THE ALKALINE WATER COMPANY, INC.
(FORMERLY GLOBAL
LINES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the year
|
|
|
Inception (June
|
|
|
Inception (June 19,
|
|
|
|
ended
|
|
|
19, 2012) to
|
|
|
2012 to
|
|
|
|
March 31, 2014
|
|
|
March 31, 2013
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(4,229,513
|
)
|
$
|
(283,388
|
)
|
|
(4,512,901
|
)
|
Adjustments to reconcile net income to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Bad Debt expense
|
|
10,000
|
|
|
|
|
|
10,000
|
|
Depreciation expense
|
|
42,407
|
|
|
1,814
|
|
|
44,221
|
|
Interest expense converted to common stock
|
|
3,555
|
|
|
|
|
|
3,555
|
|
Shares
issued for services
|
|
2,652,291
|
|
|
|
|
|
2,652,291
|
|
Amortization of debt discount
|
|
107,532
|
|
|
|
|
|
107,532
|
|
Interest
expense on redeemable preferred stock on intial issuance
|
|
455,926
|
|
|
|
|
|
455,926
|
|
Change in derivative liabilities
|
|
(617,939
|
)
|
|
|
|
|
(617,939
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(161,294
|
)
|
|
(15,110
|
)
|
|
(176,404
|
)
|
Inventory
|
|
(50,392
|
)
|
|
(7,573
|
)
|
|
(57,965
|
)
|
Prepaid
expenses and other current assets
|
|
-
|
|
|
|
|
|
-
|
|
Accounts payable
|
|
307,504
|
|
|
13,141
|
|
|
320,645
|
|
Accounts payable - related party
|
|
17,913
|
|
|
|
|
|
17,913
|
|
Accrued expenses
|
|
51,201
|
|
|
5,400
|
|
|
56,601
|
|
Accrued interest
|
|
19,829
|
|
|
1,315
|
|
|
21,144
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
operating activities
|
|
(1,390,980
|
)
|
|
(284,401
|
)
|
|
(1,675,381
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
(276,310
|
)
|
|
(39,897
|
)
|
|
(316,207
|
)
|
Deposits
|
|
-
|
|
|
(15,000
|
)
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
investing activities
|
|
(276,310
|
)
|
|
(54,897
|
)
|
|
(331,207
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
-
|
|
|
150,000
|
|
|
150,000
|
|
Proceeds from revolving
financing
|
|
83,348
|
|
|
|
|
|
83,348
|
|
Proceeds from sale of common stock
|
|
1,100,000
|
|
|
|
|
|
1,100,000
|
|
Proceeds from sale of
manadatory redeemable preferred stock, net
|
|
422,000
|
|
|
|
|
|
422,000
|
|
Shareholder contribution
|
|
|
|
|
264,575
|
|
|
264,575
|
|
Shareholder
distribution
|
|
|
|
|
(10,670
|
)
|
|
(10,670
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
financing activities
|
|
1,605,348
|
|
|
403,905
|
|
|
2,009,253
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
(61,942
|
)
|
|
64,607
|
|
|
2,665
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
64,607
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
$
|
2,665
|
|
$
|
64,607
|
|
$
|
2,665
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
$
|
-
|
|
$
|
-
|
|
|
|
|
Income taxes paid
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Debt converted to common stock
|
$
|
229,870
|
|
$
|
-
|
|
|
|
|
Derivative liability on
redeemable preferred stock
|
|
422,000
|
|
|
-
|
|
|
|
|
See Accompanying Notes to Condensed Consolidated Financial
Statements.
- 30 -
THE ALKALINE WATER COMPANY INC.
(FORMERLY GLOBAL
LINES INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Company
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles related to development
stage companies. A development-stage company is one in which planned principal
operations have not commenced or if its operations have commenced, there has
been no significant revenues there from.
Basis of presentation
The audited consolidated financial statements included herein,
presented in accordance with United States generally accepted accounting
principles and stated in U.S. dollars, have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting of normal
recurring adjustments, which in the opinion of management, are necessary for
fair presentation of the information contained therein.
Principles of consolidation
For the period from June 19, 2012 to March 31, 2014, the
consolidated financial statements include the accounts of Alkaline Water Corp.
(an Arizona Corporation) and Alkaline 88 LLC (formerly Alkaline 84, LLC) (an
Arizona Limited Liability Company). For the period from April 1, 2013 to March
31, 2014, the consolidated financial statements include the accounts of The
Alkaline Water Company Inc. (a Nevada Corporation), Alkaline Water Corp. (an
Arizona Corporation) and Alkaline 84, LLC (an Arizona Limited Liability
Company).
All significant intercompany balances and transactions have
been eliminated. The Alkaline Water Company Inc. (a Nevada Corporation),
Alkaline Water Corp. (an Arizona Corporation) and Alkaline 88, LLC (an Arizona
Limited Liability Company) will be collectively referred herein to as the
Company. Any reference herein to The Alkaline Water Company Inc., the
Company, we, our or us is intended to mean The Alkaline Water Company
Inc., including the subsidiaries indicated above, unless otherwise indicated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less to be considered cash equivalents. The carrying value of these investments approximates fair value. The Company had $2,665 and $64,607 in cash and cash equivalents at March 31, 2014 and 2013, respectively.
