Filed pursuant to Rule 424(b)(3)
Registration No.
333-192599
Prospectus
3,488,373 Shares
The Alkaline Water Company Inc.
Common Stock
_________________________________
The selling stockholders identified in this prospectus may offer and sell up to 3,488,373 shares of our common stock that have been issued or may be issued upon exercise of warrants. The warrants were acquired by the selling stockholders directly from us in a private placement pursuant to the Securities Purchase Agreement dated November 4, 2013 between our company and the selling stockholders.
The selling stockholders may sell all or a portion of the
shares being offered pursuant to this prospectus at fixed prices, at prevailing
market prices at the time of sale, at varying prices or at negotiated
prices.
Our common stock is quoted on the OTC Markets Groups OTCQB
under the symbol WTER. On August 20, 2014, the closing price of our common
stock on the OTCQB was $0.17 per share.
We will not receive any proceeds from the sale of the shares of
our common stock by the selling stockholders. We may, however, receive proceeds
upon exercise of the warrants by the selling stockholders. We will pay for
expenses of this offering, except that the selling stockholders will pay any
broker discounts or commissions or equivalent expenses and expenses of their
legal counsels applicable to the sale of their shares.
Investing in our common stock involves risks. See Risk
Factors beginning on page 5.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this prospectus is August 21, 2014.
Table of Contents
2
About This Prospectus
You should rely only on the information that we have provided
in this prospectus and any applicable prospectus supplement. We have not
authorized anyone to provide you with different information. No dealer,
salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus and any applicable
prospectus supplement. You must not rely on any unauthorized information or
representation. This prospectus is an offer to sell only the securities offered
hereby, but only under circumstances and in jurisdictions where it is lawful to
do so. You should assume that the information in this prospectus and any
applicable prospectus supplement is accurate only as of the date on the front of
the document, regardless of the time of delivery of this prospectus, any
applicable prospectus supplement, or any sale of a security.
As used in this prospectus, the terms we, us our and
Alkaline refer to The Alkaline Water Company Inc., a Nevada corporation, and
its wholly-owned subsidiary, Alkaline Water Corp., and Alkaline Water Corp.s
wholly-owned subsidiary, Alkaline 88, LLC (formerly Alkaline 84, LLC), unless
otherwise specified.
Prospectus Summary
The Offering
The selling stockholders identified in this prospectus may
offer and sell up to 3,488,373 shares of our common stock that have been issued or may be issued
upon exercise of warrants. The warrants were acquired by the selling
stockholders directly from us in a private placement pursuant to the Securities
Purchase Agreement dated November 4, 2013 between our company and the selling
stockholders.
We will not receive any proceeds from the sale of the shares of
our common stock by the selling stockholders. We may, however, receive proceeds
upon exercise of the warrants by the selling stockholders. We will pay for
expenses of this offering, except that the selling stockholders will pay any
broker discounts or commissions or equivalent expenses and expenses of their
legal counsels applicable to the sale of their shares.
Our common stock is quoted on the OTC Markets Groups OTCQB
under the symbol WTER.
Our Business
Our company offers retail consumers bottled alkaline water in
three-liter and one-gallon volumes through our brand Alkaline88. Our product
is produced through an electrolysis process that uses specialized electronic
cells coated with a variety of rare earth minerals to produce our 8.8 pH
drinking water without the use of any chemicals. Our product also incorporates
84 trace Himalayan salts.
The main reason consumers drink our product is for the
perceived benefit that a proper pH balance helps fight disease and boosts the
immune system and the perception that alkaline water helps to maintain a proper
body pH and keeps cells young and hydrated.
Alkaline 88, LLC, our operating subsidiary, operates primarily
as a marketing and distribution company. Alkaline 88, LLC has entered into
exclusive arrangements with Water Engineering Solutions LLC, an entity that is
controlled and owned by our President, Chief Executive Officer, Director and
major stockholder, Steven P. Nickolas, and our Vice-President, Secretary,
Treasurer and Director, Richard A. Wright, for the manufacture and production of
our alkaline generating electrolysis system machines. Alkaline 88, LLC has
entered into one-year agreement(s) with Arizona Bottled Water, LLC, White Water,
LLC and Brookshire's Grocery Company to act as our initial co-packers. Our
branding is being coordinated through 602 Design, LLC and our component
materials are readily available through multiple vendors. Our principal
suppliers are Plastipack Packaging and Polyplastics Co.
Sample production and testing of our product began in late
2012. We have currently established two contract manufacturing facilities in
Phoenix, Arizona and one in Tyler Texas and plan to establish other key
manufacturing facilities throughout the United States to support the national
distribution of our product.
3
Our product is currently at the introduction and expansion
phase of its lifecycle. In March 2012 Alkaline 88, LLC did market research on
the demand for a bulk alkaline product at the Natural Product Expo West in
Anaheim, California. In January 2013, we began the formal launching of our
product in Southern California and Arizona. Since then, we have begun to deliver
product through approximately 6,000 retail outlets throughout the United States.
We are presently in 49 States and the District of Columbia. Although over 40% of
our current sales are concentrated in the Southwest and Texas. We have
distribution agreements with large national distributors (UNFI, KeHe, Tree of
Life and Natures Best representing over 100,000 retail establishments. . Our
current stores include convenience stores, natural food products stores, large
ethnic markets and national retailers. Currently, we sell all of our products to
our retailers through brokers and distributors. Our larger retail clients bring
the water in through their own warehouse distribution network. Our current
retail clients are made up of a variety of the following; convenience stores,
including 7-11s; large national retailers, including Albertsons, Frys and
Smiths (both Kroger companies), and regional grocery chains such as Schnucks,
Smart & Final and Jewel-Osco, Sprouts, Bashas, Bristol Farms, Vallarta,
Superior Foods, Brookshires and other companies throughout the United States.
In April 2014 we entered into an exclusive territorial
distribution agreement with Kalil Bottling Co. on a new single serve 700ml
Bottle with a sport cap. This exclusivity is in Arizona and other areas in the
Southwestern United States. Kalil Bottling Co. is a direct to store distributor
(DSD) and we plan to expand the use of DSDs for our single serving packaging
through the remainder of 2014.
In order to continue our expansion, we anticipate that we will
be required, in most cases, to continue to give promotional deals throughout
2014 and in subsequent years on a quarterly basis ranging from a 5%-15% discount
similar to all other beverage company promotional programs. It has been our
experience that most of the retailers have requested some type of promotional
introductory program which has included either a $0.25 -$0.50 per unit discount
on an initial order; a buy one get one free program; or a free-fill program
which includes 1-2 cases of free product per store location. Slotting has only
been presented and negotiated in the larger national grocery chains and, in most
cases, is offset by product sales. Our slotting fees with our current national
retailers do not exceed $100,000 in the aggregate and are offset through product
sales. In addition we participate in promotional activities of our distributors,
these fees are not in excess of $200,000 and are offset through product sales.
We have not yet established an ongoing source of revenues
sufficient to cover our operating costs and to allow us to continue as a going
concern. As of June 30, 2014, we had an accumulated deficit of $6,950,110. Our
ability to continue as a going concern is dependent on our company obtaining
adequate capital to fund operating losses until we become profitable. If we are
unable to obtain adequate capital, we could be forced to significantly curtail
or cease operations. In its report on our financial statements for the year
ended March 31, 2014, our independent registered public accounting firm included
an explanatory paragraph regarding substantial doubt about our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The principal offices of our company are located at 7730 E
Greenway Road, Ste. 203, Scottsdale, AZ 85260. Our telephone number is (480)
656-2423.
Summary of Financial Data
The following information represents selected audited financial
information for our company for the year ended March 31, 2014 and the period
from inception on June 19, 2012 through March 31, 2013 and selected unaudited
financial information for our company for the three month periods ended June 30,
2014 and 2013. The summarized financial information presented below is derived
from and should be read in conjunction with our audited and unaudited financial
statements, as applicable, including the notes to those financial statements
which are included elsewhere in this prospectus along with the section entitled
Managements Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 28 of this prospectus.
4
Statements of
Operations Data |
Three Month Period
Ended June 30, 2014 |
Three Month
Period
Ended June 30, 2013 |
Revenue |
$572,049 |
$32,522 |
Cost
of Goods Sold |
$406,125 |
$18,057 |
Total Operating Expenses |
$2,382,067 |
$193,397 |
Net
Loss |
$(2,437,209) |
$(182,487) |
Statements of Operations Data |
Year Ended
March 31,
2014
|
Period from Inception
(June 19, 2012) to March 31, 2013 |
Revenue |
$552,699 |
$15,110 |
Cost
of Goods Sold |
$411,851 |
$8,026 |
Total Operating Expenses |
$4,421,353 |
$284,580 |
Net
Loss |
$(4,229,513) |
$(283,388) |
Balance Sheets Data |
As of June 30, 2014 |
As of March 31, 2014 |
As of March 31, 2013 |
Cash
|
$620,031 |
$2,665 |
$64,607 |
Working Capital |
$124,493 |
$(555,001) |
$(82,566) |
Total Assets |
$2,308,137 |
$568,308 |
$140,373 |
Total Liabilities |
$1,323,248 |
$836,323 |
$169,856 |
Total Stockholders Equity (Deficit) |
$984,889 |
$(351,835) |
$(29,483) |
Accumulated Deficit |
$(6,950,110) |
$(4,512,901) |
$(283,388) |
Risk Factors
An investment in our common stock involves a number of very
significant risks. You should carefully consider the following risks and
uncertainties in addition to other information in this prospectus in evaluating
our company and our business before purchasing our securities. Our business,
operating results and financial condition could be seriously harmed as a result
of the occurrence of any of the following risks. You could lose all or part of
your investment due to any of these risks. You should invest in our common stock
only if you can afford to lose your entire investment.
Risks Related to Our Business
Because we have a limited operating history, our ability
to fully and successfully develop our business is unknown.
We were incorporated in June 6, 2011, and we have only recently
begun producing and distributing alkaline bottled water, and we have a limited
operating history from which investors can evaluate our business. Our ability to
successfully develop our products, and to realize consistent, meaningful
revenues and profit has not been established and cannot be assured. We have not
generated any significant revenues and do not expect to do so in the near
future. For us to achieve success, our products must receive broad market
acceptance by consumers. Without this market acceptance, we will not be able to
generate sufficient revenue to continue our business operation. If our products
are not widely accepted by the market, our business may fail.
5
Our ability to achieve and maintain profitability and positive
cash flow is dependent upon our ability to generate revenues, manage development
costs and expenses, and compete successfully with our direct and indirect
competitors. We anticipate operating losses in upcoming future periods. This
will occur because there are expenses associated with the development,
production, marketing, and sales of our product. As a result, we may not
generate significant revenues in the future. Failure to generate significant
revenues in the near future may cause us to suspend or cease activities.
Our independent registered public accounting firm has
expressed substantial doubt about our ability to continue as a going concern.
Our financial statements are prepared using generally accepted
accounting principles in the United States of America applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. We have not yet established an
ongoing source of revenues sufficient to cover our operating costs and to allow
us to continue as a going concern. As of June 30, 2014, we had an accumulated
deficit of $6,950,110. Our ability to continue as a going concern is dependent
on our company obtaining adequate capital to fund operating losses until we
become profitable. If we are unable to obtain adequate capital, we could be
forced to significantly curtail or cease operations. In its report on the
financial statements for the year ended March 31, 2014, our independent
registered public accounting firm included an explanatory paragraph regarding
substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We will need additional funds to produce, market, and
distribute our product.
We will have to spend additional funds to produce, market and
distribute our product. If we cannot raise sufficient capital, we may have to
cease operations and you could lose your investment. We will need additional
funds to produce our product for distribution to our target market. Even after
we have produced our product, we will have to spend substantial funds on
distribution, marketing and sales efforts before we will know if we have
commercially viable and marketable/sellable products.
There is no guarantee that sufficient sale levels will be
achieved.
There is no guarantee that the expenditure of money on
distribution and marketing efforts will translate into sufficient sales to cover
our expenses and result in profits. Consequently, there is a risk that you may
lose all of your investment.
Our development, marketing, and sales activities are
limited by our size.
