (“ASU 2015-11”2019-12”)., which is intended to simplify various aspects related to accounting for income taxes. ASU 2015-11 requires that inventory within2019-12 removes certain exceptions to the scope of this standard be measured at the lower of costgeneral principles in Topic 740 and net realizable value. Net realizable valuealso clarifies and amends existing guidance to improve consistent application. This guidance is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. ASU 2015-11 will be effective for the Company’s annualfiscal years, and interim reporting periods within those fiscal years, beginning January 1, 2017,after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this ASU; however the Company does not expect that the adoption of ASU 2015-11 will have a material impactstandard on its consolidated financial statements financial condition or results of operations.and related disclosures. On February 25, 2016,NOTE 3 – FAIR VALUE MEASUREMENTS
In accordance with ASC 820 (Fair Value Measurements and Disclosures), the FASB issued ASU 2016-2, "Leases" (Topic 842),Company uses various inputs to measure the outstanding warrants on a recurring basis to determine the fair value of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below: Level 1 - Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date Level 2 - Quoted prices in markets that are not active or inputs 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 liabilitiesare either directly or indirectly observable Level 3 - Unobservable inputs for the rights to use those assets forinstrument requiring the lease term and obligations to make lease payments createddevelopment of assumptions 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 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 March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies the accounting for share-based payment transactions, including the income tax consequences, an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur, as well as certain classifications in the statement of cash flows. This guidance will be effective for fiscal years beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the effect this guidance will have on our financial statements and related disclosures.
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. ASU 2016-15 is effective forfollowing table classifies the Company’s annual and reporting periods beginning January 1, 2018. The Company is currently evaluatingliabilities measured at fair value on a recurring basis into the effect this guidance will have on our financial statements and related disclosures.
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 describedfair value hierarchy as restricted cash or restricted cash equivalents. ASU 2016-18 will become effective for us beginning April 1, 2018, or fiscal 2019. ASU 2016-18 is required to be applied retrospectively. Upon the adoption, amounts described as restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows.
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’sSeries 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 BConversion 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, 2016, the Company declared $263,588 in dividends on outstanding shares of its Series B Preferred. The Company issued a total of 1,838,390 shares of Common Stock to pay $264,529 of cumulative unpaid dividends. As of December 31, 2016, there remained $66,0802019 (amount in cumulative unpaid dividends on the Series B Preferred.thousands):
| Fair Value at December 31, 2019 | | | | | | Liabilities: | | | | | Derivative liability - Warrants | 4,144 | - | - | 4,144 | Total liabilities | $4,144 | $- | $- | $4,144 |
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,There were no transfers between Level 1, 2 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
During 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 liabilities3 during the year ended December 31, 2015.2019.
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 offeredThe following table presents changes 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 StockLevel 3 liabilities measured at fair value 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 issued2019. Both observable and unobservable inputs were used 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 expenseddetermine the fair value of the Common Stock issued of $487,826.
On April 22, 2015,positions that the Company cancelled 2,593,912 options to certain former Directors ofhas classified within the Company. The Company replaced these stock optionsLevel 3 category. Unrealized gains and losses associated with 2,594,914 warrants, 1,120,478 of these warrants had an exercise price of $0.25 per share, and 1,474,436 ofliabilities within 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 shareLevel 3 category include changes 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.
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.
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 these holders exchanged 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 1,029,413 shares of Common Stock for $0.17 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 $92,768, was recorded to derivative liabilities.
During 2016, the Company issued 60,000 shares of Series C Preferred for $100 per share over the course of three separate closings.
As additional consideration for participating in the April Series C Offering, the Purchasers received five-year warrants to purchase up to an aggregate total of approximately 33.3 million shares of Common Stock for $0.15 per share. At the completion of the April Series C Offering, the Company had issued warrants to purchase up to an aggregate total of approximately 33.4 million shares of Common Stock. 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 $2,856,678, was recorded to derivative liabilities.
NOTE 3 – STOCK OPTIONS AND WARRANTS
Warrants
A summary of the Company’s warrant activity for the years ended December 31, 2016 and 2015 is presented below:
| | Weighted Average Exercise Price | 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 | Granted | 36,696,083 | 0.15 | Exercised | (300,000) | 0.15 | Expired | (1,918,774) | 1.23 | Outstanding, December 31, 2016 | 101,396,416 | $0.15 |
As of December 31, 2016, 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.) | 99,494,347 | $0.15 | 4.11 | 427,633 | $0.19 | 4.22 | 737,218 | $0.25 | 1.69 | 737,218 | $0.38 | 1.69 | 101,396,416 | $0.15 | 4.07 |
Non-Qualified Stock Options
The Company granted options to purchase an aggregate total of 3,460,000 shares of Common Stock during the year ended December 31, 2016. The options vest evenly over a four-year period.