Accounts Receivable and Allowance for Doubtful
Accounts
- 31 -
The Company generally does not require collateral, and the
majority of its trade receivables are unsecured. The carrying amount for
accounts receivable approximates fair value.
Accounts receivable consisted of the following as of March 31,
2014 and 2013:
|
|
2014
|
|
|
2013
|
|
Trade receivables
|
$
|
176,404
|
|
$
|
15,110
|
|
Less: Allowance for doubtful accounts
|
|
(10,000
|
)
|
|
-
|
|
Net accounts receivable
|
$
|
166,404
|
|
$
|
15,110
|
|
Accounts receivable are periodically evaluated for
collectability based on past credit history with clients. Provisions for losses
on accounts receivable are determined on the basis of loss experience, known and
inherent risk in the account balance and current economic conditions.
Inventory
Inventory represents raw and blended chemicals and other items
valued at the lower of cost or market with cost determined using the weight
average method which approximates first-in first-out method, and with market
defined as the lower of replacement cost or realizable value.
As of March 31, 2014 and 2013, inventory consisted of the
following:
|
|
2014
|
|
|
2013
|
|
Raw materials
|
$
|
24,022
|
|
$
|
5,125
|
|
Finished goods
|
|
33,943
|
|
|
2,449
|
|
Total inventory
|
$
|
57,965
|
|
$
|
7,573
|
|
Property and equipment
The Company records all property and equipment at cost less
accumulated depreciation. Improvements are capitalized while repairs and
maintenance costs are expensed as incurred. Depreciation is calculated using the
straight-line method over the estimated useful life of the assets or the lease
term, whichever is shorter. Depreciation periods are as follows for the relevant
fixed assets:
Equipment
5 years
Stock-based Compensation
The Company accounts for stock-based compensation to employees
in accordance with FASB ASC 718. Stock-based compensation to employees is
measured at the grant date, based on the fair value of the award, and is
recognized as expense over the requisite employee service period. The Company
accounts for stock-based compensation to other than employees in accordance with
FASB ASC 505-50. Equity instruments issued to other than employees are valued at
the earlier of a commitment date or upon completion of the services, based on
the fair value of the equity instruments and is recognized as expense over the
service period. The Company estimates the fair value of stock-based payments
using the Black-Scholes option-pricing model for common stock options and
warrants and the closing price of the Companys common stock for common share
issuances.
Advertising
Advertising costs are charged to operations when incurred.
Advertising expense for the years ended March 31, 2014 and 2013 were $160,464
and $3,005, respectively.
- 32 -
Revenue recognition
The Company recognizes revenue when all of the following
conditions are satisfied: (1) there is persuasive evidence of an arrangement;
(2) the product or service has been provided to the customer; (3) the amount to
be paid by the customer is fixed or determinable; and (4) the collection of such
amount is probable.
The Company records revenue when it is realizable and earned
upon shipment of the finished products. The Company does not accept returns due
to the nature of the product. However, we will provide credit to our customers
for damaged goods.
Fair Value Measurements
The valuation of our embedded derivatives and warrant
derivatives are determined primarily by the multinomial distribution (Lattice)
model. An embedded derivative is a derivative instrument that is embedded within
another contract, which under the convertible note (the host contract) includes
the right to convert the note by the holder, certain default redemption right
premiums and a change of control premium (payable in cash if a fundamental
change occurs). In accordance with Accounting Standards Codification ("ASC") 815
Accounting for Derivative Instruments and Hedging Activities
, as
amended, these embedded derivatives are marked-to-market each reporting period,
with a corresponding non-cash gain or loss charged to the current period. A
warrant derivative liability is also determined in accordance with ASC 815.
Based on ASC 815, warrants which are determined to be classified as derivative
liabilities are marked-to-market each reporting period, with a corresponding
non-cash gain or loss charged to the current period. The practical effect of
this has been that when our stock price increases so does our derivative
liability resulting in a non-cash loss charge that reduces our earnings and
earnings per share. When our stock price declines, we record a non-cash gain,
increasing our earnings and earnings per share. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability. As a basis for
considering such assumptions, there exists a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value as follows:
Level 1
|
unadjusted quoted prices in active markets for identical
assets or liabilities that the Company has the ability to access as of the
measurement date.
|
|
|
Level 2
|
inputs other than quoted prices included within Level 1
that are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data.
|
|
|
Level 3
|
unobservable inputs for the asset or liability only used
when there is little, if any, market activity for the asset or liability
at the measurement date.
|
This hierarchy requires the Company to use observable market
data, when available, and to minimize the use of unobservable inputs when
determining fair value.
To determine the fair value of our embedded derivatives,
management evaluates assumptions regarding the probability of certain future
events. Other factors used to determine fair value include our period end stock
price, historical stock volatility, risk free interest rate and derivative term.
The fair value recorded for the derivative liability varies from period to
period. This variability may result in the actual derivative liability for a
period either above or below the estimates recorded on our consolidated
financial statements, resulting in significant fluctuations in other income
(expense) because of the corresponding non-cash gain or loss recorded.
Concentration
- 33 -
The Company has 4 major customers that together account for 60%
(18%, 14%, 14% and 14%, respectively) of accounts receivable at March 31, 2014,
and 5 customers that together account for 66% (20%, 16%, 15%, 8% and 6%,
respectively) of the total revenues earned for the year ended March 31, 2014.