Because we are small and do not have much capital, we must
limit our product development, marketing, and sales activities. As such we may
not be able to complete our production and business development program in a
manner that is as thorough as we would like. We may not ever generate sufficient
revenues to cover our operating and expansion costs and you may, therefore, lose
your entire investment.
Changes in the non-alcoholic beverage business
environment and retail landscape could adversely impact our financial results.
The non-alcoholic beverage business environment is rapidly
evolving as a result of, among other things, changes in consumer preferences,
including changes based on health and nutrition considerations and obesity
concerns; shifting consumer tastes and needs; changes in consumer lifestyles;
and competitive product and pricing pressures. In addition, the non-alcoholic
beverage retail landscape is very dynamic and constantly evolving, not only in
emerging and developing markets, where modern trade is growing at a faster pace
than traditional trade outlets, but also in developed markets, where discounters
and value stores, as well as the volume of transactions through e-commerce, are
growing at a rapid pace. If we are unable to successfully adapt to the rapidly
changing environment and retail landscape, our share of sales, volume growth and
overall financial results could be negatively affected.
Intense competition and increasing competition in the
commercial beverage market could hurt our business.
6
The commercial retail beverage industry, and in particular its
non-alcoholic beverage segment, is highly competitive. Market participants are
of various sizes, with various market shares and geographical reach, some of
whom have access to substantially more sources of capital.
We compete generally with all liquid refreshments, including
bottled water and numerous specialty beverages, such as: SoBe; Snapple; Arizona;
Vitamin Water; Gatorade; and Powerade.
We compete indirectly with major international beverage
companies including but not limited to: the Coca-Cola Company; PepsiCo, Inc.;
Nestlé; Dr Pepper Snapple Group; Groupe Danone; Kraft Foods Group, Inc.; and
Unilever. These companies have established market presence in the United States,
and offer a variety of beverages that are substitutes to our product. We face
potential direct competition from such companies, because they have the
financial resources, and access to manufacturing and distribution channels to
rapidly enter the alkaline water market.
We compete directly with other alkaline water producers and
brands focused on the emerging alkaline beverage market including: Eternal;
Essentia; Icelandic; Real Water; Aqua Hydrate; Mountain Valley; Qure; Penta; and
Alka Power. These companies could bolster their position in the alkaline water
market through additional expenditure and promotion.
As a result of both direct and indirect competition, our
ability to successfully distribute, market and sell our product, and to gain
sufficient market share in the United States to realize profits may be limited,
greatly diminished, or totally diminished, which may lead to partial or total
loss of your investments in our company.
Alternative non-commercial beverages or processes could
hurt our business.
The availability of non-commercial beverages, such as tap
water, and machines capable of producing alkaline water at the consumers home
or at store-fronts could hurt our business, market share, and profitability.
Expansion of the alkaline beverage market or sufficiency
of consumer demand in that market for operations to be profitable are not
guaranteed.
The alkaline water market is an emerging market and there is no
guarantee that this market will expand or that consumer demand will be
sufficiently high to allow our company to successfully market, distribute and
sell our product, or to successfully compete with current or future competition,
all of which may result in total loss of your investment.
Our growth and profitability depends on the performance
of third-parties and our relationship with them.
Our distribution network and its success depend on the
performance of third parties. Any non-performance or deficient performance by
such parties may undermine our operations, profitability, and result in total
loss to your investment. To distribute our product, we use a
broker-distributor-retailer network whereby brokers represent our products to
distributors and retailers who will in turn sell our product to consumers. The
success of this network will depend on the performance of the brokers,
distributors and retailers of this network. There is a risk that a broker,
distributor, or retailer may refuse to or cease to market or carry our product.
There is a risk that the mentioned entities may not adequately perform their
functions within the network by, without limitation, failing to distribute to
sufficient retailers or positioning our product in localities that may not be
receptive to our product. Furthermore, such third-parties financial position or
market share may deteriorate, which could adversely affect our distribution,
marketing and sale activities. We also need to maintain good commercial
relationships with third-party brokers, distributors and retailers so that they
will promote and carry our product. Any adverse consequences resulting from the
performance of third-parties or our relationship with them could undermine our
operations, profitability and may result in total loss of your investment.
The loss of one or more of our major customers or a
decline in demand from one or more of these customers could harm our business.
We have 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. There can
be no assurance that such customers will continue to order our products in the
same level or at all. A reduction or delay in orders from such customers,
including reductions or delays due to market, economic or competitive
conditions, could have a material adverse effect on our business, operating
results and financial condition.
7
Health benefits of alkaline water is not guaranteed or
proven, rather it is perceived by consumers.
Health benefits of alkaline water are not guaranteed and have
not been proven. There is a consumer perception that drinking alkaline water has
beneficial health effects. Consequently, negative changes in consumers
perception of the benefits of alkaline water or negative publicity surrounding
alkaline water may result in loss of market share or potential market share and
hence loss of your investment.
Water scarcity and poor quality could negatively impact
our production costs and capacity.
Water is the main ingredient in our product. It is also a
limited resource, facing unprecedented challenges from overexploitation,
increasing pollution, poor management, and climate change. As demand for water
continues to increase, as water becomes scarcer, and as the quality of available
water deteriorates, we may incur increasing production costs or face capacity
constraints that could adversely affect our profitability or net operating
revenues in the long run.
Increase in the cost, disruption of supply or shortage of
ingredients, other raw materials or packaging materials could harm our
business.
We and our bottlers will use water, 84 trace Himalayan salts,
packaging materials for bottles such as plastic and paper products. The prices
for these ingredients, other raw materials and packaging materials fluctuate
depending on market conditions. Substantial increases in the prices of our or
our bottlers ingredients, other raw materials and packaging materials, to the
extent they cannot be recouped through increases in the prices of finished
beverage products, would increase our operating costs and could reduce our
profitability. Increases in the prices of our finished products resulting from a
higher cost of ingredients, other raw materials and packaging materials could
affect the affordability of our product and reduce sales.
An increase in the cost, a sustained interruption in the
supply, or a shortage of some of these ingredients, other raw materials, or
packaging materials and containers that may be caused by a deterioration of our
or our bottlers relationships with suppliers; by supplier quality and
reliability issues; or by events such as natural disasters, power outages, labor
strikes, political uncertainties or governmental instability, or the like, could
negatively impact our net revenues and profits.
Changes in laws and regulations relating to beverage
containers and packaging could increase our costs and reduce demand for our
products.
We and our bottlers intend to offer our product in
nonrefillable, recyclable containers in the United States. Legal requirements
have been enacted in various jurisdictions in the United States requiring that
deposits or certain ecotaxes or fees be charged for the sale, marketing and use
of certain nonrefillable beverage containers. Other proposals relating to
beverage container deposits, recycling, ecotax and/or product stewardship have
been introduced in various jurisdictions in the United States and overseas, and
we anticipate that similar legislation or regulations may be proposed in the
future at local, state and federal levels in the United States. Consumers
increased concerns and changing attitudes about solid waste streams and
environmental responsibility and the related publicity could result in the
adoption of such legislation or regulations. If these types of requirements are
adopted and implemented on a large scale in the geographical regions in which we
operate or intend to operate, they could affect our costs or require changes in
our distribution model, which could reduce our net operating revenues or
profitability.
Significant additional labeling or warning requirements
or limitations on the availability of our product may inhibit sales of affected
products.
Various jurisdictions may seek to adopt significant additional
product labeling or warning requirements or limitations on the availability of
our product relating to the content or perceived adverse health consequences of
our product. If these types of requirements become applicable to
our product under current or future environmental or health laws or regulations,
they may inhibit sales of our product.
8
Unfavorable general economic conditions in the United
States could negatively impact our financial performance.
Unfavorable general economic conditions, such as a recession or
economic slowdown, in the United States could negatively affect the
affordability of, and consumer demand for, our product in the United States.
Under difficult economic conditions, consumers may seek to reduce discretionary
spending by forgoing purchases of our products or by shifting away from our
beverages to lower-priced products offered by other companies, including
non-alkaline water. Consumers may also cease purchasing bottled water and
consume tap water. Lower consumer demand for our product in the United States
could reduce our profitability.
Adverse weather conditions could reduce the demand for
our products.
The sales of our products are influenced to some extent by
weather conditions in the markets in which we operate. Unusually cold or rainy
weather during the summer months may have a temporary effect on the demand for
our product and contribute to lower sales, which could have an adverse effect on
our results of operations for such periods.
Changes in, or failure to comply with, the laws and
regulations applicable to our products or our business operations could increase
our costs or reduce our net operating revenues.
The advertising, distribution, labeling, production, safety,
sale, and transportation in the United States of our product will be subject to:
the Federal Food, Drug, and Cosmetic Act; the Federal Trade Commission Act; the
Lanham Act; state consumer protection laws; competition laws; federal, state,
and local workplace health and safety laws, such as the Occupational Safety and
Health Act; various federal, state and local environmental protection laws; and
various other federal, state, and local statutes and regulations. Legal
requirements also apply in many jurisdictions in the United States requiring
that deposits or certain ecotaxes or fees be charged for the sale, marketing,
and use of certain non-refillable beverage containers. The precise requirements
imposed by these measures vary. Other types of statutes and regulations relating
to beverage container deposits, recycling, ecotaxes and/or product stewardship
also apply in various jurisdictions in the United States. We anticipate that
additional, similar legal requirements may be proposed or enacted in the future
at the local, state and federal levels in the United States. Changes to such
laws and regulations could increase our costs or reduce our net operating
revenues.
In addition, failure to comply with environmental, health or
safety requirements and other applicable laws or regulations could result in the
assessment of damages, the imposition of penalties, suspension of production,
changes to equipment or processes, or a cessation of operations at our or our
bottlers facilities, as well as damage to our image and reputation, all of
which could harm our profitability.
Our products are considered premium and healthy beverages
and are being sold at premium prices compared to our competitors; we cannot
provide any assurances as to consumers continued market acceptance of our
current and future products.
We will compete directly with other alkaline water producers
and brands focused on the emerging alkaline beverage market including Eternal,
Essentia, Icelandic, Real Water, Aqua Hydrate, Mountain Valley, Qure, Penta, and
Alka Power. Products offered by our direct competitors are sold in various
volumes and prices with prices ranging from approximately $1.39 for a half-liter
bottle to approximately $2.99 for a one-liter bottle, and volumes ranging from
half-liter bottles to one-and-a half liter bottles. We currently offer our
product in a three-liter bottle for a suggested retail price (SRP) of $3.99 and
one-gallon bottle for an SRP of $4.99. Our competitors may introduce larger
sizes and offer them at an SRP that is lower than our product. We can provide no
assurances that consumers will continue to purchase our product or that they
will not prefer to purchase a competitive product.
We rely on key executive officers, and their knowledge of
our business would be difficult to replace.
9
We are highly dependent on our two executive officers, Steven
P. Nickolas and Richard A. Wright. We do not have key person life insurance
policies for any of our officers. The loss of management and industry expertise
of any of our key executive officers could result in delays in product
development, loss of any future customers and sales and diversion of management
resources, which could adversely affect our operating results.
Our executive officers are not subject to supervision or
review by an independent board or audit committee.
Our board of directors consists of Steven P. Nickolas and
Richard A. Wright, our executive officers. Accordingly, we do not have any
independent directors. Also we do not have an independent audit committee. As a
result, the activities of our executive officers are not subject to the review
and scrutiny of an independent board of directors or audit committee.
Risk Related to Our Stock
Because Steven P. Nickolas controls a large percentage of
our voting stock, he has the ability to influence matters affecting our
stockholders.
Steven P. Nickolas, our President, Chief Executive Officer and
Director, exercises voting and dispositive power with respect to 43,000,000
shares of our common stock, which are beneficially owned by WiN Investments, LLC
and Lifewater Industries, LLC, and owns 10,000,000 shares of Series A Preferred
Stock, which has 10 votes per share upon any matter submitted to our
stockholders for a vote. Accordingly, he controls a large percentage of the
votes attached to our outstanding voting securities. As a result, he has the
ability to influence matters affecting our stockholders, including the election
of our directors, the acquisition or disposition of our assets, and the future
issuance of our securities. Because he controls such large percentage of votes,
investors may find it difficult to replace our management if they disagree with
the way our business is being operated. Because the influence by Mr. Nickolas
could result in management making decisions that are in the best interest of Mr.