The weighted average estimated fair value per share of the stock options at grant date was $0.06 per share. Such fair valuesthat were estimated using the Black-Scholes stock option pricing modelattributable to both observable (e.g., changes in market interest rates) and the following weighted average assumptions.unobservable (e.g., changes in unobservable long- dated volatilities) inputs (amount in thousands).
| | Expected lifeBalance at January 1, 2019 | | Estimated volatilityAddition | 75.07,762 | Change in fair value | (3,618%) | Risk-free interest rateBalance at December 31, 2019 | 0.66$% | Dividends | -4,144
|
Stock option activity during the year ended December 31, 2016 is summarized as follows:
| | Weighted Average Exercise Price | Options outstanding at December 31, 2015 | - | $- | Exercised | - | - | Granted | 3,820,000 | 0.15 | Forfeited | 720,000 | 0.15 | Expired | - | - | Options outstanding at December 31, 2016 | 3,100,000 | $0.15 |
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.
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 718Compensation – Stock Compensation.The Company recorded approximately $1,055,000 of stock based compensation in connection with the transaction.
Restricted Common Stock Awards
The Company granted a total of 2,000,000 shares of restrictedCommon Stock pursuant to the terms and conditions of the Company’s 2013 Stock Incentive Plan to certain employees. The shares were valued at $0.061 per share and a total of $122,000 will be expensed over the vesting period. There were 500,000 shares which vested on the grant date with the remaining shares vesting over 3 years.During the year ended December 31, 2016, the Company issued 2,620,000 shares of restricted stock under the plan. As of December 31, 2016, a total of 5,079,908 shares were unvested out of the total of 16,142,229 granted shares.
The Company granted a total of 2,000,000 shares of restrictedCommon Stock pursuant to the terms and conditions of the Company’s 2013 Stock Incentive Plan to certain employees. The shares were valued at $0.061 per share and a total of $122,000 will be expensed over the vesting period. There were 500,000 shares which vested on the grant date with the remaining shares vesting over 3 years.During the year ended December 31, 2016, the Company issued 2,620,000 shares of restricted stock under the plan.
A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s restricted common stock activity for the years ended December 31, 2016 and 2015 is presented below: | Restricted Common Stock Awards
| Outstanding, December 31, 2014 | -
| Granted | 19,491,375
| Forfeited | -
| Outstanding, December 31, 2015 | 19,491,375
| Granted | 2,000,000
| Forfeited | (5,349,146)
| Outstanding, December 31, 2016 | 16,142,229
|
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 trademarksderivative liabilities that are being amortized over the lesser of their remaining life or 15 years.
Intangible assets are:
| | | Patents and trademarks | $1,027,438 | $1,706,849 | Accumulated amortization | (777,438) | (636,261) | | $250,000 | $1,070,588 |
Amortization expense for the year ended December 31, 2016 and 2015 was $141,177 and $148,768, respectively. In 2016, the Company stopped using the bottle associated with the spherical bottle patent. The Company is evaluating its options for the patent. As such, the Company estimated the valuecategorized within Level 3 of the patent using a discounted cash flows approach. This valuation lead to the Company recording an impairment charge of $679,411 to the Patent. For these assets, amortization expense over the next five years and thereafter is expected to be as follows:
| Patent and Trademark Amortization | 2017 | $37,975 | 2018 | 37,975 | 2019 | 37,975 | 2020 | 37,975 | 2021 | 37,975 | 2022 and thereafter | 60,125 | | $250,000 |
NOTE 5 – INCOME TAXES
The Company does not have significant income tax expense or benefit for the year ended December 31, 2016 or 2015. 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, 2016 and 2015. Such tax net operating loss carryforwards (“NOL”) approximated $33.0 million at December 31, 2016. 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 provision for income taxes differs from the amounts which would be provided by applying the statutory federal income tax rate of 34% to the net loss before provision for income taxes for the years ended December 31, 2016 and 2015 are as follows:
| | | Income tax expense (benefit) at statutory rate | $(1,851,491) | $(4,076,791) | Change in valuation allowance | 1,851,491 | 4,076,791) | Income tax expense | $- | $- |
The components of income tax expense (benefit) attributable to continuing operations are as follows:
| | | Current expense: | | | Federal | $- | $- | State | - | - | | | | Deferred expense (benefit): | | | Federal | $- | $- | State | - | - | | | | Total | $- | $- |
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, 2016 and 2015 as follows:
| | | Deferred tax asset –NOL’s | $13,200,000 | $11,040,000 | Less valuation allowance | (13,200,000) | (11,040,000) | 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 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 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 positionsfair value hierarchy as of December 31, 2016. 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.