The Company has 3 vendors that accounted for 56% (29%, 14%, and
13%, respectively) of purchases for the year ended March 31, 2014.
Income Taxes
In accordance with ASC 740
Accounting for Income
Taxes
, the provision for income taxes is computed using the asset and
liability method. Under the asset and liability method, deferred income tax
assets and liabilities are determined based on the differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the currently enacted tax rates and laws. A valuation allowance is
provided for the amount of deferred tax assets that, based on available
evidence, are not expected to be realized.
Basic and Diluted Loss Per Share
Basic and diluted earnings or loss per share (EPS) amounts in
the consolidated financial statements are computed in accordance Accounting
Standard Codification (ASC) 260 10
Earnings per Share
, which
establishes the requirements for presenting EPS. Basic EPS is based on the
weighted average number of common shares outstanding. Diluted EPS is based on
the weighted average number of common shares outstanding and dilutive common
stock equivalents. Basic EPS is computed by dividing net income or loss
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Potentially dilutive
securities were excluded from the calculation of diluted loss per share, because
their effect would be anti-dilutive.
Business Segments
The Company operates on one segment in one geographic location
the United States of America and, therefore, segment information is not
presented.
Fair Value of Financial Instruments
The carrying amounts of the companys financial instruments
including accounts payable, accrued expenses, and notes payable approximate fair
value due to the relative short period for maturity these instruments.
Environmental Costs
Environmental expenditures that relate to current operations
are expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations, and which do not contribute to
current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable, and the
cost can be reasonably estimated. Generally, the timing of these accruals
coincides with the earlier of completion of a feasibility study or the Companys
commitments to a plan of action based on the then known facts.
The Company incurred no environmental expenses during the years
ended March 31, 2014 and 2012, respectively.
Reclassification
Certain accounts in the prior period were reclassified to
conform to the current period financial statements presentation.
Recent pronouncements
- 34 -
The Company has evaluated all the recent accounting
pronouncements through January 2014 and believes that none of them will have a
material effect on our financial statements.
NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the recoverability and/or acquisition and sale of assets and the satisfaction of
liabilities in the normal course of business. Since its inception, the Company
has been engaged substantially in financing activities, developing its business
plan and building its initial customer and distribution base for its products.
As a result, the Company incurred accumulated net losses from Inception (June
19, 2012) through the period ended March 31, 2014 of $(4,512,901). In addition,
the Companys development activities since inception have been financially
sustained through debt and equity financing.
The ability of the Company to continue as a going concern is
dependent upon its ability to raise additional capital from the sale of common
stock and, ultimately, the achievement of significant operating revenues. These
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might result from this uncertainty.
NOTE 3 PROPERTY AND EQUIPMENT
Fixed assets consisted of the following at:
|
|
March 31, 2014
|
|
|
March 31, 2013
|
|
Machinery and Equipment
|
$
|
273,597
|
|
$
|
39,897
|
|
Office Equipment
|
|
53,631
|
|
|
|
|
Leasehold Improvements
|
|
3,979
|
|
|
|
|
Less: Accumulated Depreciation
|
|
(44,221
|
)
|
|
(1,814
|
|
Fixed Assets, net
|
$
|
286,986
|
|
$
|
38,083
|
|
Depreciation expense for the years ended March 31, 2014 and
2013 was $42,407 and $1,814, respectively.
NOTE 4 EQUIPMENT DEPOSITS RELATED PARTY
On February 27, 2013, we paid a $15,000 deposit on equipment
that we purchased for approximately $208,773. During the year ended March 31,
2014, the Company paid an additional $193,773 for equipment that was completed
during this year and $10,287 for a storage tank. The Company also paid an
additional $201,900 for more equipment, however these funds were returned to the
company. As of March 31, 2014, the total amount of deposits for equipment is $0.
The equipment was manufactured by and purchased under an exclusive manufacturing
contract from Water Engineering Solutions, LLC, an entity that is controlled and
majority owned by Steven P. Nickolas and Richard A. Wright, for the production
of our alkaline water.
NOTE 5 REVOLVING FINANCING
On February 20, 2014, The Alkaline Water Company Inc., and
subsidiaries, Alkaline 88, LLC and Alkaline Water Corp., entered into a
revolving accounts receivable funding agreement with Gibraltar Business Capital,
LLC (Gibraltar). Under the agreement, from time to time, the Company agreed to
tender to Gibraltar all of our accounts (which is defined as our rights to
payment whether or not earned by performance, (i) for property that has been or
is to be sold, leased, licensed, assigned or otherwise disposed of, or (ii) for
services rendered or to be rendered, or (iii) as otherwise defined in the
Uniform Commercial Code of the State of Illinois). Gibraltar will have the
right, but will not be obligated, to purchase such accounts tendered in its sole
discretion. If Gibraltar purchases such accounts, Gibraltar will make cash
advances to us as the purchase price for the purchased accounts.
The Company assumed full risk of non-payment and
unconditionally guaranteed the full and prompt payment of the full face amount
of all purchased accounts. We also agreed to direct all parties obligated to pay
the accounts to send all payments for all accounts directly to Gibraltar. All
collections from accounts will be applied to our indebtedness, which is defined as the amount owed by us to Gibraltar from
time to time, i.e., all cash advances, plus all charges, plus all other amounts
owning from us to Gibraltar pursuant to the agreement, less all collections
retained by Gibraltar from either purchased accounts or from us which are
applied to indebtedness, unless Gibraltar elects to hold any such collections to
establish reserves to secure payment of any purchased accounts.