Nickolas and not in the best interest of the investors, you may lose some or all
of the value of your investment in our common stock.
Because we can issue additional shares of common stock,
our stockholders may experience dilution in the future.
We are authorized to issue up to 1,125,000,000 shares of common
stock and 100,000,000 shares of preferred stock, of which 102,927,070 shares of
common stock are issued and outstanding and 20,000,000 shares of Series A
Preferred Stock are issued and outstanding as of August 20, 2014. Our board of
directors has the authority to cause us to issue additional shares of common
stock and preferred stock, and to determine the rights, preferences and
privileges of shares of our preferred stock, without consent of our
stockholders. Consequently, the stockholders may experience more dilution in
their ownership of our stock in the future.
Trading on the OTCQB may be volatile and sporadic, which
could depress the market price of our common stock and make it difficult for our
stockholders to resell their shares.
Our common stock is quoted on the OTCQB. Trading in stock
quoted on the OTCQB is often thin and characterized by wide fluctuations in
trading prices, due to many factors that may have little to do with our
operations or business prospects. This volatility could depress the market price
of our common stock for reasons unrelated to operating performance. Moreover,
the OTCQB is not a stock exchange, and trading of securities on the OTCQB is
often more sporadic than the trading of securities listed on a national
securities exchange like the NASDAQ or the NYSE. Accordingly, stockholders may
have difficulty reselling any of our shares.
A decline in the price of our common stock could affect
our ability to raise further working capital, it may adversely impact our
ability to continue operations and we may go out of business.
A prolonged decline in the price of our common stock could
result in a reduction in the liquidity of our common stock and a reduction in
our ability to raise capital. Because we plan to acquire a significant portion
of the funds we need in order to conduct our planned operations through the sale
of equity securities, a decline in the price of our common stock could be
detrimental to our liquidity and our operations because the decline may cause
investors not to choose to invest in our stock. If we are unable to raise the
funds we require for all our planned operations, we may be forced to reallocate
funds from other planned uses and may suffer a significant negative effect on
our business plan and operations, including our ability to develop new
products and continue our current operations. As a result, our business may
suffer, and not be successful and we may go out of business. We also might not
be able to meet our financial obligations if we cannot raise enough funds
through the sale of our equity securities and we may be forced to go out of
business.
10
Because we do not intend to pay any cash dividends on our
shares of common stock in the near future, our stockholders will not be able to
receive a return on their shares unless they sell them.
We intend to retain any future earnings to finance the
development and expansion of our business. We do not anticipate paying any cash
dividends on our common stock in the near future. The declaration, payment and
amount of any future dividends will be made at the discretion of the board of
directors, and will depend upon, among other things, the results of operations,
cash flows and financial condition, operating and capital requirements, and
other factors as the board of directors considers relevant. There is no
assurance that future dividends will be paid, and if dividends are paid, there
is no assurance with respect to the amount of any such dividend. Unless we pay
dividends, our stockholders will not be able to receive a return on their shares
unless they sell them.
Our stock is a penny stock. Trading of our stock may be
restricted by the SECs penny stock regulations, which may limit a stockholders
ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange
Commission (SEC) has adopted Rule 15g-9 which generally defines penny stock
to be any equity security that has a market price (as defined in Rule 15g-9)
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. Our securities are covered by the penny stock
rules, which impose additional sales practice requirements on broker-dealers who
sell to persons other than established customers and accredited investors. The
term accredited investor refers generally to institutions with assets in
excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 jointly with their spouse. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC, which provides information
about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customers account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customers
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules; the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchasers written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade our securities. We
believe that the penny stock rules discourage investor interest in and limit the
marketability of our common stock.
FINRA sales practice requirements may also limit a
stockholders ability to buy and sell our stock.
In addition to the penny stock rules promulgated by the SEC,
the Financial Industry Regulatory Authority (FINRA) has adopted rules
that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable for
that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customers financial status, tax status, investment
objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock.
11
Forward-Looking Statements
This prospectus contains forward-looking statements.
Forward-looking statements are projections in respect of future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as may, should, intend, expect, plan,
anticipate, believe, estimate, predict, potential, or continue or
the negative of these terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, including the risks in
the section entitled Risk Factors, uncertainties and other factors, which may
cause our companys or our industrys actual results, levels of activity or
performance to be materially different from any future results, levels of
activity or performance expressed or implied by these forward-looking
statements. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity or performance. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results.
Use of Proceeds
We will not receive any proceeds from the sale of the shares of
our common stock by the selling stockholders. We may, however, receive proceeds
upon exercise of the warrants by the selling stockholders. If we receive
proceeds upon exercise of warrants, we will use these proceeds for working
capital purposes.
We will pay for expenses of this offering, except that the
selling stockholders will pay any broker discounts or commissions or equivalent
expenses and expenses of their legal counsels applicable to the sale of their
shares.
Private Placement
The selling stockholders identified in this prospectus may
offer and sell up to 3,488,373 shares of our common stock that have been issued or may be issued
upon exercise of warrants. The warrants were acquired by the selling
stockholders directly from us in a private placement which was consummated on
November 7, 2013.
On November 7, 2013, we issued an aggregate of 500.00028 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 $500,000.28 (the Offering). On the same date, we
also issued Series A, Series B and Series C common stock purchase warrants. The
Series A warrants are exercisable into 1,162,791 shares of our common stock with
an exercise price of $0.55 per share and have a term of exercise of five years.
The Series B warrants are exercisable into 1,162,791 shares of the Common Stock
with an exercise price of $0.43 per share and have a term of exercise of 54
weeks. The Series C warrants are exercisable into 1,162,179 shares of the Common
Stock with an exercise price of $0.55 per share and have a term of exercise of
five years, provided that such Series C warrants only become exercisable ratably
upon exercise of the Series B Warrants. We issued the Series B Preferred Stock
and the Series A, Series B and Series C common stock purchase warrants to
accredited institutional investors. The issuance and sale of securities is
exempt from registration pursuant to Section 4(a)(2) of the Securities Act of
1933 and Rule 506 promulgated thereunder.
Between April 16 and April 24, 2014, we redeemed 247 shares of
the Series B Preferred Stock for $247,171 plus accrued interest of $46,456 and
$10,212 penalty related to the delayed registration.
In connection with the private placement, we also entered into
a Registration Rights Agreement with the investors pursuant to which we were
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. We filed the registration statement and the
Securities and Exchange Commission declared the registration statement on April
16, 2014.
On August 20, 2014, we enter into a warrant amendment agreement
(the Warrant Amendment Agreement) with certain holders (the
Holders), including the selling stockholders, of our outstanding common
stock purchase warrants (the Existing Warrants), whereby we reduced the
exercise price of the Existing Warrants to $0.10 per share in consideration for
the immediate exercise of the Existing Warrants by the Holders and the Holders
were issued new common stock purchase warrants of our company (the New
Warrants) in the form of the Existing Warrants to purchase up to a number
of shares of our common stock equal to the number of Existing Warrants exercised by the Holders, provided that the exercise price of
the New Warrants will be $0.125 per share, subject to adjustment in the New
Warrants.
12
On August 21, 2014, pursuant to the Warrant Amendment
Agreement, we issued an aggregate of 1,162,791 shares of our common stock to the
selling stockholders upon exercise of the Series A common stock purchase
warrants at an exercise price of $0.10 per share. In issuing these shares, we
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 and Rule 506
promulgated thereunder. In addition, we issued New Warrants to purchase an
aggregate of 1,162,791 shares of our common stock to the selling stockholders at
an exercise price of $0.125 per share for a period of five years from the date
of issuance. In issuing the New Warrants, we 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.
Selling Stockholders
The selling stockholders may offer and sell, from time to time,
any or all of shares of our common stock that have been issued or may be issued upon exercise of the
warrants. The warrants were acquired by the selling stockholders directly from
our company pursuant to the Securities Purchase Agreement dated November 4, 2013
between our company and the selling stockholders.
The following table sets forth certain information regarding
the beneficial ownership of shares of common stock by the selling stockholders
as of August 21, 2014 and the number of shares of our common stock being offered
pursuant to this prospectus. Except as otherwise described below, we believe
that the selling stockholders have sole voting and investment powers over their
shares.
Because the selling stockholders may offer and sell all or only
some portion of the 3,488,373 shares of our common stock being offered pursuant
to this prospectus, the numbers in the table below representing the amount and
percentage of these shares of our common stock that will be held by the selling
stockholders upon termination of the offering are only estimates based on the
assumption that each selling stockholder will sell all of its shares of our
common stock being offered in the offering.
None of the selling stockholders had or have any position or
office, or other material relationship with us or any of our affiliates over the
past three years.
To our knowledge, none of the selling stockholders is a
broker-dealer or an affiliate of a broker-dealer. We may require the selling
stockholders to suspend the sales of the shares of our common stock being
offered pursuant to this prospectus upon the occurrence of any event that makes
any statement in this prospectus or the related registration statement untrue in
any material respect or that requires the changing of statements in those
documents in order to make statements in those documents not misleading.
Name of Selling
Stockholder |
Shares Owned
by the
Selling Stockholder before the Offering(1) |
Total Shares
Offered in
the Offering |
Number of Shares to Be
Owned
by Selling Stockholder After the Offering and
Percent of Total Issued and Outstanding Shares(1)
|
# of
Shares(3)
|
% of
Class(2),(3)
|
Anson Investments Master Fund LP(4) |
4,077,519(5)
|
1,744,185 (6)
|
2,333,334
|
2.2%
|
Cranshire Capital Master Fund, Ltd.(7) |
2,595,351(8)
|
1,395,351 (9)
|
1,200,000
|
1.1%
|
Equitec Specialists, LLC(10) |
648,837(11)
|
348,837(12)
|
300,000
|
*
|
|
13
Name of Selling
Stockholder |
Shares Owned
by the
Selling Stockholder before the Offering(1) |
Total Shares
Offered in
the Offering |
Number of Shares to Be
Owned
by Selling Stockholder After the Offering and
Percent of Total Issued and Outstanding Shares(1)
|
# of
Shares(3)
|
% of
Class(2),(3)
|
Totals |
7,321,707 |
3,488,373 |
3,833,334 |
3.5%
|
Notes |
|
* |
Less than 1%. |
|
|
(1) |
Beneficial ownership is determined in accordance with
Securities and Exchange Commission rules and generally includes voting or
investment power with respect to shares of common stock. Shares of common
stock subject to options and warrants currently exercisable, or
exercisable within 60 days, are counted as outstanding for computing the
percentage of the person holding such options or warrants but are not
counted as outstanding for computing the percentage of any other person.
|
|
|
(2) |
We have assumed that the selling stockholders will sell
all of the shares being offered in this offering. |
|
|
(3) |
Based on 102,927,070 shares of our common stock issued
and outstanding as of August 20, 2014. Shares of our common stock being
offered pursuant to this prospectus by a selling stockholder are counted
as outstanding for computing the percentage of that particular selling
stockholder but are not counted as outstanding for computing the
percentage of any other person. |
|
|
(4) |
Moez Kassam exercises voting and dispositive power with
respect to the shares of our common stock that are beneficially owned by
Anson Investments Master Fund LP. |
|
|
(5) |
Consists of 4,077519 shares of our common stock issued or
issuable upon exercise of warrants. |
|
|
(6) |
Consists of 1,744,185 shares of our common stock issued
or issuable upon exercise of warrants. |
|
|
(7) |
Cranshire Capital Advisors, LLC (CCA) is the investment
manager of Cranshire Capital Master Fund, Ltd. (Cranshire Master Fund)
and has voting control and investment discretion over securities held by
Cranshire Master Fund. Mitchell P. Kopin (Mr. Kopin), the present, the
sole member and the sole member of the Board of Managers of CCA, has
voting control over CCA. As a result, each of Mr. Kopin and CCA may be
deemed to have beneficial ownership (as determined under Section 13(d) of
the Securities Exchange Act of 1934, as amended) of the securities held by
Cranshire Master Fund. |
|
|
(8) |
Consists of 2,595,351 shares of our common stock issued
or issuable upon exercise of warrants. |
|
|
(9) |
Consists of 1,395,351 shares of our common stock issued
or issuable upon exercise of warrants. |
|
|
(10) |
CCA (as defined in note 7 above) is the investment
manager of Equitec Specialists, LLC (Equitec) and has voting control and
investment discretion over securities held in the managed accounts by
Equitec. Mr. Kopin (as defined in note 7 above), the present, the sole
member and the sole member of the Board of Managers of CCA, has voting
control over CCA. As a result, each of Mr. Kopin and CCA may be deemed to
have beneficial ownership (as determined under Section 13(d) of the
Securities Exchange Act of 1934, as amended) of the securities held in the
managed accounts by Equitec. |
14
(11) |
Consists of 648,837 shares of our common stock issued or
issuable upon exercise of warrants. |
|
|
(12) |
Consists of 348,837 shares of our common stock issued or
issuable upon exercise of warrants. |
Plan of Distribution
Each selling stockholder of the securities and any of their
pledgees, assignees and successors-in-interest may, from time to time, sell any
or all of their securities covered hereby on the OTC Markets Groups OTCQB or
any other stock exchange, market or trading facility on which the securities are
traded or in private transactions. A selling stockholder may sell all or a
portion of the shares being offered pursuant to this prospectus at fixed prices,
at prevailing market prices at the time of sale, at varying prices or at
negotiated prices. A selling stockholder may use any one or more of the
following methods when selling securities:
-
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
-
block trades in which the broker-dealer will attempt to sell the securities
as agent but may position and resell a portion of the block as principal to
facilitate the transaction;
-
purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
-
an exchange distribution in accordance with the rules of the applicable
exchange;
-
privately negotiated transactions;
-
settlement of short sales;
-
in transactions through broker-dealers that agree with the selling
stockholders to sell a specified number of such securities at a stipulated
price per security;
-
through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
-
a combination of any such methods of sale; or
-
any other method permitted pursuant to applicable law.