NOTE 6 – DEBT
A summary of convertible notes payable as of December 31, 2016 and 20152019 is as follows:
| AmountAs of December 31, 2019 | Outstanding, December 31, 2014Exercise price | $4,030,0000.0044 | BorrowingsContractual term (years) | 1,470,0004.32 | RepaymentsVolatility (annual) | (3,498,00070.0)% | Conversions to Series C Preferred StockRisk-free rate | (1,147,0001.7)% | Outstanding, December 31, 2015Dividend yield (per share) | $0855,000% | Borrowings | -
| Repayments | (355,000)
| Conversions to Series C Preferred Stock | (500,000)
| Outstanding, December 31, 2016 | $-
|
A summaryNOTE 4 – STOCK-BASED COMPENSATION
On April 26, 2019, in connection with employment agreements with its CEO and COO, the line-of-creditCompany issued market condition awards contingent upon the achievement of certain market capitalization targets. The awards are subject to a three-year service vesting period. The awards are settleable in a variable number of common shares based on defined percentages of the Company's total shares determined by market capitalization targets and are, therefore, classified as liabilities in accordance with ASC 718. The fair value of the awards is remeasured at each reporting period until settlement. Compensation cost is attributed over the period encompassing the derived service period and the explicit service period. The fair value of the market condition awards as ofDecember 31, 3019, was approximately $1.4 million. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 1.6% and a volatility of 85% based on volatility over 3 years using daily stock prices. For the year ending December 31, 2019, the Company recorded an expense of $316,000for these awards. On April 26, 2019, as additional consideration for advisory services provided in connection with the Charlie’s Financing and the Share Exchange (see Note 1 above), the Company issued an aggregate of 902.7 million shares of common stock (the “Advisory Shares”), including to a member of the Company’s Board of Directors, pursuant to a subscription agreement. The fair value of a share of common stock was $0.0032 which is based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $2.9 million on the grant date.
Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into 7.1 million shares of common stock and 69,815 shares of Series B Preferred (or 698.1 million shares of common stock equivalents) due to the effect of the Share Exchange. The 705.3 million shares of common stock will vest over a two-year period. The fair value of a share of common stock was $0.0032 which is based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $752,000during the year endedDecember 31, 2019. NOTE 5 - PROPERTY AND EQUIPMENT Property and Equipment detail as of December 31, 20162019 and 2015 is2018 are as follows (amount in thousands): | | | | | | Machinery and equipment | $96 | $64 | Trade show booth | 171 | 144 | Office equipment | 118 | 26 | Leasehold improvements | 440 | 20 | | 825 | 254 | Accumulated depreciation | (282) | (209) | | $543 | $45 |
Depreciation and amortization expense totaled $73,000 and $18,000, respectively, during the years ended December 31, 2019 and 2018. NOTE 6 - CONCENTRATIONS Vendors The Company’s concentration of purchases are as follows: | | Outstanding, December 31, 2014 | $233,000
| Net Borrowings | 249,000
| Outstanding, December 31, 2015 | $482,000
| Net Repayments | (372,000)
| Outstanding, December 31, 2016 | $110,000
|
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 each 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. | | | | | | | Vendor A | 57% | 74% | Vendor B | 16% | 15% |
As described under Note 2, “Shareholder’s Equity” above, in September 2015,During the Company began a private offering to certain accredited investors of: (i) Secured Notes inyear ended December 31, 2019, purchases from two vendors represented 73% of total inventory purchases. During the aggregate principal amountyear ended December 31, 2018, purchases from two vendors represented 89% 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. total inventory purchases.
As of December 31, 2015,2019 and 2018, amounts owed to these vendors totaled $58,000 and $654,000 respectively, which are included in accounts payable in the accompanying condensed consolidated balance sheets. Accounts Receivable The Company’s concentration of accounts receivable are as follows:
One customer made up more than 10% of net accounts receivable at December 31, 2019. Customer A owed the Company had issued Secured Notesa total of $211,000, representing 23% of net receivables. No customer exceeded 10% of total net sales for the years ended December 31, 2019 and 2018, respectively.
NOTE 7 – DON POLLY, LLC. Don Polly, LLC is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s CBD product lines. We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are variable interest entities (“VIEs”), and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously perform this assessment, as changes to existing relationships or future transactions may result in the aggregate principal amountconsolidation or deconsolidation of $855,000a VIE. Effective April 25, 2019, we consolidated the financial statements of Don Polly and Note Warrantsit is considered a VIE of the Company. Since the Company has been determined to purchase an aggregate totalbe the primary beneficiary of 280,265 shares of Common Stock. On January 20, 2016, Secured NotesDon Polly, we have included Don Polly’s assets, liabilities, and operations in the aggregate principal amountaccompanying consolidated financial statements of $500,000 were exchanged for shares of Series C Preferred and warrants. See Note 2 “Stockholder’s Equity” above.the Company. In September 2015,Don Polly operates under exclusive licensing and service contracts with 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,whereby the Company paid a lender's fee toreceives 75% of net income from the related parties equal to 10%licensing agreement and 25% of net income from the service agreement, therefore, as the Company receives 100% of the principal amount.net income or incurs 100% of the net loss of the VIE, no non-controlling interests are recorded.