- 35 -
In consideration of Gibraltars purchase of the accounts, the
Company agreed to pay Gibraltar interest on the indebtedness outstanding at the
rate of 8% per annum plus the prime rate in effect at the end of each month with
the prime rate for these purposes never being less than 3.25% per annum,
calculated on a 360-day year and payable monthly. In addition, the Company
agreed to pay to Gibraltar a monthly collateral/management fee in the amount of
0.5% calculated on the average daily borrowing amount for the given month and an
unused line fee of 0.25% monthly based on the difference between the actual line
of credit and the average daily borrowing amount for the given month. The
Company also agreed to pay to Gibraltar upon execution of the agreement and as
of the commencement of each renewal term, a closing cost of 1% of the initial
indebtedness in addition to the amount of any other credit accommodations
granted from Gibraltar, which amount will be deducted from the first cash
advances.
The initial indebtedness is $500,000. The Company may request
an increase to the initial indebtedness in $500,000 increments up to $5,000,000,
subject the Companys financial performance and/or projections are satisfactory
to Gibraltar, and absent an event of default. The Company also granted to
Gibraltar a security interest in all of our presently-owned and
hereafter-acquired personal and fixture property, wherever located. The
agreement will continue until the first to occur of (i) demand by Gibraltar; or
(ii) 24 months from the first day of the month following the date that the first
purchased account is purchased and will be automatically renewed for successive
periods of 12 months thereafter unless, at least 30 days prior to the end of the
term, we give Gibraltar notice of our intention to terminate the agreement. In
addition, we will be able to exit the agreement at any time for a fee of 2% of
the line of credit in place at the time of prepayment. On March 31, 2014 the
amount borrowed on this facility was $83,348.
NOTE 6 DERIVATIVE LIABILITY
On November 7, 2013, we sold to certain institutional investors
10% Series B Convertible Preferred Shares which are subject to mandatory
redemption and include down-round provisions that reduce the exercise price of a
warrant and convertible instrument. As required by ASC 815 Derivatives and
Hedging, if the Company either issues equity shares for a price that is lower
than the exercise price of those instruments or issues new warrants or
convertible instruments that have a lower exercise price, the investors will be
entitled to down-round protection. The Company evaluated whether its warrants
and convertible debt instruments contain provisions that protect holders from
declines in its stock price or otherwise could result in modification of either
the exercise price or the shares to be issued under the respective warrant
agreements. The Company determined that a portion of its outstanding warrants
and conversion instruments contained such provisions thereby concluding they
were not indexed to the Companys own stock and therefore a derivative
instrument.
The range of significant assumptions which the Company used to
measure the fair value of warrant liabilities (a level 3 input) at March 31,
2014 is as follows:
|
Warrant
|
Conversion feature
|
Stock price
|
$ .25
|
$ .25
|
Term (Years)
|
1 to 5
|
1
|
Volatility
|
138% to 338%
|
138% to 338%
|
Exercise prices
|
$ 0.55 to 0.25
|
$ 0.43
|
Dividend yield
|
0%
|
0%
|
The following table sets forth the fair value hierarchy within
our financial assets and liabilities by level that were accounted for at fair
value on a recurring basis as of March 31, 2014.
- 36 -
|
|
|
|
|
Fair Value Measurement at March 31,
2014
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative convertible debt liability
|
$
|
128,668
|
|
$
|
-
|
|
$
|
-
|
|
$
|
128,668
|
|
Derivative warrant liability
|
$
|
209,320
|
|
$
|
-
|
|
$
|
-
|
|
$
|
209,320
|
|
Total derivative liability
|
$
|
337,988
|
|
$
|
-
|
|
$
|
-
|
|
$
|
337,988
|
|
The Company analyzed the warrants and conversion feature under
ASC 815 to determine the derivative liability. The Company estimated the fair
value of these derivatives using a multinomial distribution (Lattice) valuation
model. The fair value of these warrant liabilities at March 31, 2014 was
$209,320 and their conversion feature liability was $128,668. At November 7,
2013 the fair value of these warrant liabilities was $606,044 and the conversion
feature liability was $349,883. The change in fair value of derivative
liabilities of $617,937 was included in the consolidated statement of operations
for the nine months ended March 31, 2014.
The following table sets forth the fair value hierarchy within
our financial assets and liabilities by level that were accounted for at fair
value on a recurring basis as of November 7, 2013.