The selling stockholders may also sell securities under Rule
144 under the Securities Act of 1933 (the Securities Act), if
available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange
for other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchaser of securities, from the purchaser) in amounts to
be negotiated, but, except as set forth in a supplement to this prospectus, in
the case of an agency transaction not in excess of a customary brokerage
commission in compliance with FINRA Rule 2440; and in the case of a principal
transaction a markup or markdown in compliance with FINRA IM-2440.
In connection with the sale of the securities or interests
therein, the selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn engage in
short sales of the securities in the course of hedging the positions they
assume. The selling stockholders may also sell securities short and deliver
these securities to close out their short positions, or loan or pledge the
securities to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or create one or more derivative
securities which require the delivery to such broker-dealer or other financial
institution of securities offered by this prospectus, which securities such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
15
The selling stockholders and any broker-dealers or agents that
are involved in selling the securities may be deemed to be underwriters within
the meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of the securities purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each selling stockholder has
informed us that it does not have any written or oral agreement or
understanding, directly or indirectly, with any person to distribute the
securities.
We are required to pay certain fees and expenses incurred by us
incident to the registration of the securities. We have agreed to indemnify the
selling stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
Because selling stockholders may be deemed to be underwriters
within the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act including Rule 172 thereunder. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather
than under this prospectus. The selling stockholders have advised us that there
is no underwriter or coordinating broker acting in connection with the proposed
sale of the resale securities by the selling stockholders.
We agreed to keep this prospectus effective until the earlier
of (i) the date on which the securities may be resold by the selling
stockholders without registration and without regard to any volume or
manner-of-sale limitations by reason of Rule 144, without the requirement for us
to be in compliance with the current public information under Rule 144 under the
Securities Act or any other rule of similar effect or (ii) all of the securities
have been sold pursuant to this prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale securities will be sold only
through registered or licensed brokers or dealers if required under applicable
state securities laws. In addition, in certain states, the resale securities
covered hereby may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities
Exchange Act of 1934, any person engaged in the distribution of the resale
securities may not simultaneously engage in market making activities with
respect to the common stock for the applicable restricted period, as defined in
Regulation M, prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Securities
Exchange Act of 1934 and the rules and regulations thereunder, including
Regulation M, which may limit the timing of purchases and sales of securities of
the common stock by the selling stockholders or any other person. We will make
copies of this prospectus available to the selling stockholders and have
informed them of the need to deliver a copy of this prospectus to each purchaser
at or prior to the time of the sale (including by compliance with Rule 172 under
the Securities Act).
Description of Securities
Capital Stock
The aggregate number of shares that we have the authority to
issue is 1,225,000,000, of which 1,125,000,000 shares are common stock, with a
par value of $0.001 per share, and 100,000,000 shares are preferred stock, with
a par value of $0.001 per share. 20,000,000 shares of our authorized preferred
stock are designated as Series A Preferred Stock, which have 10 votes per
share and are not convertible into shares of our common stock. 1,000 shares of
our authorized preferred stock are designated as 10% Series B Convertible
Preferred Stock, which have a stated value of $1,000 per share and have
liquidation preferences, dividend rights, redemption rights and conversion
rights.
As of August 20, 2014, there were 102,927,070 shares of our
common stock issued and outstanding, 20,000,000 shares of Series A Preferred
Stock issued and outstanding and no shares of 10% Series B Convertible Preferred
Stock issued and outstanding.
Common Stock
Our common stock is entitled to one vote per share on all
matters submitted to a vote of our stockholders, including the election of
directors. Except as otherwise provided by law or as provided in any resolution
adopted by our board of directors providing for the issuance of any series of
preferred stock, the holders of our common stock possess all voting power. There is no cumulative voting in the election of
directors. Stockholders holding at least 10% of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, will
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the articles of
incorporation. When a quorum is present or represented at any meeting, the vote
of the stockholders of a majority of the stock having voting power present in
person or represented by proxy will be sufficient to elect members of our board
of directors or to decide any question brought before such meeting, unless the
question is one upon which by express provision of statute or of the articles of
incorporation, a different vote is required in which case such express provision
will govern and control the decision of such question. Except as otherwise
required by law, any action required to be taken at a meeting of our
stockholders, or any other action which may be taken at a meeting of our
stockholders, may be taken without a meeting, without prior notice and without a
vote if written consents are signed by our stockholders representing a majority
of the shares entitled to vote at such a meeting.
16
Our board of directors has the power to amend our bylaws. As a
result, our board of directors can change the quorum and voting requirements at
a meeting of our stockholders, subject to the applicable laws.
Subject to any preferential rights of any outstanding series of
preferred stock created by our board of directors from time to time, the holders
of our common stock are entitled to receive, when, as and if declared by our
board of directors, out of funds legally available therefore, dividends payable
in cash, stock or otherwise. Our board of directors is not obligated to declare
a dividend. Any future dividends will be subject to the discretion of our board
of directors and will depend upon, among other things, future earnings, the
operating and financial condition of our company, its capital requirements,
general business conditions and other pertinent factors. It is not anticipated
that dividends will be paid in the foreseeable future.
Upon any liquidation of our company, and after holders of any
outstanding series of preferred stock have been paid in full the amounts to
which they respectively are entitled or a sum sufficient for such payment in
full has been set aside, the remaining net assets of our company are to be
distributed pro rata to the holders of our common stock, to the exclusion of
holders of our preferred stock.
Our common stock is not convertible or redeemable and has no
preemptive, subscription or conversion rights. There are no conversions,
redemption, sinking fund or similar provisions regarding our common stock.
Preferred Stock
Our preferred stock may be divided into and issued in series.
Our board of directors is authorized to divide the authorized shares of
preferred stock into one or more series, each of which will be so designated as
to distinguish the shares thereof from the shares of all other series and
classes. Our board of directors is authorized to fix and determine the
designations, rights, qualifications, preferences, limitations and terms of the
shares of any series of preferred stock including but not limited to the
following.
|
(a) |
The rate of dividend, the time of payment of dividends,
whether dividends are cumulative, and the date from which any dividends
will accrue; |
|
|
|
|
(b) |
Whether shares may be redeemed, and, if so, the
redemption price and the terms and conditions of redemption; |
|
|
|
|
(c) |
The amount payable upon shares in the event of voluntary
or involuntary liquidation; |
|
|
|
|
(d) |
Sinking fund or other provisions, if any, for the
redemption or purchase of shares; |
|
|
|
|
(e) |
The terms and conditions on which shares may be
converted, if the shares of any series are issued with the privilege of
conversion; |
|
|
|
|
(f) |
Voting powers, if any, provided that if any of the
preferred stock or series thereof will have voting rights, such preferred
stock or series will vote only on a share for share basis with the common
stock on any matter, including but not limited to the election of
directors, for which such preferred stock or series has such rights;
and |
|
|
|
|
(g) |
Subject to the foregoing, such other terms,
qualifications, privileges, limitations, options, restrictions, and
special or relative rights and preferences, if any, of shares or such
series as our board of directors may, at the time so acting, lawfully fix
and determine under the laws of the State of
Nevada. |
17
We must not declare, pay or set apart for payment any dividend
or other distribution (unless payable solely in shares of common stock or other
class of stock junior to the preferred stock as to dividends or upon
liquidation) in respect of common stock, or other class of stock junior to the
preferred stock, nor must we redeem, purchase or otherwise acquire for
consideration shares of any of the foregoing, unless dividends, if any, payable
to holders of preferred stock for the current period (and in the case of
cumulative dividends, if any, payable to holders of preferred stock for the
current period and in the case of cumulative dividends, if any, for all past
periods) have been paid, are being paid or have been set aside for payment, in
accordance with the terms of the preferred stock, as fixed by our board of
directors.
In the event of the liquidation of our company, holders of
preferred stock are entitled to receive, before any payment or distribution on
the common stock or any other class of stock junior to the preferred stock upon
liquidation, a distribution per share in the amount of the liquidation
preference, if any, fixed or determined in accordance with the terms of such
preferred stock plus, if so provided in such terms, an amount per share equal to
accumulated and unpaid dividends in respect of such preferred stock (whether or
not earned or declared) to the date of such distribution. Neither the sale,
lease or exchange of all or substantially all of the property and assets of our
company, nor any consolidation or merger of our company, will be deemed to be a
liquidation for this purpose.
Series A Preferred Stock
20,000,000 shares of our authorized preferred stock are
designated as Series A Preferred Stock. Except with respect to matters which
adversely affect the holders of Series A Preferred Stock, as required by law, or
as required by the articles of incorporation, the holders of Series A Preferred
and the holders of common stock of our company, are entitled to notice of any
stockholders meeting and to vote as a single class upon any matter submitted to
the stockholders for a vote, on the following basis: (a) holders of common stock
will have one vote per share of common stock held by them; and holders of Series
A Preferred Stock will have 10 votes per share of Series A Preferred Stock.
Shares of Series A Preferred Stock are not convertible into shares of our common
stock.
10% Series B Convertible Preferred Stock
1,000 shares of our authorized preferred stock are designated
as 10% Series B Convertible Preferred Stock (Series B Preferred
Stock), which have a stated value of $1,000 per share.
Anti-Takeover Provisions
Some features of the Nevada Revised Statutes, which are further
described below, may have the effect of deterring third parties from making
takeover bids for control of our company or may be used to hinder or delay a
takeover bid. This would decrease the chance that our stockholders would realize
a premium over market price for their shares of common stock as a result of a
takeover bid.
Combination with Interested Stockholder
The Nevada Revised Statutes contain provisions governing
combination of a Nevada corporation that has 200 or more stockholders of record
with an interested stockholder. As of August 20, 2014, we had approximately 80
stockholders of record. Therefore, we believe that these provisions governing
combination of a Nevada corporation do not apply to us and will not until such
time as these requirements have been met. At such time as they may apply to us,
these provisions may also have effect of delaying or making it more difficult to
effect a change in control of our company.
A corporation affected by these provisions may not engage in a
combination within three years after the interested stockholder acquires his,
her or its shares unless the combination or purchase is approved by the board of
directors before the interested stockholder acquired such shares. Generally, if
approval is not obtained, then after the expiration of the three-year period,
the business combination may be consummated with the approval of the board of
directors before the person became an interested stockholder or a majority of
the voting power held by disinterested stockholders, or if the consideration to
be received per share by disinterested stockholders is at least equal to the
highest of:
18
-
the highest price per share paid by the interested stockholder within the
three years immediately preceding the date of the announcement of the
combination or within three years immediately before, or in, the transaction
in which he, she or it became an interested stockholder, whichever is higher;
-
the market value per share on the date of announcement of the combination
or the date the person became an interested stockholder, whichever is higher;
or
-
if higher for the holders of preferred stock, the highest liquidation value
of the preferred stock, if any.