Line-of-Credit FacilityNOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
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, 2016, the total outstanding on the line-of-credit was $109,682Accounts payable and the Company did not have any availability to borrow. The line-of-credit bears interest at Prime rate (3.5%accrued expenses as of December 31, 2016) plus 4.5%2019 and 2018 are as follows (amount in thousands):
| | | | | | Accounts payable | $673 | $901 | Accrued compensation | 1,635 | 288 | Insurance payable | - | 20 | Other accrued expenses | 208 | 7 | | $2,516 | $1,216 |
NOTE 9 – EARNING PER SHARE BASIC AND FULLY DILUTED Basic earnings per annum, as well as a monthly fee of 0.50% on the average amount outstanding on the line, andcommon share is securedcomputed by dividing net income by the accounts receivablesweighted average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed similar to basic earnings per common share except that are funded against. The line-of-credit matures on July 31, 2017.it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Diluted weighted average common shares include common stock potentially issuable under the Company’s convertible preferred stock, warrants and vested and unvested stock options.
The following table sets forth the computation of earnings per share (in thousands):
| | | | | | | Net (loss) earnings applicable to common shareholders- basic | $(3,796) | $7,200 | | | | Net (loss) earnings applicable to common shareholders - diluted | $(3,796) | $7,200 | | | | Weighted average shares outstanding - basic | 10,648,129 | 141,041 | Series B convertible preferred shares | - | 13,963,048 | Weighted average shares outstanding - diluted | 10,648,129 | 14,104,089 |
F-18
| | | | | | | Options | 801,325 | 85,991 | Series A convertible preferred shares | 4,616,268 | - | Warrants | 4,033,769 | - | Total | 9,451,362 | 85,991 |
NOTE 710 – STOCKHOLDERS’ EQUITY Series A Preferred On April 25, 2019, in connection with the Share Exchange, the Company filed the Certificate of Designation, Preferences and Rights of the Series A Convertible Preferred Stock (the “Series A COD”), with the Nevada Secretary of State of the State, designating 300,000 shares of its preferred stock as Series A Convertible Preferred Stock. Each share of Series A Preferred has a stated value of $100 per share (the “Series A Stated Value”). The Series A Preferred rank senior to all of the Company’s outstanding securities. At December 31, 2019, there were a total of 204,561 shares of Series A Preferred outstanding. The Series A Preferred provides the holders with the right to receive a one-time dividend payment equal to 8% of the Series A Stated Value (the “Series A Dividend”), which Series A Dividend shall be paid by the Company on the earlier to occur of (i) when declared at the election of the Company, (ii) one year from the date of issuance, or (iii) when a holder elects to convert its shares of Series A Preferred into common stock. Each share of Series A Preferred is convertible, at the option of the holder, into that number of shares of common stock equal to the Series A Stated Value, plus all accrued but unpaid dividends, divided by $0.044313, which conversion rate is subject to adjustment in accordance with the terms of the Series A COD. Holders of Series A Preferred are prohibited from converting Series A Preferred into common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% (or 9.99% upon the election of the holder prior to the issuance of the Series A Preferred) of the total number of shares of common stock then issued and outstanding. Each share of Series A Preferred is convertible at the option of the Company, at the same conversion rate set forth above, at such time, if ever, that the Company’s common stock is listed on the Nasdaq Stock Market and the Company has paid the Series A Dividend. In addition, upon the occurrence of a Bankruptcy Event (as defined in the Series A COD), the Company shall be required to redeem, in cash, all outstanding shares of Series A Preferred at a price equal to the conversion amount; provided, however, that holders of the Series A Preferred shall have the right to waive, in whole or in part, such right to receive payment upon the occurrence of a Bankruptcy Event.
Holders of the Series A Preferred are entitled to vote on an as-converted basis along with holders of the Company’s common stock on all matters presented to the Company’s stockholders; provided, however, that the number of votes that any holder, together with its affiliates, may exercise in connection with all of the Company securities held by such holder shall not exceed 9.99% of the voting power of the Company. In addition, pursuant to the Series A COD, the Company shall not take the following actions without obtaining the prior consent of at least a majority of the holders of the outstanding Series A Preferred, voting separately as a single class: (i) amend the Company’s Amended and Restated Articles of Incorporation or bylaws, or file a certificate of designation or certificate of amendment to any series of preferred stock if such action would adversely affect the holders of the Series A Preferred, (ii) increase or decrease the authorized number of shares of Series A Preferred, (iii) create or authorize any series of stock that ranks senior to, or on parity with, the Series A Preferred, (iv) purchase, repurchase or redeem any shares of junior stock, or (v) pay dividends on any junior or parity stock . Furthermore, so long as at least 25% of the Series A Preferred remain outstanding, holders of the Series A Preferred (other than the Direct Investors) shall have a right to appoint two members to the Company’s Board of Directors, and the Board shall not consist of more than five members, unless the holders of a majority of the outstanding Series A Preferred have consented to an increase in such number. Conversion of Preferred Shares For the year ended December 31,2019 the Company issued approximately 38,081,000 common stock conversion shares as 1,687 shares of Series A preferred were converted into common shares.