|
|
|
|
|
Fair Value Measurement at November 7, 2013
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
November 7, 2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative convertible debt liability
|
$
|
349,883
|
|
$
|
-
|
|
$
|
-
|
|
$
|
349,883
|
|
Derivative warrant liability
|
$
|
606,044
|
|
$
|
-
|
|
$
|
-
|
|
$
|
606,044
|
|
Total derivative liability
|
$
|
955,927
|
|
$
|
-
|
|
$
|
-
|
|
$
|
955,927
|
|
The range of significant assumptions which the Company used to
measure the fair value of warrant liabilities (a level 3 input) at November 7,
2013 is as follows:
|
Warrant
|
Conversion feature
|
Stock price
|
$ .50
|
$ .50
|
Term (Years)
|
1 to 5
|
1
|
Volatility
|
120% to 265%
|
120% to 265%
|
Exercise prices
|
$ 0.55
|
$ 0.43
|
Dividend yield
|
0%
|
0%
|
NOTE 7 PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Convertible preferred shares
On November 7, 2013, the Company sold to certain institutional
investors an aggregate of 500 shares of our 10% Series B Convertible Preferred
Stock (Series B Preferred Stock) at a stated value of $1,000 per share of
Series B Preferred Stock for gross proceeds of $500,000. Additionally the
investors also received Series A, Series B and Series C common stock purchase
warrants. The Series A warrants will be exercisable into 1,162,791 shares of our
common stock at an exercise price of $0.55 per share, the Series B warrants will
be exercisable into 1,162,791 shares of our common stock at an exercise price of
$0.43 per share and the Series C warrants will be exercisable into 1,162,791
shares our common stock at an exercise price of $0.55 per share. Holders of the
Series B Preferred Stock will be entitled to receive cumulative dividends at the
rate per share (as a percentage of the stated value per share) of 10% per annum,
payable semi-annually. Each share of the Series B Preferred Stock will be
convertible at the option of the holder thereof into that number of shares of
common stock determined by dividing the stated value of such share of the Series
B Preferred Stock by the conversion price of $0.43, subject to later adjustment.
On November 4, 2013, we also entered into a registration rights agreement with
the investors pursuant to which we are obligated to file a registration
statement to register the resale of the shares of common stock issuable upon
conversion of the Series B Preferred Stock and upon exercise of the Warrants.
- 37 -
Effective November 7, 2013, the Company issued common stock
purchase warrants to the placement agent and its designees as compensation for
the services provided by the placement agent in connection with our private
placement of 500.00028 shares of our 10% Series B Convertible Preferred Stock,
which was completed on November 7, 2013. The warrants issued to the placement
agent and its designees are exercisable into an aggregate of 116,279 shares of
our common stock with an exercise price of $0.55 per share and have a term of
exercise of five years. The Company issued the warrants to six accredited
investors and paid certain transactional costs of $78,000. For the year ended
March 31, 2014 the Company recorded $123,123 of amortization of the debt
discount and deferred financing cost.
The 10% Series B Preferred Stock included down-round provisions
which reduce the exercise price of a warrant and convertible instrument as
required by ASC 815 Derivatives and Hedging. The aggregate of the derivative
liability at issuance was $955,927 which was recorded as amortization of debt
discount at issuance. The Company recorded a debt discount cost of $500,000 and
will amortize this cost over the mandatory redemption period.
NOTE 8 STOCKHOLDERS EQUITY
Preferred shares
On October 7, 2013, the Company amended its articles of
incorporation to create 100,000,000 shares of preferred stock by filing a
Certificate of Amendment to Articles of Incorporation with the Secretary of
State of Nevada. The preferred stock may be divided into and issued in series,
with such designations, rights, qualifications, preferences, limitations and
terms as fixed and determined by our board of directors.
Grant of Series A Preferred stock
On October 8, 2013, the Company issued a total of 20,000,000
shares of non-convertible Series A Preferred Stock to Steven A. Nickolas and
Richard A. Wright (10,000,000 shares to each), our directors and executive
officers, in consideration for the past services, at a deemed value of $0.001
per share. The company valued these shares based on the cost considering the
time and average billing rate of these individuals and recorded a $20,000 stock
compensation cost for the year ended March 31, 2014.
Common stock
We are authorized to issue 1,125,000,000 shares of $0.001 par
value common stock. On May 31, 2013, we effected a 15-for-1 forward stock split
of our $0.001 par value common stock. All shares and per share amounts have been
retroactively restated to reflect such split.
Prior to the acquisition of Alkaline Water Corp., we had
109,500,000 shares of common stock issued and outstanding.
On May 31, 2013, we issued 43,000,000 shares in exchange for a
100% interest in Alkaline Water Corp. For accounting purposes, the acquisition
of Alkaline Water Corp. by The Alkaline Water Company Inc. has been recorded as
a reverse acquisition of a company and recapitalization of Alkaline Water Corp.
based on the factors demonstrating that Alkaline Water Corp. represents the
accounting acquirer. Consequently, after the closing of this agreement we
adopted the business of Alkaline Water Corp.s wholly-owned subsidiary, Alkaline
88, LLC. As part of the acquisition, the former management of the Company agreed
to cancel 75,000,000 shares of common stock.
Sale of restricted shares
On October 8, 2013, the Company issued an aggregate of
1,250,000 shares of our common stock to three investors in a non-brokered
private placement, at a purchase price of $0.40 per share for gross proceeds of
$500,000. In addition, the Company issued 1,250,000 warrants with an exercise
price of $0.50 per share and 650,000 warrants with an exercise prices of $0.60
per share to a finder in connection with this private placement. Each unit
consisted of one share purchase warrant entitling the holder to purchase, for a
period of two years from issuance, one share of our common stock at an exercise
price of $0.50 per share and one-half of one share purchase warrant, with each
whole share purchase warrant entitling the holder to purchase, for a period of
two years from issuance, one share of our common stock at an exercise price of $0.60 per share.