Generally, these provisions define an interested stockholder as
a person who is the beneficial owner, directly or indirectly of 10% or more of
the voting power of the outstanding voting shares of a corporation. Generally,
these provisions define combination to include any merger or consolidation with
an interested stockholder, or any sale, lease, exchange, mortgage, pledge,
transfer or other disposition, in one transaction or a series of transactions
with an interested stockholder of assets of the corporation having:
-
an aggregate market value equal to 5% or more of the aggregate market value
of the assets of the corporation;
-
an aggregate market value equal to 5% or more of the aggregate market value
of all outstanding shares of the corporation; or
-
representing 10% or more of the earning power or net income of the
corporation.
Articles of Incorporation and Bylaws
There are no provisions in our articles of incorporation or our
bylaws that would delay, defer or prevent a change in control of our company and
that would operate only with respect to an extraordinary corporate transaction
involving our company, such as merger, reorganization, tender offer, sale or
transfer of substantially all of its assets, or liquidation.
Experts and Counsel
Our consolidated financial statements for the years ended March
31, 2014 and 2013 and for the period from inception on June 19, 2012 through
March 31, 2014 included in this prospectus have been audited by Seale and Beers,
CPAs, to the extent and for the period set forth in their report (which contains
an explanatory paragraph regarding our ability to continue as a going concern)
appearing elsewhere in the prospectus, and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
Clark Wilson LLP provided us with an opinion on the validity of
the shares of our common stock being offered pursuant to this prospectus.
Interest of Named Experts and Counsel
No expert named in the registration statement of which this
prospectus forms a part as having prepared or certified any part thereof (or is
named as having prepared or certified a report or valuation for use in
connection with such registration statement) or counsel named in this prospectus
as having given an opinion upon the validity of the securities being offered
pursuant to this prospectus or upon other legal matters in connection with the
registration or offering such securities was employed for such purpose on a
contingency basis. Also at the time of such preparation, certification or
opinion or at any time thereafter, through the date of effectiveness of such
registration statement or that part of such registration statement to which such
preparation, certification or opinion relates, no such person had, or is to
receive, in connection with the offering, a substantial interest, direct or
indirect, in our company or any of its parents or subsidiaries. Nor was any such person
connected with our company or any of its parents or subsidiaries as a promoter,
managing or principal underwriter, voting trustee, director, officer or
employee.
19
Information with respect to Our Company
Description of
Business
Corporate Overview
Our company, The Alkaline Water Company Inc., was incorporated
under the laws of the State of Nevada on June 6, 2011 under the name Global
Lines Inc.. Our business model prior to the acquisition of Alkaline Water Corp.
on May 31, 2013 was to provide chauffeuring and transportation services to
residents within our local market, primarily providing transportation services
such as private school student transport, sightseeing trips, and elderly
transportation, and offering transportation to the airport and special events
such as proms and weddings. However, as we had not successfully developed our
service and had no source of revenue from our business plan, we determined to
seek out a new business opportunity to increase value for our stockholders.
On February 20, 2013, The Alkaline Water Company Inc. (formerly
Global Lines Inc.) entered into a non-binding letter of intent with Alkaline 88,
LLC (formerly Alkaline 84, LLC), a wholly-owned subsidiary of Alkaline Water
Corp., for the acquisition of all of the issued and outstanding securities of
the capital of Alkaline 88, LLC. Further to this letter of intent, on May 31,
2013, The Alkaline Water Company Inc. entered into a share exchange agreement
with Alkaline Water Corp. and all of its stockholders, and as a result of the
closing of this agreement on the same date, Alkaline Water Corp. became a
wholly-owned subsidiary of The Alkaline Water Company Inc. Consequently, after
the closing of this agreement we adopted the business of Alkaline Water Corp.s
wholly-owned subsidiary, Alkaline 88, LLC.
Alkaline Water Corp. was incorporated in the State of Arizona
on March 7, 2013, and it is the sole stockholder of Alkaline 88, LLC. Alkaline
Water Corp. is the wholly-owned subsidiary of The Alkaline Water Company Inc.,
and Alkaline 88, LLC is Alkaline Water Corp.s wholly-owned subsidiary.
Prior to the closing of the share exchange agreement, on May
30, 2013, our company effected a name change by merging with its wholly-owned
Nevada subsidiary named The Alkaline Water Company Inc. with our company as
the surviving corporation under the new name The Alkaline Water Company Inc.
In addition, on May 30, 2013, our company effected a 15:1 forward stock split of
our authorized and issued and outstanding common stock.
On October 7, 2013, we amended our 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 the 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. As a result, the aggregate
number of shares that we have the authority to issue is 1,225,000,000, of which
1,125,000,000 shares are common stock, with a par value of $0.001 per share, and
100,000,000 shares are preferred stock, with a par value of $0.001 per
share.
On October 8, 2013, we designated 20,000,000 shares of the
authorized and unissued preferred stock of our company as Series A Preferred
Stock by filing a Certificate of Designation with the Secretary of State of the
State of Nevada. The Series A Preferred Stock has 10 votes per share and is not
convertible into shares of our common stock.
On November 5, 2013, we designated 1,000 shares of the
authorized and unissued preferred stock of our company as 10% Series B
Convertible Preferred Stock by filing a Certificate of Designation with the
Secretary of State of the State of Nevada. The 10% Series B Convertible
Preferred Stock has, among other things, conversion rights, liquidation
preferences, dividend rights, redemption rights and conversion rights.
The principal offices of our company are located at 7730 E
Greenway Road, Ste. 203, Scottsdale, AZ 85260. Our telephone number is (480)
656-2423.
20
Principal Products
Our company offers retail consumers bottled alkaline water in
three-liter and one-gallon volumes through our brand Alkaline88. Our product
is produced through an electrolysis process that uses specialized electronic
cells coated with a variety of rare earth minerals to produce our 8.8 pH
drinking water without the use of any chemicals. Our product also incorporates
84 trace Himalayan salts.
The main reason consumers drink our product is for the
perceived benefit that a proper pH balance helps fight disease and boosts the
immune system and the perception that alkaline water helps to maintain a proper
body pH and keeps cells young and hydrated.
Operations
Alkaline 88, LLC, our operating subsidiary, operates primarily
as a marketing and distribution company. Alkaline 88, LLC has entered into
exclusive arrangements with Water Engineering Solutions LLC, an entity that is
controlled and owned by our President, Chief Executive Officer, Director and
major stockholder, Steven P. Nickolas, and our Vice-President, Secretary,
Treasurer and Director, Richard A. Wright, for the manufacture and production of
our alkaline generating electrolysis system machines. Alkaline 88, LLC has
entered into one-year agreement(s) with Arizona Bottled Water, LLC , White
Water, LLC and Brookshire's Grocery Company to act as our initial co-packers.
Our branding is being coordinated through 602 Design, LLC and our component
materials are readily available through multiple vendors. Our principal
suppliers are Plastipack Packaging and Polyplastics Co.
Sample production and testing of our product began in late
2012. We have currently established two contract manufacturing in Phoenix,
Arizona and one in Tyler Texas and plan to establish other key manufacturing
facilities throughout the United States to support the national distribution of
our product.
Our product is currently at the introduction and expansion
phase of its lifecycle. In March 2012 Alkaline 88, LLC did market research on
the demand for a bulk alkaline product at the Natural Product Expo West in
Anaheim, California. In January 2013, we began the formal launching of our
product in Southern California and Arizona. Since then, we have begun to deliver
product through approximately 6,000 retail outlets throughout the United States.
We are presently in 49 States and the District of Columbia. Although over 40% of
our current sales are concentrated in the Southwest and Texas. We have
distribution agreements with large national distributors (UNFI, KeHe, Tree of
Life and Natures Best representing over 100,000 retail establishments. . Our
current stores include convenience stores, natural food products stores, large
ethnic markets and national retailers. Currently, we sell all of our products to
our retailers through brokers and distributors. Our larger retail clients bring
the water in through their own warehouse distribution network. Our current
retail clients are made up of a variety of the following; convenience stores,
including 7-11s; large national retailers, including Albertsons, Frys and
Smiths (both Kroger companies), and regional grocery chains such as Schnucks,
Smart & Final and Jewel-Osco , Sprouts, Bashas, Bristol Farms, Vallarta,
Superior Foods, Brookshires and other companies throughout the United
States.
In April 2014 we entered into an exclusive territorial
distribution agreement with Kalil Bottling Co. on a new single serve 700ml
Bottle with a sport cap. This exclusivity is in Arizona and other areas in the
Southwestern United States. Kalil Bottling Co. is a direct to store distributor
(DSD) and we plan to expand the use of DSDs for our single serving packaging
through the remainder of 2014.
In order to continue our expansion, we anticipate that we will
be required, in most cases, to continue to give promotional deals throughout
2014 and in subsequent years on a quarterly basis ranging from a 5%-15% discount
similar to all other beverage company promotional programs. It has been our
experience that most of the retailers have requested some type of promotional
introductory program which has included either a $0.25 -$0.50 per unit discount
on an initial order; a buy one get one free program; or a free-fill program
which includes 1-2 cases of free product per store location. Slotting has only
been presented and negotiated in the larger national grocery chains and, in most
cases, is offset by product sales. Our slotting fees with our current national
retailers do not exceed $100,000 in the aggregate and are offset through product
sales. In addition we participate in promotional activities of our distributors,
these fees are not in excess of $200,000 and are offset through product sales.
21
Plan of Operations
In order for us to implement our business plan over the next
twelve-month period, we have identified the following milestones that we expect
to achieve:
-
Training and Hiring of Staff - The first milestone that we expect to
achieve throughout 2014 will be hiring and the internal training of our sales
and marketing staff and logistic personnel, located in Scottsdale, Arizona.
-
We expect to continue to develop our working relationship with our national
broker network known as Beacon United. Except in the Northeast. We continually
meet train and go on sales call with the Beacon United Network in order to
take advantage of the momentum currently being created by their efforts. We
anticipate a considerable amount of travel and ongoing for both internal staff
and Beacon United at an estimated cost during that time of $100,000.
-
Increase Manufacturing Capacity We anticipate during the second half on
2014 that we will need to secure an additional four contract manufacturing
facilities, beyond the three that currently exist in Phoenix, Arizona and
Tyler Texas. The strategic importance of this is to reduce freight costs that
are currently being incurred with respect to shipping product around the
country. We are currently in negotiations with four contract packaging
facilities located in North Carolina, Illinois, Georgia and California. Based
on the location of various retailers in different parts of the country and our
expected growth, we anticipate that we will need to open a new facility every
two months in 2014. Each of the contract packaging facilities will require the
installation of a specifically designed proprietary piece of equipment that
will allow them to manufacture and produce our Alkaline 88 products. The cost
of each of these systems, including installation, is approximately $230,000,
per system. We anticipate having all four of these additional locations in
operation by the end of 2014. Depending on the demand for our product, we
anticipate that some of these contract packers up to three or four of our
standard systems. Given the total cost of each machine, along with the
ancillary storage equipment and installation, of approximately $230,000, the
total cost of implementation and expansion to the various contract packers
could be in excess of $2,300,000.
-
Expand Retail Distribution - As the contract packaging facilities continue
to come online, it is imperative to the execution of our business plan that we
continue to sign up major retailers for the acceptance and sales of our
product throughout the United States, Canada and Mexico. We anticipate most
major markets and retailers in the country to be opened prior to the end of
2014. We are currently in negotiations or have received the new item paperwork
from retailers that will introduce our Alkaline 88 product line to over 350
retailers, representing approximately 30,000 store locations throughout North
America. We believe that it will be possible for us to bring on an additional
four to five retailers per month over the next twelve months. The cost of this
retail expansion is expected to be $500,000 during that time.