Deemed Dividends on Series A Preferred Stock As a result of the issuance of preferred stock, we have a deemed dividend of approximately $1,650,000 which is due on April 26, 2020 and is payable in cash, or if certain equity conditions are met, it is payable in common shares of the Company. In the event the Equity Conditions are satisfied, and the Corporation elects to pay the Dividend Amount in shares of Common Stock, the number of shares of Common Stock to be issued to each Holder shall be determined by dividing the Dividend Amount payable to each Holder on the applicable payment date as set forth above, and rounding up to the nearest whole share, by the Dividend Conversion Price. The term Dividend Conversion Price shall mean 90% of the VWAP of the Corporation’s Common Stock for the five (5) Trading Days prior to the Dividend Payment Date, as adjusted for any stock dividend, stock split, stock combination or other similar transaction during such five (5) Trading Day period. “Equity Conditions” means that each of the following conditions is satisfied: (i) the number of authorized but unissued and otherwise unreserved shares of Common Stock is sufficient for such issuance; (ii) such shares of Common Stock are registered for resale by the Holders and may be sold by the Holders pursuant to an effective registration statement or all such shares may be sold without volume restrictions pursuant to Rule 144 under the 1933 Act;(iii) the Common Stock is listed or quoted (and is not suspended from trading) on an Eligible Market; (iv) the average daily dollar value of shares of Common Stock traded on the Eligible Market for the ten (10) Trading Days prior to the Dividend Payment Date is greater than $500,000; and (v) such issuance would be permitted in full without violation Section 4(e) below or the rules or regulations of any Eligible Market. If the equity conditions are not met and the Company does not wish to pay the dividends in cash it will have to seek waivers from the Series A preferred shareholders. Series B Preferred On April 26, 2019, in connection with the Share Exchange, the Company filed the Certificate of Designation, Preferences and Rights of the Series B Convertible Preferred Stock (the “Series B COD”), with the Secretary of State of the State of Nevada, designating 1.5 million shares of its preferred stock as Series B Preferred. At the time of the filing of the Series B COD, the Series B Preferred ranked junior to the Series A Preferred and senior to all of the Company’s other outstanding securities. The Series B Preferred was structured to act as a common stock equivalent, and, on June 28, 2019, the Company amended and restated its Articles of Incorporation (the “Amended and Restated Charter”) to (i) change our corporate name to Charlie’s Holdings, Inc. and (ii) increase the number of shares authorized as common stock from 7.0 billion to 50.0 billion shares. The Amended and Restated Charter was approved by our Board of Directors and holders of a majority of our outstanding voting securities on May 8, 2019, and the Amended and Restated Charter was filed with the State of Nevada on June 28, 2019. As a result of the filing of the Amended and Restated Charter and the increase of our authorized common stock to 50.0 billion shares, all 1,396,305 outstanding shares of Series B Preferred automatically converted into a total of 13,963,047,716 shares of common stock in accordance with the Series B COD. At December 31, 2019, no shares of Series B Preferred were outstanding. Prior to the filing of the Amended and Restated Charter, holders of the Series B Preferred were entitled to vote on an as-converted basis along with holders of the Company’s common stock on all matters presented to the Company’s stockholders. In addition, pursuant to the Series B COD, the Company was not permitted to take the following actions without obtaining the prior consent of at least 50% of the holders of the outstanding Series B Preferred, voting separately as a single class: (i) amend the provisions of the Series B COD so as to adversely affect holders of the Series B Preferred, (ii) increase the authorized number of shares of Series B Preferred, or (iii) effect any distribution with respect to junior stock, unless the Company also provides such distribution to holders of the Series B Preferred.