- 38 -
On May 31, 2013, the Company sold 1,312,500 units at $0.40 per
share for total cash of $525,000. Each unit consisted of one share of common
stock, one warrant which entitles the holder to purchase one share of common
stock for a period of 2 years with an exercise price of $0.50 per share, and 1/2
warrant which entitles the holder to purchase 1/2 share of common stock for a
period of 2 years with an exercise price of $0.60 per share.
On May 31, 2013, the Company converted principal amount of
$225,000 and accrued interest of $4,870 into 574,675 units at $0.40 per share
for total debt converted of $229,870. Each unit consisted of one share of common
stock, one warrant which entitles the holder to purchase one share of common
stock for a period of 2 years with an exercise price of $0.50 per share, and 1/2
warrant which entitles the holder to purchase 1/2 share of common stock for a
period of 2 years with an exercise price of $0.60 per share.
Common stock issued for services
Effective October 10, 2013, the Company issued 200,000 shares
of common stock to a consultant in consideration for services rendered by the
consultant to our company.
On August 8, 2013, the Company entered into a service contract
that included the issuance of 250,000 common shares. These shares were valued at
fair value of $0.55 per share and have been charged as stock compensation to
general and administrative expense.
On December 20, 2013, the Company issued 65,000 common shares
to employees for services rendered. These shares were valued at fair value of
$0.327 per share and have been charged as stock compensation to general and
administrative expense.
Between December 13, 2013 and December 20, 2013, the Company
issued 170,000 common shares to consultants for services rendered. These shares
were valued at fair value of $59,300 and have been charged as stock compensation
to general and administrative expense.
Between January 2, 2014 and January 14, 2014, the Company
issued 280,000 shares of common stock to various consultants in consideration
for services rendered by the consultants to the company. These shares were
valued at fair value of $76,500 and have been charged as stock compensation to
general and administrative expense.
NOTE 9 OPTIONS AND WARRANTS
Stock Option Awards
On October 9, 2013, the Company granted a total of 6,000,000
stock options to Steven A. Nickolas and Richard A. Wright (3,000,000 stock
options to each). The stock options are exercisable at the exercise price of
$0.605 per share for a period of ten years from the date of grant. The stock
options vest as follows: (i) 1,000,000 upon the date of grant; and (ii) 500,000
per quarter until fully vested.
The Company has recognized compensation expense of $2,225,736
on the stock options granted that vested during the current period for the nine
months ended March 31, 2014. The fair value of the unvested shares is $1,112,868
as of March 31, 2014 with the total unrecognized compensation cost related to
non-vested stock options which is expected to be recognized over a
weighted-average period of approximately 1 year. The aggregate intrinsic value
of these options was $0 at March 31, 2014.
Stock option activity summary covering options is presented in
the table below:
- 39 -
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (years)
|
|
|
Outstanding at March 31, 2013
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
Granted
|
|
6,000,000
|
|
$
|
0.61
|
|
|
9.8
|
|
|
Exercised
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
Expired/Forfeited
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
Outstanding at March 31, 2014
|
|
6,000,000
|
|
$
|
0.61
|
|
|
9.8
|
|
|
Exercisable at March 31, 2014
|
|
2,000,000
|
|
$
|
0.61
|
|
|
9.8
|
|
Warrants
The following is a summary of the status of all of our warrants
as of March 31, 2014 and changes during the twelve months ended on that date:
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of Warrants
|
|
|
Exercise Price
|
|
Outstanding at April 1, 2013
|
|
-
|
|
$
|
0.00
|
|
Granted
|
|
8,310,415
|
|
|
0.52
|
|
Exercised
|
|
-
|
|
|
0.00
|
|
Cancelled
|
|
-
|
|
|
0.00
|
|
Outstanding at March 31, 2014
|
|
8,310,415
|
|
|
0.52
|
|
Warrants exercisable at March 31, 2014
|
|
7,147,624
|
|
$
|
0.52
|
|
The following table summarizes information about stock warrants
outstanding and exercisable at March 31, 2014:
|
|
STOCK WARRANTS OUTSTANDING AND EXERCISABLE
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
Remaining
|
|
Weighted-
|
|
|
Warrants
|
|
Contractual
|
|
Average
|
Exercise Price
|
|
Outstanding
|
|
Life
in Years
|
|
Exercise Price
|
$ 0.50
|
|
3,137,175
|
|
1.35
|
|
$ 0.50
|
$ 0.60
|
|
1,568,588
|
|
1.35
|
|
$ 0.60
|
$ 0.55
|
|
2,441,861
|
|
3.46
|
|
$ 0.55
|
$ 0.43
|
|
1,162,791
|
|
.65
|
|
$ 0.43
|
NOTE 10 RELATED PARTY TRANSACTIONS
On October 8, 2013, the Company issued a total of 20,000,000
shares of non-convertible Series A Preferred Stock to Steven A. Nickolas and
Richard A. Wright (10,000,000 shares to each), our directors and executive
officers, in consideration for the past services, at a deemed value of $0.001
per share. We valued these shares based on the cost considering the time and
average billing rate of these individuals and recorded a $20,000 stock
compensation cost for the year ended March 31, 2014.