-
Addition of Support Staff - In order to support expansion efforts and to
continue the training and support of our broker network, we will need to hire
approximately ten more people on the corporate level, most of which will be
hired for the specific purpose of supporting the broker, distributor and
retailers and their logistical requirements. We continue to seek and interview
candidates to fill our growing need for additional staffing. The additional
cost of these new hires is expected to be approximately $1,000,000 in salary
and benefits over the next twelve months.
-
Capital Considerations Our business plan can be adjusted based on the
available capital to the business. We plan to begin moving in an eastward
direction and building machines and entering into co-packing arrangements as
funding allows. We anticipate that approximately $2,300,000 is necessary in
order to build-out a national presence for our product and to allow for the
purchase of the necessary equipment and facilities over the next twelve
months.
22
We believe that our cash flows from operations will not meet
our present and near-term cash needs and thus we will require additional cash
resources, including the sale of equity or debt securities, to meet our planned
capital expenditures and working capital requirements for the next 12 months. We
estimate that our capital needs over the next 12 month will be $2,000,000 to
$5,000,000, depending on how we can continue to expand the distribution of our
products across the country. We will require additional cash resources to purchase
equipment, increase the production of our products, implement our strategy to
expand our sales and marketing initiatives and increase brand awareness. If our
own financial resources and then current cash-flows from operations are
insufficient to satisfy our capital requirements, we may seek to sell additional
equity or debt securities or obtain additional credit facilities. The sale of
additional equity securities will result in dilution to our stockholders. The
incurrence of indebtedness will result in increased debt service obligations and
could require us to agree to operating and financial covenants that could
restrict our operations or modify our plans to grow the business. Financing may
not be available in amounts or on terms acceptable to us, if at all. Any failure
by us to raise additional funds on terms favorable to us, or at all, will limit
our ability to expand our business operations and could harm our overall
business prospects.
Distribution Method for Our Product
Our distribution network is a broker-distributor-retailer
network, whereby brokers represent our products to distributors and retailers.
Our target retail markets are: (a) chain and independent health food stores; (b)
grocery stores; (c) convenience stores; (d) drug stores; and (e) the mass retail
market.
Currently we have gained broker representation through the
Beacon United Group of brokers, which extend throughout the United States.
Across the country and in all categories of retail trade, we
are aggressively utilizing both DSD (direct to store deliveries) and warehouse
opportunities in the distribution of our products throughout the country.
We have been successful in reaching 21 of the top 75 retail
grocery stores and have ongoing meetings with all categories of retail grocery
stores.
National distribution is being arranged through our distributor
network including, but not limited: KeHE, Tree of Life, UNFI and Natures Best
with a combined account total of over 100,000.
Our retail network currently consists of Albertsons/SuperValu,
Superior Grocers, Kroger (Frys and Smiths) Vallarta Supermarkets., Schnucks,
Smart & Final and Jewel-Osco , Sprouts, Bashas, Bristol Farms, Vallarta,
Superior Foods, and Brookshires.
Dependence on Few Customers
We have 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.
Marketing
We intend to market our product through our broker network and
to avail ourselves to the promotional activities of other companies and
competitors regarding the benefits of alkaline water. We anticipate that our
initial marketing thrust will be to support the retailers and distribution
network with point of sales displays and other marketing materials,
strategically adding an extensive public relations program and other marketing
as the markets dictate.
Competition
The beverage industry is extremely competitive. The principal
areas of competition include pricing, packaging, development of new products and
flavors, and marketing campaigns. Our product will be competing directly with a
wide range of drinks produced by a relatively large number of manufacturers.
Most of these brands have enjoyed broad, well-established national recognition
for years, through well-funded ad and other marketing campaigns. In addition,
companies manufacturing these products generally have far greater financial,
marketing, and distribution resources than we have.
Important factors that will affect our ability to compete
successfully include the continued public perception of the benefits of alkaline
water, taste and flavor of our product, trade and consumer promotions, the
development of new, unique and cutting edge products, attractive and unique
packaging, branded product advertising, pricing, and the success of our
distribution network.
23
We will also be competing to secure distributors who will agree
to market our product over those of our competitors, provide stable and reliable
distribution, and secure adequate shelf space in retail outlets. The extremely
competitive pressures within the beverage categories could result in our product
never even being introduced beyond what they can market locally themselves.
Our product will compete generally with all liquid
refreshments, including bottled water and numerous specialty beverages, such as
SoBe, Snapple, Arizona, Vitamin Water, Gatorade, and Powerade. We will compete
directly with other alkaline water producers and brands focused on the emerging
alkaline beverage market including Eternal, Essentia, Icelandic, Real Water,
Aqua Hydrate, Mountain Valley, Qure, Penta, and Alka Power.
Products offered by our direct competitors are sold in various
volumes and prices with prices ranging from approximately $1.39 for a half-liter
bottle to $2.99 for a one-liter bottle, and volumes ranging from half-liter
bottles to one-and-a half liter bottles. We currently offer our product in a
three-liter bottle for an SRP of $3.99 and one-gallon bottle for an SRP of $4.99
and 700 millimeter single serving at SRP of $1.29.
Intellectual Property
Where available, we intend to obtain trademark protection in
the United States for a number of trademarks for slogans and product designs. We
intend to aggressively assert our rights under trade secret, unfair competition,
trademark and copyright laws to protect our intellectual property, including
product design, product research and concepts and recognized trademarks. These
rights are protected through the acquisition of patents and trademark
registrations, the maintenance of trade secrets, the development of trade dress,
and, where appropriate, litigation against those who are, in our opinion,
infringing these rights. The trademark for Alkaline 88 has been approved and is
currently active. The trade mark for A88 has been applied for and is being
prosecuted.
While there can be no assurance that registered trademarks will
protect our proprietary information, we intend to assert our intellectual
property rights against any infringer. Although any assertion of our rights
could result in a substantial cost to, and diversion of effort by, our company,
management believes that the protection of our intellectual property rights will
be a key component of our sales and operating strategy.
Seasonality of Business
The sales of our products are influenced to some extent by
weather conditions in the markets in which we operate. Unusually cold or rainy
weather during the summer months may have a temporary effect on the demand for
our product and contribute to lower sales, which could have an adverse effect on
our results of operations for such periods.
Research and Development Costs During the Last Two Years
Alkaline 88, LLC has worked with Water Engineering Solutions,
LLC, an entity that is controlled and majority-owned by Steven P. Nickolas and
Richard A. Wright, on the research and development activities related to the
development of our alkaline generating electrolysis system machines, a
proprietary alkaline water system.
Government Regulation
The advertising, distribution, labeling, production, safety,
sale, and transportation in the United States of our product will be subject to:
the Federal Food, Drug, and Cosmetic Act; the Federal Trade Commission Act; the
Lanham Act; state consumer protection laws; competition laws; federal, state and
local workplace health and safety laws; various federal, state and local
environmental protection laws; and various other federal, state and local
statutes and regulations.
Legal requirements apply in many jurisdictions in the United
States requiring that deposits or certain ecotaxes or fees be charged for the
sale, marketing, and use of certain non-refillable beverage containers. The
precise requirements imposed by these measures vary. Other types of
statutes and regulations relating to beverage container deposits, recycling,
ecotaxes and/or product stewardship also apply in various jurisdictions in the
United States. We anticipate that additional, similar legal requirements may be
proposed or enacted in the future at the local, state and federal levels in the
United States.
24
Any third-party bottling facility that we may choose to utilize
in the future and any other such operations will be subject to various
environmental protection statutes and regulations, including those relating to
the use of water resources and the discharge of wastewater. It will be our
policy to comply with any and all such legal requirements. Compliance with these
provisions has not had, and we do not expect such compliance to have, any
material adverse effect on our capital expenditures, net income or competitive
position.
Employees
In addition to Steven P. Nickolas, who is our President, Chief
Executive Officer, Director and major stockholder, and Richard A. Wright, who is
our Vice-President, Secretary, Treasurer and Director, we currently employ 8
full time employees and 1 part-time employee in marketing, accounting and
administration. We also work with retail brokers in the United States who are
paid on a contract basis. Our operations are overseen directly by management
that engages our employees to carry on our business. Our management oversees all
responsibilities in the areas of corporate administration, business development,
and research. We intend to expand our current management to retain skilled
directors, officers, and employees with experience relevant to our business
focus. Our managements relationships with manufacturers, distillers,
development/research companies, bottling concerns, and certain retail customers
will provide the foundation through which we expect to grow our business in the
future. We believe that the skill-set of our management team will be a primary
asset in the development of our brands and trademarks. We also plan to form an
independent network of contract sales and regional managers, a promotional
support team, and several market segment specialists who will be paid on a
variable basis.
Description of Property
We do not own any real estate or other property used in the
operation of our current business. Our principal offices are located at 7730 E
Greenway Road Ste. 203, Scottsdale, AZ 85260 with the size of 3,500 square feet.
We have recently entered into a new leasing arrangement with rent arrangement
with 7730 E Greenway Properties, an unrelated third party, for $2,000 per month.
We believe that the condition of our principal offices is satisfactory, suitable
and adequate for our current needs.
Legal Proceedings
We know of no material pending legal proceedings to which our
company or any of our subsidiaries is a party or of which any of our properties,
or the properties of any of our subsidiaries, is the subject. In addition, we do
not know of any such proceedings contemplated by any governmental authorities.
We know of no material proceedings in which any of our
directors, officers or affiliates, or any registered or beneficial stockholder
is a party adverse to our company or any of our subsidiaries or has a material
interest adverse to our company or any of our subsidiaries.
Market Price of and Dividends on Our Common Equity
and
Related Stockholder Matters
Market information
Our common stock is quoted on the OTCQB under the trading
symbol WTER. Trading in stocks quoted on the OTCQB is often thin and is
characterized by wide fluctuations in trading prices due to many factors that
may be unrelated or have little to do with a companys operations or business
prospects.
Our common stock became eligible for quotation on the OTC
Bulletin Board on July 10, 2012 and became ineligible for quotation on July 17,
2014. During the year ended March 31, 2013, no shares of our common stock
traded.
25
Set forth below are the range of high and low bid quotations
for the periods indicated as reported by the OTC Bulletin Board. The market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.
Quarter
Ended |
High Bid |
Low Bid |
June 30, 2014 |
$0.438 |
$0.10 |
March 31, 2014 |
$0.26 |
$0.15 |
December 31, 2013 |
$0.70 |
$0.2501 |
September 30, 2013 |
$1.305 |
$0.35 |
June 30, 2013 |
$0 |
$0 |
On August 20, 2014, the closing price of our common stock as
reported by the OTCQB was $0.17 per share.
Transfer Agent
Our shares of common stock are issued in registered form. The
transfer agent and registrar for our common stock is Island Stock Transfer,
located at 15500 Roosevelt Boulevard, Suite 301, Clearwater, Florida 33760.
Holders of Common Stock
As of August 20, 2014, there were approximately 80 holders of
record of our common stock. As of such date, 102,927,070 shares were issued and
outstanding.
Dividends
The payment of dividends, if any, in the future, rests within
the sole discretion of our board of directors. The payment of dividends will
depend upon our earnings, our capital requirements and our financial condition,
as well as other relevant factors. We have not declared any cash dividends since
our inception and have no present intention of paying any cash dividends on our
common stock in the foreseeable future.
There are no restrictions in our articles of incorporation or
bylaws that prevent us from declaring dividends. The Nevada Revised Statutes,
however, do prohibit us from declaring dividends where, after giving effect to
the distribution of the dividend:
|
1. |
We would not be able to pay our debts as they become due
in the usual course of business; or |
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2. |
Our total assets would be less than the sum of our total
liabilities plus the amount that would be needed to satisfy the rights of
shareholders who have preferential rights superior to those receiving the
distribution. |
26
Financial Statements
Financial Statements For the Years Ended March 31, 2014 and
2013
Report of Independent Registered Public Accounting firm
Consolidated Balance Sheets
Consolidated Statement of Operations
Consolidated Statements of Stockholders Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statements for the Three Month Periods Ended June
30, 2014 and 2013
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
27
SEALE AND BEERS, CPAs
PCAOB REGISTERED AUDITORS
www.sealebeers.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Alkaline Water Company Inc
(A Development Stage Company)
We have audited the accompanying balance sheets of The Alkaline Water Company Inc (A Development Stage Company) as of March 31, 2014 and 2013 and the related statements of income, stockholders’ equity (deficit), and cash flows for each of the years then ended, and since inception on June 19, 2012 through March 31, 2014. The Alkaline Water Company Inc’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Alkaline Water Company Inc (A Development Stage Company) as of March 31, 2014 and 2013, and the related statements of income, stockholders’ equity (deficit), and cash flows for each of the years then ended and since inception on June 19, 2012 through March 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has negative working capital at March 31, 2014, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Seale and Beers, CPAs
Seale and Beers, CPAs
Las Vegas, Nevada
June 30, 2014
50 S. Jones Blvd, Suite 201 - Las Vegas, NV 89107 Phone: (888)727-8251 Fax: (888)782-2351
F-1
THE ALKALINE WATER COMPANY, INC.
