THE ALKALINE WATER COMPANY INC.
(A DEVELOPMENT STAGE
COMPANY)
FORMERLY GLOBAL LINES INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
For the Three
|
|
|
For the Three
|
|
|
Inception
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
(June 19, 2012)
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
to June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,437,209
|
)
|
$
|
(182,487
|
)
|
$
|
(6,950,110
|
)
|
Adjustments to
reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
-
|
|
|
-
|
|
|
10,000
|
|
Depreciation expense
|
|
16,534
|
|
|
1,849
|
|
|
60,755
|
|
Interest expense
converted to common stock
|
|
-
|
|
|
-
|
|
|
3,555
|
|
Shares
issued for services
|
|
1,399,127
|
|
|
-
|
|
|
4,051,418
|
|
Amortization of debt
discount
|
|
414,370
|
|
|
-
|
|
|
521,902
|
|
Initial
discount on Redeemable preferred stock
|
|
-
|
|
|
-
|
|
|
455,926
|
|
Change in derivative
liabilities
|
|
(264,051
|
)
|
|
-
|
|
|
(881,990
|
)
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
6,011
|
|
|
(9,435
|
)
|
|
(170,393
|
)
|
Accounts
receivable - related party
|
|
-
|
|
|
|
|
|
-
|
|
Inventory
|
|
(295,864
|
)
|
|
(21,591
|
)
|
|
(353,829
|
)
|
Prepaid
expenses and other current assets
|
|
(4,694
|
)
|
|
|
|
|
(4,694
|
)
|
Accounts payable
|
|
170,837
|
|
|
19,221
|
|
|
491,482
|
|
Accounts
payable - related party
|
|
(18,403
|
)
|
|
-
|
|
|
(490
|
)
|
Accrued expenses
|
|
14,936
|
|
|
-
|
|
|
71,537
|
|
Accrued
interest
|
|
(19,829
|
)
|
|
3,555
|
|
|
1,315
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
(1,018,235
|
)
|
|
(188,888
|
)
|
|
(2,693,616
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
(17,435
|
)
|
|
(1,019
|
)
|
|
(333,642
|
)
|
Proceeds from sale
lease back
|
|
208,773
|
|
|
-
|
|
|
208,773
|
|
Equipment deposits - related party
|
|
(711,500
|
)
|
|
(90,000
|
)
|
|
(726,500
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(520,162
|
)
|
|
(91,019
|
)
|
|
(851,369
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from notes
payable
|
|
-
|
|
|
75,000
|
|
|
150,000
|
|
Proceeds from revolving financing
|
|
46,138
|
|
|
-
|
|
|
129,486
|
|
Proceeds from sale of
common stock, net
|
|
2,361,999
|
|
|
525,000
|
|
|
3,461,999
|
|
Repayment of capital lease
|
|
(5,204
|
)
|
|
-
|
|
|
(5,204
|
)
|
Repayment of redeemable
preferred shares
|
|
(247,170
|
)
|
|
-
|
|
|
(247,170
|
)
|
Proceeds from sale of mandatory
redeemable preferred stock, net
|
|
-
|
|
|
-
|
|
|
422,000
|
|
Shareholder
contribution
|
|
-
|
|
|
-
|
|
|
264,575
|
|
Shareholder distribution
|
|
-
|
|
|
-
|
|
|
(10,670
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
2,155,763
|
|
|
600,000
|
|
|
4,165,016
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
617,366
|
|
|
320,093
|
|
|
620,031
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
2,665
|
|
|
64,607
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
$
|
620,031
|
|
$
|
384,700
|
|
$
|
620,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
-
|
|
|
|
|
|
|
|
Preferred stock
conversion to common stock
|
|
252,830
|
|
|
|
|
|
|
|
Deferred
discount on conversion of preferred stock
|
|
56,098
|
|
|
|
|
|
|
|
Fair value of derivate
liability at isuance of Warrants
|
|
240,023
|
|
|
|
|
|
|
|
See Accompanying Notes to Condensed Consolidated Financial
Statements.
5
THE ALKALINE WATER COMPANY INC.
(FORMERLY GLOBAL
LINES INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The interim consolidated financial statements included herein,
presented in accordance with United States generally accepted accounting
principles and stated in U.S. dollars, have been prepared by the Company,
without audit, 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. It is suggested that
these condensed interim consolidated financial statements be read in conjunction
with the financial statements of the Company for the period of inception (June
19, 2012) to June 30, 2014 and notes thereto included in the Companys Annual
Report on Form 10-K dated March 31, 2014. The Company follows the same
accounting policies in the preparation of interim reports. Results of operations
for the interim period are not indicative of annual results.