On October 9, 2013, the Company granted a total of 6,000,000
stock options to Steven A. Nickolas and Richard A. Wright (3,000,000 stock
options to each). The stock options are exercisable at the exercise price of
$0.605 per share for a period of ten years from the date of grant. The stock
options vest as follows: (i) 1,000,000 upon the date of grant; and (ii) 500,000
per quarter until fully vested.
On August 1, 2013 the Company entered into a 3-year sub-lease
agreement requiring a monthly payment of $2,085 for office space in Scottsdale,
Arizona, with a basic monthly lease increase of 8% and 7% on each anniversary
date.
- 40 -
The Company or the landlord can cancel the lease with 30 days
notice. The sub-lessor is an entity owned by the Companys Chief Executive
Officer and President.
As of March 31, 2013, the Company had an equipment deposit
totaling $15,000 to an entity that is controlled and owned by an officer,
director and shareholder of the Company. During the period from Inception (June
19, 2012) to March 31, 2013, the Company purchased $39,897 in equipment from an
entity that is controlled and owned by an officer, director and shareholder of
the Company.
As of March 31, 2014 the Company had $0 in equipment deposits
with an entity that is controlled and owned by an officer, director and
shareholder of the Company. During the year ended March 31, 2014, the Company
provided $201,900 of deposits on equipment used to produce our alkaline water to
an entity that is controlled and owned by an officer, director and shareholder
of the Company. During the month of March 2014, these funds were returned to the
Company.
During the year ended March 31, 2014 the Company acquired
equipment of $208,773 and $10,287 from an entity that is controlled and
majority-owned by an officer, director and shareholder of the Company.
During the year ended March 31, 2014, the Company had a total
of $62,092, in general and administrative expenses with related parties. Of that
total for year ended March 31, 2014, $33,592 was consulting fees to an officer,
director and shareholder of the Company, $12,000 was rent to an entity that is
controlled and owned by an officer, director and shareholder of the Company and
$16,500 was professional fees to an entity that is controlled and owned by an
officer, director and shareholder. During the period from inception to March 31,
2013, the Company had a total of $104,929 in general and administrative expenses
related party, principally $69,736 was consulting fees to an officer, director
and shareholder of the Company, $32,322 was rent to an entity that is controlled
and owned by an officer, director and shareholder of the Company and $2,875 was
professional fees to an entity that is controlled and owned by an officer,
director and shareholder.
During the year ended March 31, 2014, the Company recorded as
other related party income a total of $40,029 to an entity that is controlled
and owned by an officer, director and shareholder of the Company. The income
reflects the Companys estimate of vehicle rent and labor of an employee when
utilized by the related party.
On January 17, 2014 the Company entered into an equipment lease
with Water Engineering Solutions LLC, an entity that is controlled and owned by
an officer, director and shareholder, for specialized equipment used to make our
alkaline water totaling $190,756 and agreed to a 60 month term at $2,512 per
month and a final payment of $28,585. On February 12, 2014 the Company amended
this lease, as noted above, with equipment deposits of $201,900 being returned
to the Company. In addition the lease terms were amended to 60 monthly payments
of $3,864, payable 30 days after installation of the equipment and a purchase
option of $1.00.
On April 2, 2014 the Company entered into a sale-leaseback
transaction with Water Engineering Solutions LLC, an entity that is controlled
and owned by an officer, director and shareholder, for specialized equipment
with an original cost of $208,773 acquired in August 2013. The Company received
proceeds of $188,000 in April 2014.
Under the terms of the exclusive manufacturing agreement
entered into on April 15, 2013 between the Company and Water Engineering
Solutions LLC, a related party, the Company paid $690,000 on May 1 2014 for
specialized equipment used in the production of our alkaline water.
NOTE 11 INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company
recorded the valuation allowance due to the uncertainty of future realization of
federal and state net operating loss carryforwards. The deferred income tax
assets are comprised of the following at March 31:
- 41 -
|
|
2014
|
|
|
2013
|
|
Deferred income tax assets:
|
$
|
260,000
|
|
$
|
110,000
|
|
Valuation allowance
|
|
(260,000
|
)
|
|
(110,000
|
)
|
Net total
|
$
|
-
|
|
$
|
-
|
|
At March 31, 2014, the Company had net operating loss
carryforwards of approximately $665,000 and net operating loss carryforwards
expire in 2023 through 2033.
The valuation allowance was increased by $150,000 during the
year ended March 31, 2014. The current income tax benefit of $260,000 and
$110,000 generated for the years ended March 31, 2014 and 2013, respectively,
was offset by an equal increase in the valuation allowance. The valuation
allowance was increased due to uncertainties as to the Companys ability to
generate sufficient taxable income to utilize the net operating loss
carryforwards and other deferred income tax items.
The Company recognizes interest and penalties related to
uncertain tax positions in general and administrative expense. As of March 31,
2014, the Company has no unrecognized uncertain tax positions, including
interest and penalties.