Common Stock On June 28, 2019, the Company filed the Amended and Restated Charter to change the name of the Company to “Charlie’s Holdings, Inc.”, as well as to increase the number of shares of the Company’s common stock authorized for issuance from 7.0 billion shares to 50.0 billion shares. Warrants On April 26, 2019, pursuant to the Share Exchange as described in Notes 1 and 3, the Companyissued warrants to purchase approximately 4 billion shares of common stock, consisting of the Investor Warrants issued to the new investors and the Direct Investors, and the Placement Agent Warrants issued to Katalyst. The warrants have a 5-year term and an exercise price of $0.0044313, subject to adjustment for anti-dilution events. Due to the exercise features of these warrants they are not indexed to the Company’s own stock and are therefore not afforded equity treatment in accordance with ASC Topic 815,Derivatives and Hedging(“ASC 815”). ASC 815 requires the Company to assess the fair value of warrant liabilities at each reporting period and recognize any change in the fair value as items of other income or expense (see Note 3). NOTE 11 – STOCK OPTIONS The True Drinks Holdings, Inc. 2013 Stock Incentive Plan (the “Prior Plan”) was first approved in December 2013 and was approved by a majority of the stockholders in October 2014. The Prior Plan originally authorized 20.0 million shares of common stock for issuance as equity-based awards, which amount was increased to 120.0 million in January 2018 by authorization of the Board of Directors at that time (the “Prior Plan Amendment”). As of the date of the Share Exchange, April 26, 2019, a total of approximately 91.7 million awards were issued under the Prior Plan and the Prior Plan Amendment, consisting entirely of outstanding stock options. As of December 31, 2019, approximately 61.8 million of these stock options remain vested and exercisable under this plan. The Company will not grant any additional awards or shares of common stock under the Prior Plan beyond those that are currently outstanding. On May 8, 2019, our Board of Directors approved the Charlie’s Holdings, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date. The 2019 Plan will supersede and replace the Prior Plan and no new awards will be granted under the Prior Plan. Any awards outstanding under the Prior Plan on the date of stockholder approval of the 2019 Plan will remain subject to the terms in the Prior Plan, including those granted under the Prior Plan Amendment, and any shares subject to outstanding awards under the Prior Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2019 Plan. Up to 1,107,254,205 stock options may be granted under the 2019 Plan. The shares of common stock issuable under the 2019 Plan will consist of authorized and unissued shares, treasury shares, and shares purchased on the open market or otherwise. The following table summarizes stock option activities during the year ended December 31, 2019 (all option amounts are in thousands): | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | Outstanding at January 1, 2019 | 85,991 | $0.02 | 1.12 | $- | Options granted | 788,882 | 0.02 | 9.49 | - | Options forfeited/expired | (73,548) | 0.02 | - | - | Outstanding at December 31, 2019 | 801,325 | $0.01 | 9.41 | $- | Options vested and exercisable at December 31, 2019 | 61,825 | $0.02 | 4.47 | $- |
During the year ended December 31, 2019, the Company modified 49.4 million option to extend its maturity date. All options were fully vested as of the modification date. The Company accounted for the modification as a Type I (probable-to-probable) modification. Any additional compensation related to this modification was considered immaterial.
During the year ended December 31, 2019, the Company granted 739.5 million optionunder the 2019 Plan. The fair value of the option on the grant date was approximately $1.1 million based on the following assumptions: | | Exercise price | $0.0044 | Expected term (years) | 5.79 | Volatility (annual) | 70.0% | Risk-free rate | 1.7% | Dividend yield (per share) | 0% |
As of December 31, 2019, there was approximately $1.0 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the 2019 Plan. That cost is expected to be recognized over a weighted average period of 2.5 years. For the year ended December 31, 2019 the Company recorded compensation expense of $178,000 related to the issuance of stock options. NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under agreements classified as operating leases that expire on various dates through 2024. All of the Company’s lease liabilities result from the lease of its corporateheadquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which expires in 2021, its office and warehouse in Irvine,Denver, Colorado, which expires in 2022, and its warehouse space in Huntington Beach, California, which expires in 2022. Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor or have any leases classified as financing leases. The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a one-yearstraight-line basis over the lease term. The currentCompany entered into a commercial lease for the Company’s corporate headquarters (the “Lease”) in Costa Mesa, California with Brandon Stump, Ryan Stump and Keith Stump, the Company’s Chief Executive Officer, Chief Operating Officer and member of the Board. Messrs. Stump, Stump and Stump purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month to month basis, has been formalized to have a term of five years and a base rent rate of $22,940 per month, which rate is setsubject to expireannual adjustments based on September 30, 2017. Total rent expense relatedthe consumer price index, as may be mutually agreed upon by the parties to the Company's operating leaseLease. The terms of the Lease were negotiated and approved by the independent members of the Board, and executed by Mr. David Allen, the Company’s Chief Financial Officer after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant. The total amount paid to related parties for the year ended December 31, 2016 was $57,159. Total remaining payments on2019 is $115,000.
At December 31, 2019, the Company had operating lease through September 30, 2017 are $28,458.liabilities of approximately $1,644,000 and right of use assets of approximately $1,623,000, which were included in the consolidated balance sheet.