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.
Principles of consolidation
For the period from June 19, 2012 to June 30, 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 June
30, 2013 and April 1, 2014 to June 30, 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.
6
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. We had $620,031 and
$384,700 in cash and cash equivalents at June 30, 2014 and 2013, respectively.
Accounts Receivable and Allowance for Doubtful
Accounts
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 June 30, 2014 and March 31, 2014:
|
|
June 30
|
|
|
March 31
|
|
|
|
2014
|
|
|
2014
|
|
Trade receivables
|
$
|
169,361
|
|
$
|
176,404
|
|
Less: Allowance for doubtful accounts
|
|
(8,968
|
)
|
|
(10,000
|
)
|
Net accounts receivable
|
$
|
160,393
|
|
$
|
166,404
|
|
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 packaging items, empty bottles, finished
goods 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 June 30, 2014 and March 31 2014, inventory consisted of the following:
|
|
June 30
|
|
|
March 31
|
|
|
|
2014
|
|
|
2014
|
|
Raw materials
|
$
|
246,557
|
|
$
|
24,022
|
|
Finished goods
|
|
107,272
|
|
|
33,943
|
|
Total inventory
|
$
|
353,829
|
|
$
|
57,965
|
|
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:
7
Stock-based Compensation
The Company accounts for stock-based compensation to employees
in accordance with Accounting Standard Codification (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 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.
Revenue recognition
We recognize 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. We do 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.
8
Concentration
The Company has 2 major customers that together account for 54%
(33% and 21%, respectively) of accounts receivable at June 30, 2014, and 4
customers that together account for 54% (16%, 13%, 13% and 12%, respectively) of
the total revenues earned for the period ended June 30, 2014.
The Company has 3 vendors that accounted for 62% (23%, 20%, and
19%, respectively) of purchases for the period ended June 30, 2014.
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.
Reclassification
Certain accounts in the prior period were reclassified to
conform to the current period financial statements presentation.
Recent pronouncements
The Company has evaluated all the recent accounting
pronouncements through June 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 June 30, 2014 of $(6,950,110). 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:
|
|
June
|
|
|
March
|
|
|
|
30, 2014
|
|
|
31, 2014
|
|
Machinery and Equipment
|
$
|
72,137 $
|
|
|
273,597
|
|
Machinery under Capital Lease
|
|
378,576
|
|
|
|
|
Office Equipment
|
|
54,612
|
|
|
53,631
|
|
Leasehold Improvements
|
|
13,120
|
|
|
3,979
|
|
Less: Accumulated
Depreciation
|
|
(60755
|
)
|
|
(44,221
|
)
|
Fixed Assets, net
|
$
|
457,690
|
|
$
|
286,986
|
|
9
Depreciation expense for the periods ended June 30, 2014 and
2013 was $16,534 and $1,849, 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. 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.
On May 1, 2014 the Company paid a $690,000 deposit on equipment
and on June 27, 2014 the Company paid a $21,500 deposit on equipment. As of June
30, 2014, the total amount of deposits for equipment is $711,500. The equipment
will be manufactured by and 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. The Company 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.
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.
10
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 June 30, 2014 the
amount borrowed on this facility was $129,486.
NOTE 6 DERIVATIVE LIABILITY
On November 7, 2013, we sold to certain institutional investors
10% Series B Convertible Preferred Shares (Series B Preferred Stock) 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.
Between April 16 and April 24, 2014, the Company redeemed 247
shares of the 10% Series B Preferred Stock for $247,171 plus accrued interest of
$46,456 and $10,212 penalty related to the delayed registration. The effect of
this redemption resulted in a reduction of $56,098 derivative liability.
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. The warrants 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.
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, 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. The warrants
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.
11
The range of significant assumptions which the Company used to
measure the fair value of warrant liabilities (a level 3 input) at April 24,
2014 is as follows:
|
|
Conversion feature
|
|
Stock price
|
$
|
0 .3275
|
|
Term (Years)
|
|
Less than 1
|
|
Volatility
|
|
331%
|
|
Exercise prices
|
$
|
0.43
|
|
Dividend yield
|
|
0%
|
|
The range of significant assumptions which the Company used to
measure the fair value of warrant liabilities (a level 3 input) at May 1, 2014
is as follows:
|
|
Issuance Warrants
|
|
|
Placement agent Warrants
|
|
Stock price
|
$
|
0.15
|
|
$
|
0.15
|
|
Term (Years)
|
|
5
|
|
|
5
|
|
Volatility
|
|
306%
|
|
|
306%
|
|
Exercise prices
|
$
|
0.15
|
|
$
|
0.1875
|
|
Dividend yield
|
|
0%
|
|
|
0%
|
|
The range of significant assumptions which the Company used to
measure the fair value of warrant liabilities (a level 3 input) at June 30, 2014
is as follows:
|
|
Warrants (including
placement agent)
|
|
Stock price
|
$
|
0.1282
|
|
Term (Years)
|
|
4 to 5
|
|
Volatility
|
|
282%
|
|
Exercise prices
|
$
|
0.55 to 0.15
|
|
Dividend yield
|
|
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 May 1, 2013.