NOTE 12 COMMITMENTS AND CONTINGENCIES
Leases
The Company has long-term leases for its offices under
cancelable operating leases from August 1, 2013 through July 31, 2016. At March
31, 2014, future minimum contractual obligations were as follows:
|
|
Facilities
|
|
|
Equipment
|
|
|
|
|
|
|
|
|
Year ending March 31, 2015
|
$
|
26,333
|
|
$
|
10,436
|
|
Year ending March 31, 2016
|
|
28,293
|
|
|
10,436
|
|
Year ending March 31, 2017
|
|
9,648
|
|
|
10,436
|
|
Year ending March 31, 2018
|
|
|
|
|
4,347
|
|
Total Minimum Lease Payments:
|
$
|
64,274
|
|
$
|
35,655
|
|
On August 1, 2013 the Company entered into a 3-year sub-lease
agreement requiring a monthly payment of $2,085 for office space in Scottsdale,
Arizona, with a basic monthly lease increase of 8% and 7% on each anniversary
date. The Company or the landlord can cancel the lease with 30 days notice. The
sub-lessor is an entity owned by the Companys Chief Executive Officer and
President.
On August 2, 2013 the Company entered into a 4-year lease
agreement for certain office equipment requiring monthly payment of $870.
NOTE 13 SUBSEQUENT EVENTS
On April 2, 2014 the Company entered into a sale-leaseback
transaction with Water Engineering Solutions LLC, an entity that is controlled
and owned by an officer, director and shareholder, for specialized equipment
with an original cost of $208,773 acquired in August 2013. The Company received
proceeds of $188,000 in April 2014.
On April 15, 2014 the Company entered into purchase agreement
with Water Engineering Solutions LLC, valued at $690,000 for equipment utilizing
the proceeds from the S-1 offering of May 1, 2014.
Between April 16, 2014 and April 22, 2014, the Redeemable
Preferred holders exercise their intention to redeem the Redeemable Preferred
all 500 shares partially as a conversion to Common stock and $292,840 the
remaining portion as cash including accrued interest of $35,456 and penalty for
late registration of $10,212. The Redeemable Preferred converted 252.83
preferred shares into 796,566 common shares at a conversion price of $0.3174 per
share.
- 42 -
On May 1, 2014, the Company completed the offering and sale of
an aggregate of 17,333,329 shares of our common stock and warrants to purchase
an aggregate of 8,666,665 shares of our common stock, for aggregate gross
proceeds of $2,599,999. Each share of common stock we sold in the offering was
accompanied by a warrant to purchase one-half of a share of common stock at an
exercise price of $0.15 per share for a period of five years from the date of
issuance. Each share of common stock, together with each warrant was sold at a
price of $0.15. These securities were sold pursuant to the securities purchase
agreement dated April 28, 2014 and have been registered under the Securities Act
of 1933 pursuant to our registration statement on Form S-1, as amended (No.
333-192599), which was declared effective by the Securities and Exchange
Commission on April 16, 2014. Pursuant to the engagement agreement dated March
12, 2014 with H.C. Wainwright & Co., LLC (Wainwright), Wainwright agreed
to act as our exclusive placement agent in connection with the offering.
Pursuant to the engagement agreement, the Company paid Wainwright a cash
placement fee equal to 8% of the aggregate gross proceeds from the offering, or
$208,000, and a non-accountable expense allowance equal to 1% of the aggregate
gross proceeds from the offering, or $26,000. In addition, we issued warrants to
purchase an aggregate of 5.5% of the aggregate number of shares of our common
stock sold in the offering, or 953,333, to Wainwright and its designees. These
warrants have an exercise price of $0.1875 per share and expire on April 16,
2019. In issuing these warrants, the Company relied on an exemption from the
registration requirements of the Securities Act of 1933 provided by Section
4(a)(2) of the Securities Act of 1933.
Under the terms of the exclusive manufacturing agreement
entered into on April 15, 2013 between the Company and Water Engineering
Solutions LLC, a related party, the Company paid $690,000 on May 1 2014 for
specialized equipment used in the production of our alkaline water.
On May 12, 2014, the Company granted a total of 820,000 stock
options to employees and consultants. The stock options are exercisable at the
exercise price of $0.15 per share for a period of five years from the date of
grant. 502,500 stock options vested upon the date of grant, 116,250 stock
options vest on June 30, 2014, 116,250 stock options vest on September 30, 2014
and 85,000 stock options vest on December 31, 2014.
On May 12, 2014, the Company granted a total of 1,200,000 stock
options Steven A. Nickolas and Richard A. Wright (600,000 stock options to
each). The stock options are exercisable at the exercise price of $0.165 per
share for a period of five years from the date of grant. 1,200,000 stock options
vested upon the date of grant.
On May 15, 2014, the Company issued 100,000 restricted common
shares to consultant for services rendered.
On May 16, 2014, the Company granted a total of 250,000 stock
options to a consultant. The stock options are exercisable at the exercise price
of $0.143 per share for a period of five years from the date of grant. 62,500
stock options vested upon the date of grant, 62,500 stock options vest on June
30, 2014, 62,500 stock options vest on September 30, 2014 and 62,500 stock
options vest on December 31, 2014.
On May 21, 2014, the Company granted a total of 6,000,000 stock
options Steven A. Nickolas and Richard A. Wright (3,000,000 stock options to
each). The stock options are exercisable at the exercise price of $0.1455 per
share for a period of five years from the date of grant. 3,000,000 stock options
vested upon the date of grant and the 3,000,000 stock options will vest on
November 21, 2014.
On June 2, 2014, the Company issued 100,000 restricted common
shares to consultant for services rendered.
On June 6, 2014, the Company issued
1,000,000 restricted common shares to consultant for services rendered.
On June
11, 2014, the Company issued 250,000 restricted common shares to consultant for
services rendered.
-43-