(FORMERLY GLOBAL
LINES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
BALANCE SHEETS
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March 31, 2014 |
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March 31, 2013 |
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ASSETS |
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Current assets: |
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Cash |
$ |
2,665 |
|
$ |
64,607 |
|
Accounts receivable |
|
166,404 |
|
|
15,110 |
|
Inventory |
|
57,965 |
|
|
7,573 |
|
Deferred financing cost |
|
54,288 |
|
|
- |
|
|
|
|
|
|
|
|
Total current assets |
|
281,322 |
|
|
87,290 |
|
|
|
|
|
|
|
|
Fixed assets, net |
|
286,986 |
|
|
38,083 |
|
Equipment deposits - related party |
|
- |
|
|
15,000 |
|
|
|
|
|
|
|
|
Total assets |
$ |
568,308 |
|
$ |
140,373 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
$ |
320,154 |
|
$ |
12,651 |
|
Accounts payable - related party |
|
18,403 |
|
|
490 |
|
Accrued expenses |
|
56,601 |
|
|
5,400 |
|
Accrued interest |
|
19,829 |
|
|
1,315 |
|
Revolving financing |
|
83,348 |
|
|
- |
|
Notes payable |
|
- |
|
|
150,000 |
|
Derivative liability |
|
337,988 |
|
|
- |
|
|
|
|
|
|
|
|
Total current liabilities |
|
836,323 |
|
|
169,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible Preferred stock |
|
83,820 |
|
|
- |
|
|
|
|
|
|
|
|
Stockholders' deficit: |
|
|
|
|
|
|
Preferred stock - $0.001 par value, 100,000,000 shares
authorized. |
|
|
|
|
|
|
Series A issued 20,000,000 |
|
20,000 |
|
|
- |
|
Common stock, Class A, $0.001 par value, 1,125,000,000
shares authorized, 81,602,175 and 77,500,000 shares issued and outstanding
as of March 31, 2014 and March 31, 2013, respectively |
|
81,602 |
|
|
77,500 |
|
|
|
- |
|
|
|
|
Additional paid in capital |
|
4,059,464 |
|
|
176,405 |
|
Common stock issuable |
|
- |
|
|
- |
|
Deficit accumulated during development stage |
|
(4,512,901 |
) |
|
(283,388 |
) |
|
|
|
|
|
|
|
Total stockholders' deficit |
$ |
(351,835 |
) |
$ |
(29,483 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit |
$ |
568,308 |
|
$ |
140,373 |
|
See Accompanying Notes to Condensed Consolidated Financial
Statements.
F-2
THE ALKALINE WATER COMPANY, INC.
(FORMERLY GLOBAL
LINES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
|
|
|
Inception (June 19, |
|
|
Inception (June 19, |
|
|
|
For the year ended |
|
|
2012 to |
|
|
2012 to |
|
|
|
March 31, 2014 |
|
|
March 31, 2013 |
|
|
March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
552,699 |
|
$ |
15,110 |
|
$ |
567,809 |
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
411,851 |
|
|
8,026 |
|
|
419,877 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
140,848 |
|
|
7,084 |
|
|
147,932 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Sales and marketing expenses |
|
464,081 |
|
|
88,229 |
|
|
552,310 |
|
General and
administrative |
|
3,852,773 |
|
|
89,608 |
|
|
3,942,381 |
|
General and administrative - related
party |
|
62,092 |
|
|
104,929 |
|
|
167,021 |
|
Depreciation expense |
|
42,407 |
|
|
1,814 |
|
|
44,221 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
4,421,353 |
|
|
284,580 |
|
|
4,705,933 |
|
|
|
|
|
|
|
|
|
|
|
Other Income (expenses): |
|
|
|
|
|
|
|
|
|
Interest expense |
|
(11,057 |
) |
|
(1,315 |
) |
|
(12,372 |
) |
Interest expense on
redeemable preferred stock |
|
(468,255 |
) |
|
|
|
|
(468,255 |
) |
Fees paid on credit line |
|
(8,603 |
) |
|
|
|
|
(8,603 |
) |
Placement agent fee to
acquired credit line |
|
(10,000 |
) |
|
|
|
|
(10,000 |
) |
Amortization of debt discount |
|
(107,532 |
) |
|
|
|
|
(107,532 |
) |
Other expenses |
|
(1,529 |
) |
|
(4,577 |
) |
|
(6,106 |
) |
Other income - related party |
|
40,029 |
|
|
|
|
|
40,029 |
|
Change in derivative
liability |
|
617,939 |
|
|
|
|
|
617,939 |
|
|
|
|
|
|
|
|
|
|
|
Total
other expense |
|
50,992 |
|
|
(5,892 |
) |
|
45,100 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
$ |
(4,229,513 |
) |
$ |
(283,388 |
) |
$ |
(4,512,901 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding - basic |
|
80,220,729 |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic |
$ |
(0.05 |
) |
$ |
(70.85 |
) |
|
|
|
See Accompanying Notes to Condensed Consolidated Financial
Statements.
F-3
THE ALKALINE WATER COMPANY, INC.
(FORMERLY GLOBAL
LINES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated |
|
|
|
|
|
|
Number |
|
|
Par
Value |
|
|
Number |
|
|
Par
Value |
|
|
Paid-in Capital |
|
|
Development |
|
|
Total |
|
Inception (June 19, 2012) |
|
- |
|
$ |
- |
|
|
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
Effect of reverse merger between Global Lines, Inc. and The Alkaline Water Corp. on
March 31, 2013 |
|
|
|
|
|
|
|
77,500,000 |
|
|
77,500 |
|
|
176,405 |
|
|
|
|
|
253,905 |
|
Net (loss) from
Inception to March 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(283,388 |
) |
|
(283,388 |
) |
Balance, March 31, 2013 |
|
- |
|
$ |
- |
|
|
77,500,000 |
|
$ |
77,500 |
|
$ |
176,405 |
|
$ |
(283,388 |
) |
$ |
(29,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued at $.40 for
conversion of notes and interest payable |
|
|
|
|
|
|
|
574,675 |
|
|
574 |
|
|
229,295 |
|
|
|
|
|
229,869 |
|
Common stock issued for
cash at $.40 per share |
|
|
|
|
|
|
|
2,562,500 |
|
|
2,563 |
|
|
1,022,438 |
|
|
|
|
|
1,025,001 |
|
Common stock issued for services at
$.55 per share |
|
|
|
|
|
|
|
250,000 |
|
|
250 |
|
|
137,250 |
|
|
|
|
|
137,500 |
|
Common stock issued for
services at $.56 per share |
|
|
|
|
|
|
|
200,000 |
|
|
200 |
|
|
111,800 |
|
|
|
|
|
112,000 |
|
Common stock issued for services at
$.35 per share |
|
|
|
|
|
|
|
100,000 |
|
|
100 |
|
|
34,910 |
|
|
|
|
|
35,010 |
|
Common stock issued for
services at $.33 per share |
|
|
|
|
|
|
|
85,000 |
|
|
85 |
|
|
27,710 |
|
|
|
|
|
27,795 |
|
Common stock issued for services at
$.36 per share |
|
|
|
|
|
|
|
50,000 |
|
|
50 |
|
|
17,700 |
|
|
|
|
|
17,750 |
|
Common stock issued for
services at $.27 per share |
|
|
|
|
|
|
|
190,000 |
|
|
190 |
|
|
51,110 |
|
|
|
|
|
51,300 |
|
Common stock issued for services at
$.28 per share |
|
|
|
|
|
|
|
90,000 |
|
|
90 |
|
|
25,110 |
|
|
|
|
|
25,200 |
|
Issuance of options for
common stock at $.61 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,225,736 |
|
|
|
|
|
2,225,736 |
|
Issuance of Series A preferred stock to
officers |
|
20,000,000 |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
Net (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,229,513 |
) |
|
(4,229,513 |
) |
Balance, March 31, 2014 |
|
20,000,000 |
|
$ |
20,000 |
|
|
81,602,175 |
|
$ |
81,602 |
|
$ |
4,059,464 |
|
$ |
(4,512,901 |
) |
$ |
(351,835 |
) |
See Accompanying Notes to Condensed Consolidated Financial
Statements.
F-4
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.
F-5
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
F-6
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.
F-7
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
F-8
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
F-9
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.
F-10
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.
F-11
|
|
|
|
|
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.
F-12
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.
F-13
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:
F-14
|
|
|
|
|
|
|
|
|
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.
F-15
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:
F-16
|
|
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.
F-17
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.
F-18
THE ALKALINE WATER COMPANY, INC.
(FORMERLY GLOBAL
LINES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
BALANCE SHEETS
(unaudited)
|
|
June 30, 2014 |
|
|
March 31, 2014 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash |
$ |
620,031 |
|
$ |
2,665 |
|
Accounts receivable |
|
160,393 |
|
|
166,404 |
|
Inventory |
|
353,829 |
|
|
57,965 |
|
Prepaid expenses and
other current assets |
|
4,694 |
|
|
- |
|
Deferred financing cost |
|
- |
|
|
54,288 |
|
|
|
|
|
|
|
|
Total current assets |
|
1,138,947 |
|
|
281,322 |
|
|
|
|
|
|
|
|
Fixed assets, net |
|
457,690 |
|
|
286,986 |
|
Equipment deposits - related
party |
|
711,500 |
|
|
- |
|
|
|
|
|
|
|
|
Total
assets |
$ |
2,308,137 |
|
$ |
568,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
$ |
490,991 |
|
$ |
320,154 |
|
Accounts payable - related party |
|
- |
|
|
18,403 |
|
Accrued expenses |
|
71,537 |
|
|
56,601 |
|
Accrued interest |
|
- |
|
|
19,829 |
|
Revolving financing |
|
129,486 |
|
|
83,348 |
|
Notes payable |
|
- |
|
|
- |
|
Current portion of
capital leases |
|
64,578 |
|
|
- |
|
Derivative liability |
|
257,862 |
|
|
337,988 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
1,014,454 |
|
|
836,323 |
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
Capitalize leases-
related party |
|
308,794 |
|
|
- |
|
|
|
|
|
|
|
|
Total
long-term liabilities |
|
308,794 |
|
|
- |
|
|
|
|
|
|
|
|
Total
liabilities |
|
1,323,248 |
|
|
836,323 |
|
|
|
|
|
|
|
|
Redeemable convertible
preferred stock |
|
- |
|
|
83,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit: |
|
|
|
|
|
|
Preferred stock - $0.001 par value,
100,000,000 shares
authorized. Series A issued 20,000,000
|
|
20,000 |
|
|
20,000 |
|
Common stock, Class A,
$0.001 par value, 1,125,000,000
shares authorized,
101,182,070 and 81,602,175 shares issued and
outstanding as
of June 30, 2014 and March 31, 2014,
respectively |
|
101,182 |
|
|
81,602 |
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
7,813,817 |
|
|
4,059,464 |
|
Deficit accumulated during development stage
|
|
(6,950,110 |
) |
|
(4,512,901 |
) |
|
|
|
|
|
|
|
Total stockholders'
deficit |
$ |
984,889 |
|
$ |
(351,835 |
) |
|
|
|
|
|
|
|
Total liabilities and
stockholders' deficit |
$ |
2,308,137 |
|
$ |
568,308 |
|
See Accompanying Notes to Condensed Consolidated Financial
Statements.
F-19
THE ALKALINE WATER COMPANY INC.