|
|
|
|
|
Fair
Value Measurement at May 1, 2014
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2014
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant liability
|
$
|
216,236
|
|
$
|
-
|
|
$
|
-
|
|
$
|
216,236
|
|
Derivative placement agent warrant liability
|
$
|
23,787
|
|
$
|
-
|
|
$
|
-
|
|
$
|
23,787
|
|
Total derivative liability
|
$
|
240,023
|
|
$
|
-
|
|
$
|
-
|
|
$
|
240,023
|
|
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 June 30, 2014.
12
|
|
|
|
|
Fair
Value Measurement at June 30, 2014
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative convertible debt
liability
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Derivative warrant liability convertible
preferred stock
|
$
|
80,974
|
|
$
|
-
|
|
$
|
-
|
|
$
|
80,974
|
|
Derivative warrants liability
on common stock issuance including placement agent warrants
|
$
|
176,888
|
|
$
|
-
|
|
$
|
-
|
|
$
|
176,888
|
|
Total derivative liability
|
$
|
257,862
|
|
$
|
-
|
|
$
|
-
|
|
$
|
257,862
|
|
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 June 30, 2014 was $257,862
and the conversion feature liability was $0. At March 31, 2014 the fair value of
these warrant liabilities was $209,320 and the conversion feature liability was
$128,668. Changes in the derivative liability for the period ended June 30, 2014
consist of:
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
June 30,
2014
|
|
Derivative liability at March
31, 2014
|
$
|
337,998
|
|
Redemption of convertible preferred stock
|
|
(56,098
|
)
|
Warrants issued May 1, 2014
|
|
216,236
|
|
Placement agent warrants May 1, 2014
|
|
23,787
|
|
Change in derivative
liability mark to market
|
|
(264,051
|
)
|
Derivative liability at June 30, 2014
|
$
|
257,862
|
|
NOTE 7 PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Redeemable 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.
Between April 16, 2014 and April 22, 2014, the holders of our
Series B Preferred Stock exercised their right to have the Company redeem their
shares whereby we redeemed 247.17 shares of Series B Preferred Stock for
$303,839, which included accrued interest of $46,456 and a penalty for late
registration of $10,212. The remaining portion of the Series B Preferred Stock,
or 252.83 shares, was converted into 796,566 of our common shares at a
conversion price of $0.3174 per share.
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 Series B 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 period ended June 30, 2014 the Company
recorded $123,123 of amortization of the debt discount and deferred financing
cost.
13
The Series B Preferred Stock included down-round provisions
that 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 Stock
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 period ended June 30, 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.
Sales of Registered Shares of Common Stock
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 the Company 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.
14
Sale of Restricted Shares of Common Stock
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.
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
On May 15, 2014, the Company issued 100,000 restricted common
shares to consultant for services rendered and were valued at the market value
on that date of $0.150 per share.
On June 2, 2014, the Company issued 100,000 restricted common
shares to consultant for services rendered and were valued at the market value
on that date of $0.130 per share.
On June 6, 2014, the Company issued 1,000,000 restricted common
shares to consultant for services rendered and were valued at the market value
on that date of $0.134 per share.
On June 11, 2014, the Company issued 250,000 restricted common
shares to consultant for services rendered and were valued at the market value
on that date of $0.121 per share.
NOTE 9 OPTIONS AND WARRANTS
Stock Option Awards
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 ten 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 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 ten 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 ten 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.
15
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 ten years from the date of grant. 1,200,000 stock options
vested upon the date of grant.
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.
For the period ended June 30, 2014 and June 30, 2013 the
Company has recognized compensation expense of $1,206,877 and $0, respectively,
on the stock options granted that vested. The fair value of the unvested shares
is $992,348 as of June 30, 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 June 30, 2014.