The Company maintains employment agreements with certain key members of management. The agreements provide for minimum base salaries, eligibility for stock options, performance bonuses and severance payments.following summarizes quantitative information about the Company’s operating leases (amount in thousands): Legal Proceedings | For the Year Ended December 31, 2019 | Operating leases | | Operating lease cost | $271 | Variable lease cost | - | Operating lease expense | 271 | Short-term lease rent expense | - | Total rent expense | $271 |
| For the Year Ended December 31, 2019 | Operating cash flows from operating leases | $169 | Weighted-average remaining lease term – operating leases (in years) | 3.8 | Weighted-average discount rate – operating leases | 12.0% |
Maturities of our operating leases, excluding short-term leases, are as follows: Year Ended December 31, 2020 | $600 | Year Ended December 31, 2021 | 577 | Year Ended December 31, 2022 | 400 | Year Ended December 31, 2023 | 275 | Year Ended December 31, 2024 | 206 | Total | 2,058 | Less present value discount | (414) | Operating lease liabilities as of December 31, 2019 | $1,644 |
Legal proceedings From time to time, claims are made against the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business, which could result in litigation. Claims and associated litigationbusiness. Other than as set forth below, there 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 positionno additional pending or results of operations. We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations.
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 itemthreatened legal proceedings 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;this time.
- C.H. Robinson Worldwide, Inc. v. True Drinks, Inc.On September 5, 2018, C.H. Robinson Worldwide (“Level 2Robinson: Inputs, other than”) filed a complaint against True Drinks, Inc. in the quoted pricesCalifornia Superior Court for the County of Orange located in active markets,Santa Ana, California alleging open book account, account stated, reasonable value of services received, agreement, and unjust enrichment related to shipping services provided by Robinson. Robinson has asserted $121,743 in damages plus interest, attorney’s fees and costs. We believe Robinson’s claim is substantially offset by damages caused by its failures to timely deliver products it was supposed to ship and intend to vigorously defend the complaint. The probability of any loss cannot be determined at this time.
The Company was classified as a partnership through the Closing Date, and therefore, not subject to entity level tax. After the Closing Date, the Company is taxed as a C corporation and files a consolidated return with True Drinks, Inc. The tax effects of temporary differences and tax loss and credit carry forwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 2019 are observable either directly or indirectly;comprised of the following (in thousands): | | | | | Deferred tax assets: | | | Bad Debt | 133 | - | Inventory | 9 | - | Lease liability | 385 | - | Stock compensation | 349 | - | Transaction costs | 808 | - | Net operation loss | 698 | - | Derivatives | 268 | - | Total deferred income tax assets | 2,650 | - | | | | Deferred income tax liabilities: | | | ROU assets | (384) | - | Fixed assets | (20) | - | Total deferred income tax liabilities | (404) | - | | | | Net deferred income tax assets | 2,246 | - | Valuation allowance | (2,246) | - | Deferred tax asset, net of allowance | (0) | $- |
At December 31, 2019, the Company had federal and state net operating loss carry forwards for income tax purposes of approximately $73.5 million. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards (“NOL”) attributable to periods before the change. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. The Company has not performed a detailed analysis to determine the realizability of the NOL under Section 382 of the IRC..As such, deferred tax assets related to NOLs incurred before the Closing Date of $71M relating to True Drinks, Inc. have not been recorded. NOLs incurred after the Closing Date of $2.5M will begin to expire in 2029. - Level 3: Unobservable inputsIn assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which therethose temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. Based on the review of positive and negative evidence, the Company has provided a full valuation allowance against its deferred tax assets as it is little or no market data, which require the reporting entity to develop its own assumptions.more likely than not that they may not be realized.
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 measurementsexpected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as definedfollows: | Year ended December 31, 2019 | Year ended December 31, 2018 | Statutory federal income tax rate | 21.0% | -% | Non-taxable Income | 15.1% | -% | State taxes, net of federal tax benefit | 20.6% | -% | Non-deductible expenses | (1.3%) | -% | Derivatives | 27.2% | -% | Change in valuation allowance | (81.3%) | -% | Income taxes provision (benefit) | 1.3% | -% |
(in thousands)
| | | | | Current | | | US Federal | $- | $- | US State | - | - | Total current provision | - | - | Deferred | | | US Federal | 1,331 | - | US State | 443 | - | Total deferred benefit | 1,774 | - | Change in valuation allowance | (1,745) | - | Total provision for income taxes | $29 | $- |
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by FASB ASC 810. Liabilities measured at estimated fair value ontaxing authorities. As of December 31, 2019, and 2018, there were no uncertain tax positions. The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such expense as a recurring basis include derivative liabilities. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transferscomponent of financial liabilities among the levels occur at the beginning of the reporting period.income tax expense. There were no transfers between Level 1, Level 2 and/amounts accrued for penalties or Level 3interest during the year ended December 31, 2016. 2019. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