Stock option activity summary covering options is presented in
the table below:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
(years)
|
|
Outstanding at March 31, 2014
|
|
6,000,000
|
|
$
|
0.61
|
|
|
9.3
|
|
Granted
|
|
8,270,000
|
|
$
|
0.15
|
|
|
9.9
|
|
Exercised
|
|
-
|
|
$
|
-.
|
|
|
-
|
|
Expired/Forfeited
|
|
-
|
|
$
|
-
|
|
|
-
|
|
Outstanding at June 30, 2014
|
|
14,270,000
|
|
$
|
0.34
|
|
|
9.8
|
|
Exercisable at June 30, 2014
|
|
9,193,750
|
|
$
|
0.34
|
|
|
9.8
|
|
Warrants
The following is a summary of the status of all of our warrants
as of June 30, 2014 and changes during the twelve months ended on that date:
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of
Warrants
|
|
|
Exercise
Price
|
|
Outstanding at March 31, 2014
|
|
8,310,415
|
|
$
|
0.53
|
|
Granted
|
|
9,619,998
|
|
|
0.15
|
|
Exercised
|
|
-
|
|
|
0.00
|
|
Cancelled
|
|
-
|
|
|
0.00
|
|
Outstanding at June 30, 2014
|
|
17,930,413
|
|
|
0.52
|
|
Warrants exercisable at June 30, 2014
|
|
17,378,072
|
|
$
|
0.52
|
|
The following table summarizes information about stock warrants
outstanding and exercisable at June 30, 2014:
16
|
|
STOCK WARRANTS OUTSTANDING AND EXERCISABLE
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
Remaining
|
|
|
|
Warrants
|
|
Contractual
|
|
Exercise Price
|
|
Outstanding
|
|
Life in Years
|
|
$ 0.1500
|
|
8,666,665
|
|
4.8
|
|
$ 0.1875
|
|
953,333
|
|
4.8
|
|
$ 0.4300
|
|
1,162,791
|
|
1.1
|
|
$ 0.5000
|
|
3,137,175
|
|
1.1
|
|
$ 0.5500
|
|
2,441,861
|
|
3.27
|
|
$ 0.6000
|
|
1,568,588
|
|
0.40
|
|
NOTE 10 RELATED PARTY TRANSACTIONS
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 ten 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 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 period ended June 30, 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. 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, 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 period 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 period ended June 30, 2013, the Company had a total
of $39,846, in general and administrative expenses with related parties. Of that
total for period ended June 30, 201, $20,000 was consulting fees to an officer,
director and shareholder of the Company, $8,346 was rent and repairs to an
entity that is controlled and owned by an officer, director and shareholder of
the Company and $11,500 was professional fees to an entity that is controlled
and owned by an officer, director and shareholder.
On January 17, 2014, amended on February 12, 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 $3,864 per month.
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.
17
The lease terms are 60 monthly payments of $3,812, payable 30
days after installation of the equipment and a purchase option of $1.00. The
Company recorded a loss on sales leaseback of $20,773.
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, we paid $690,000 on May 1 2014 and $21,500 on
June 27, 2014 for specialized equipment used in the production of our alkaline
water. Water Engineering Solutions LLC is an entity that is controlled and owned
by an officer, director and shareholder.
NOTE 11 - SALES LEASEBACK
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. Under the terms of
the sale leaseback agreement, the Company received proceeds of $188,000 in April
2014 and recorded a loss on sales leaseback of $20,773.
NOTE 12 CAPITAL LEASE
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 with a stated value of $190,756 and agreed to a 60 month term at
$3,864 per month and a purchase option of $1 which commenced on May 1, 2014.
On April 2, 2014, we entered into a capital lease agreement
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 with a stated value of $188,000, terms of 60 monthly payments of
$3,812, payable 30 days after installation of the equipment and a purchase
option of $1.00 which commenced on July 1, 2014.
NOTE 13 SUBSEQUENT EVENTS
On July 3, 2014, the Company entered into an agreement with a
third-party to provide consulting services. The compensation in the agreement
was $25,000 in cash upon execution of the agreement and the issuance of 350,000
of the Companys common shares as follows: 175,000 common shares upon execution
of the agreement, 70,000 common shares on or before July 15, 2014, 70,000 common
shares on or before August 15, 2014 and 35,000 common shares on or before
September 15, 2014.
On August 1, 2014, the Company issued 1,000,000 common shares
to consultant for services rendered that were valued at the market value on that
date of $0.175 per share.
On August 7, 2014, the Company entered into an agreement with a
third-party to provide consulting services. The compensation in the agreement
was for 2,000,000 of the Companys common shares to be issued as follows:
500,000 common shares on the date of the execution of the agreement, 500,000
common shares on the date that is 45 days from the execution date, 500,000
common shares on the date that is 90 days from the execution date, and 500,000
common shares on the date that is 135 days from the execution date.
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