The Company hadis subject to U.S. federal and state taxes in the normal course of business, and its income tax returns are subject to examination by the relevant tax authorities. Tax years 2016-2018 are still open for examination by Federal tax authorities and tax years 2015-2018 are generally open for examination by state tax authorities. The Company is under IRS audit for 2017, however no Level 1 or 2 fair value measurements during 2016 or 2015.material adjustments have currently been identified that would affect the tax provision as stated. 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, 2016 and 2015:
| | | | | | | Quoted market prices in active markets | Internal Models with significant observable market parameters | Internal models with significant unobservable market parameters | Derivative liabilities - December 31, 2016 | $5,792,572 | $- | $- | $5,792,572 | Derivative liabilities - December 31, 2015 | $6,199,021 | $- | $- | $6,199,021 |
The following table presents the changes in recurring fair value measurements included in net loss for the years ended December 31, 2016 and 2015:
| Recurring Fair Value Measurements | | Changes in Fair Value Included in Net Loss | | | | | Derivative liabilities - December 31, 2016 | $3,566,170 | $- | $3,566,170 | Derivative liabilities - December 31, 2015 | $1,262,329 | $- | $1,262,329 |
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, 2016:
| | Recorded new Derivative Liabilities | Reclassification of Derivative Liabilities | Change in Estimated Fair Value Recognized in Results of Operations | | Derivative liabilities | $6,199,021 | $3,159,721 | $- | $(3,566,170) | $5,792,572 |
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, 2015:
| | Recorded new Derivative Liabilities | Reclassification of Derivative Liabilities | Change in Estimated Fair Value Recognized in Results of Operations | | Derivative liabilities | $1,569,522 | $5,891,828 | $- | $(1,262,329) | $6,199,021 |
NOTE 9 – LICENSING AGREEMENTS We first entered into licensing agreements with Disney Consumer Products, Inc. and an 18-month licensing agreement with Marvel Characters, B.V. (collectively, the “Licensing Agreements”) in 2012. Each Licensing Agreement allows us to feature popular Disney and Marvel characters on AquaBall™ Naturally Flavored Water, allowing AquaBall™ to stand out among other beverages marketed towards children. Under the terms and conditions of the Licensing Agreements, we 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 with Disney and Marvel to set retail calendars, rotating the placement of different AquaBall™ designs over the course of the year.
In 2015, the Company and Disney entered into a renewed Licensing Agreement, which extended the Company’s license with Disney through March 31, 2017 (the “Disney Agreement”). The terms of the Disney Agreement entitle Disney to receive a royalty rate of 5% on sales of AquaBall™ Naturally Flavored Water adorned with Disney characters, paid quarterly, with a total guarantee of $450,870 over the period from April 1, 2015 through March 31, 2017. In addition, the Company is required to make a ‘common marketing fund’ contribution equal to 1% of sales due annually during the agreement. The Company is required to spend a total of $820,000 on advertising and promotional opportunities over the term of the Disney Agreement. During the year ended December 31, 2016, the Company paid a total of $129,597 to Disney pursuant to the Disney Agreement.
On August 22, 2015, the Company and Marvel entered into a renewed Licensing Agreement to extend the Company's license to feature certain Marvel characters on bottles of AquaBall™ Naturally Flavored Water through December 31, 2017. The Marvel Agreement requires 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.The total royalty paid to Marvel during the year ended December 31, 2016 was $100,000.
NOTE 10 –14- SUBSEQUENT EVENTS
The Company has evaluated events subsequent to December 31, 2019 to assess the need for potential recognition or disclosure in this report. Such events were evaluated through the date the accompanying consolidatedthese financial statements were issued and determined that no subsequent event activity required additional disclosure.available to be issued. Based upon this evaluation the following items were noted. On February 12, 2020, the Company, entered into a form of Amended and Restated Employment Agreement with both the Company’s Chief Executive Officer and Chief Operating Officer, respectively. The terms of the Amended Employment Agreements have been amended as follows: (i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated; however, the awards based on financial milestones remain in full force and effect; and (ii) payment of the 2019 bonuses has been deferred, resulting in the accrual of such bonuses on the books and records of the Company. All other terms of the respective Employment Agreements will remain in full force and effect subject to further review by the Board as it deems necessary and appropriate. On March 11, 2020, the World Health Organization designated the ongoing and evolving coronavirus (COVID-19) outbreak as a pandemic. The outbreak has caused substantial disruption in international and U.S. economies and markets as it continues to spread. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration. The financial impact of this matter on our business cannot be reasonably estimated at this time, however, if repercussions of the outbreak are prolonged, it will have an adverse impact on our business. On April 8, 2020, the Company. and its wholly-owned subsidiaries, Charlie's Chalk Dust, LLC and its variable interest entity, Don Polly LLC, issued a secured promissory note ("Note") to one of the Company's largest stockholder's, Red Beard Holdings, LLC (the "Lender") in the principal amount of $750,000, which Note is secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the "Note Financing"). The Note requires the payment of principal and guaranteed interest in the amount of at least $75,000 on or before the earlier date of (i) a Liquidity Event, as defined under the terms of the Note; or (ii) October 1, 2020. The Company intends to use the proceeds from the Note Financing for general corporate purposes, and its working capital requirements, pending availability of long-term working capital. |