(A DEVELOPMENT STAGE COMPANY)
FORMERLY GLOBAL LINES
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
572,049 |
|
$ |
32,522 |
|
$ |
1,139,858 |
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
406,125 |
|
|
18,057 |
|
|
826,002 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
165,924 |
|
|
14,465 |
|
|
313,856 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Sales and marketing expenses |
|
226,780 |
|
|
84,193 |
|
|
779,090 |
|
General and
administrative |
|
2,138,753 |
|
|
67,509 |
|
|
6,081,134 |
|
General and administrative - related
party |
|
- |
|
|
39,846 |
|
|
167,021 |
|
Depreciation expense
|
|
16,534 |
|
|
1,849 |
|
|
60,755 |
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses |
|
2,382,067 |
|
|
193,397 |
|
|
7,088,000 |
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
Interest expense |
|
(2,524 |
) |
|
(3,555 |
) |
|
(14,896 |
) |
Interest expense on
redeemable preferred stock |
|
(40,382 |
) |
|
- |
|
|
(508,637 |
) |
Fees paid on credit line |
|
(7,057 |
) |
|
- |
|
|
(15,660 |
) |
Placement agent fee to
acquired credit line |
|
- |
|
|
- |
|
|
(10,000 |
) |
Amortization of debt discount |
|
(414,370 |
) |
|
- |
|
|
(521,902 |
) |
Other expenses |
|
(11 |
) |
|
- |
|
|
(6,117 |
) |
Other income - related party |
|
- |
|
|
- |
|
|
40,029 |
|
Loss on sales leaseback
|
|
(20,773 |
) |
|
- |
|
|
(20,773 |
) |
Change in derivative liability |
|
264,051 |
|
|
- |
|
|
881,990 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
(221,066 |
) |
|
(3,555 |
) |
|
(175,966 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
$ |
(2,437,209 |
) |
$ |
(182,487 |
) |
$ |
(6,950,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding - basic |
|
94,019,973 |
|
|
78,156,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic
|
$ |
(0.03 |
) |
$ |
(0.00 |
) |
|
|
|
See Accompanying Notes to Condensed Consolidated Financial
Statements.
F-20
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.
F-21
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.
F-22
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:
F-23
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.
F-24
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 |
|
F-25
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.
F-26
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.
F-27
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.
F-28
|
|
|
|
|
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.
F-29
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.
F-30
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.
F-31
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:
F-32
|
|
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.
F-33
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.
F-34
Managements Discussion and Analysis of Financial Condition
and Results of Operations
Our managements discussion and analysis provides a narrative
about our financial performance and condition that should be read in conjunction
with the audited and unaudited consolidated financial statements and related
notes thereto included in this prospectus. This discussion contains forward
looking statements reflecting our current expectations and estimates and
assumptions about events and trends that may affect our future operating results
or financial position. Our actual results and the timing of certain events could
differ materially from those discussed in these forward-looking statements due
to a number of factors, including, but not limited to, those set forth in the
sections of this prospectus titled Risk Factors beginning at page 5 above and
Forward-Looking Statements beginning at page 12 above.
Overview
We were incorporated under the laws of the State of Nevada on
June 6, 2011. Our business model prior to the acquisition of Alkaline Water
Corp. on May 31, 2013 was to provide chauffeuring and transportation services to
residents within our local market, primarily providing transportation services
such as private school student transport, sightseeing trips, and elderly
transportation, and offering transportation to the airport and special event
such as proms and weddings. However, as we had not successfully developed our
service at the time prior to the entry into the share exchange agreement with
Alkaline Water Corp., and had no source of revenue from our business plan, we
determined to seek out a new business opportunity to increase value for our
stockholders.
On May 31 2013, we completed the acquisition of Alkaline Water
Corp. pursuant to the share exchange agreement with Alkaline Water Corp. and its
stockholders. As a result, Alkaline Water Corp. became our wholly-owned
subsidiary. Consequently, after the closing of this agreement we adopted the
business of Alkaline Water Corp.s wholly-owned subsidiary, Alkaline 88, LLC
(formerly Alkaline 84, LLC), which is the business of the production and sale of
bottled alkaline water, with a specific focus on bulk bottled alkaline water.
Going Concern
Our financial statements are prepared using generally accepted
accounting principles in the United States of America applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. We have not yet established an
ongoing source of revenues sufficient to cover our operating costs and to allow
us to continue as a going concern. As of June 30, 2014, we had an accumulated
deficit of $6,950,110. Our ability to continue as a going concern is dependent
on our company obtaining adequate capital to fund operating losses until we
become profitable. If we are unable to obtain adequate capital, we could be
forced to significantly curtail or cease operations.
In its report on our financial statements for the year ended
March 31, 2014, our independent registered public accounting firm included an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern. Our financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
We will need to raise additional funds to finance continuing
operations. However, there are no assurances that we will be successful in
raising additional funds. Without sufficient additional financing, it would be
unlikely for us to continue as a going concern.
Our ability to continue as a going concern is dependent upon
our ability to successfully accomplish the plans described in this annual report
and eventually secure other sources of financing and attain profitable
operations.
28
Results of Operations
Our results of operations for the three months ended June 30,
2014, the three months ended June 30, 2013, the year ended March 31, 2014 and
the period from inception (June 19, 2012) to March 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Inception |
|
|
|
|
|
|
|
|
|
For the year |
|
|
(June 19, |
|
|
|
For the three |
|
|
For the three |
|
|
ended |
|
|
2012) to |
|
|
|
months ended |
|
|
months ended |
|
|
March 31, |
|
|
March 31, |
|
|
|
June 30, 2014 |
|
|
June 30, 2013 |
|
|
2014 |
|
|
2013 |
|
Revenue |
$ |
572,049
|
|
$ |
32,522 |
|
$ |
552,699
|
|
$ |
15,110 |
|
Cost of goods sold |
|
406,125 |
|
|
18,057 |
|
|
411,851 |
|
|
8,026 |
|
Gross profit |
|
165,924 |
|
|
14,465 |
|
|
140,848 |
|
|
7,084 |
|
Net loss (after operating expenses and other
expenses) |
$ |
(2,437,209 |
) |
$ |
(182,487 |
) |
$ |
(4,229,513 |
) |
$ |
(283,388 |
) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the three months
ended June 30, 2014 of $572,049, as compared to $32,522 for the three month
period ended June 30, 2013. The increase in sales is due to the expanded
distribution of our products to additional retailers throughout the country.
Cost of goods sold is comprised of production costs, shipping and handling
costs.
We had revenue from sales of our product for the year ended
March 31, 2014 of $552,699, as compared to $15,110 for the period from inception
on June 19, 2012 to March 31, 2013, generated by sales of our beverage products.
Cost of goods sold is comprised of production costs, shipping and handling
costs. For the year ended March 31, 2014, we had cost of goods sold of $411,851,
as compared to $8,026 in cost of goods sold from inception on June 19, 2012 to
March 31, 2013.
Expenses
Our operating expenses for the three months ended June 30,
2014, the three months ended June 30, 2013, the year ended March 31, 2014 and
the period from inception (June 19, 2012) to March 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Inception |
|
|
|
|
|
|
|
|
|
For the year |
|
|
(June 19, |
|
|
|
For the three |
|
|
For the three |
|
|
ended |
|
|
2012) to |
|
|
|
months ended |
|
|
months ended |
|
|
March 31, |
|
|
March 31, |
|
|
|
June 30, 2014 |
|
|
June 30, 2013 |
|
|
2014 |
|
|
2013 |
|
Sales and marketing expenses
|
$ |
226,780
|
|
$ |
84,193 |
|
$ |
464,081
|
|
$ |
88,229 |
|
General and administrative expenses |
|
2,138,753 |
|
|
67,509 |
|
|
3,852,773 |
|
|
89,608 |
|
General and administrative
expenses related party |
|
- |
|
|
39,846 |
|
|
62,092 |
|
|
104,929 |
|
Depreciation expenses |
|
16,534 |
|
|
1,849 |
|
|
42,407 |
|
|
1,814 |
|
Total operating expenses |
$ |
2,382,067 |
|
$ |
193,397 |
|
$ |
4,421,353 |
|
$ |
284,580 |
|
During the three months ended June 30, 2014 and June 30, 2013,
we had a total of $2,138,753 and $67,509, respectively, in general and
administrative expenses. The primary factor in the increase which is included in
general and administrative expense was the fair value of shares and options of
$1,399,127 and $0 for the three months ended June 30, 2014 and 2013,
respectively. Administrative expense with related parties was $0 and $39,846 for
the three month periods ended June 30, 2014 and 2013, respectively. For these
respective periods, administrative expenses with related parties consisted of $0
and $20,000 for consulting fees to an officer, director and shareholder of the
Company, $0 and $8,346 for rent, including repairs, to an
entity that is controlled and owned by an officer, director and shareholder of
the Company and $0 and $11,500 for professional fees to an entity that is
controlled and owned by an officer, director and shareholder.
29
During the year ended March 31, 2014, our total operating
expenses were $4,4,421,353, as compared to $284,580 for the period from
inception (June 19, 2012) to March 31, 2013. For the year ended March 31, 2014,
the total included $464,083 of sales and marketing expenses and $3,852,773 of
general and administrative expenses, consisting primarily of approximately
$2,225,736 of stock option compensation expense, $426,555 in stock compensation
expense and $541,158 of professional fees. Our stock and stock option
compensation expense was incurred as a part of our issuance of certain stock
options and stock grants to employees and key consultants to develop our
business. Although a non-cash expense, the value of such issuances had a
material impact on our general and administrative expenses for the year ended
March 31, 2014. For the period from inception (June 19, 2012) to March 31, 2013,
(as it was prior to the acquisition of Alkaline Water Corp.) we had nominal
operations and our expenditures, consisting mainly of professional fees and
rent, were significantly less to support our business at that time.
During the year ended March 31, 2014, we had a total of $62,092
in general and administrative expenses with related parties. Of the total,
$33,592 was consulting fees to an officer, director and stockholder of our
company, $12,000 was rent to an entity that is controlled and owned by an
officer, director and stockholder of our company, and $16,500 was professional
fees to an entity that is controlled and owned by an officer, director and
stockholder of our company.
During the period from inception on June 19, 2012 to March 31,
2013, we had a total of $104,929 in general and administrative expenses with
related parties. Of the total, $69,732 was consulting fees to an officer,
director and stockholder of our company, $32,322 was rent to an entity that is
controlled and owned by an officer, director and stockholder of our company, and
$2,875 was professional fees to an entity that is controlled and owned by an
officer, director and stockholder of our company.
Liquidity and Capital Resources
Working Capital
Our working capital as of June 30, 2014, March 31, 2014 and
March 31, 2013 was as follows:
|
|
June 30, 2014 |
|
|
March 31, 2014 |
|
|
March 31, 2013 |
|
Current assets |
$ |
1,138,947
|
|
$ |
281,322
|
|
$ |
87,290 |
|
Current liabilities |
|
1,014,454 |
|
|
836,323 |
|
|
169,856 |
|
Working capital |
$ |
124,493 |
|
$ |
(555,001 |
) |
$ |
(82,566 |
)
|
Current Assets
Current assets as of June 30, 2014 primarily relate to $620,031
in cash, $160,393 in accounts receivable and $353,829 in inventory. Current
assets as of March 31, 2014 and March 31, 2013 primarily relate to $2,665 and
$64,607 in cash, $166,404 and $15,110 in accounts receivable and $57,965 and
$7,573 in inventory, respectively.
Current Liabilities
Current liabilities as at June 30, 2014 primarily relate
$490,991 in accounts payable and $257,862 in derivative liability. Current
liabilities at March 31, 2014 primarily relate to $320,154 in accounts payable
and $337,988 in derivative liability. Current liabilities as at March 31, 2013
primarily relate to $150,000 in notes payable.
Cash Flow
Our cash flows for the three months ended June 30, 2014 and
2013 are as follows:
30
|
|
Three months ended |
|
|
Three months ended |
|
|
|
June 30, 2014 |
|
|
June 30, 2013 |
|
Net cash used in operating
activities |
$ |
(1,018,235 |
) |
$ |
(188,888 |
) |
Net cash used in investing activities |
|
(520,162 |
) |
|
(91,019 |
) |
Net cash provided by
financing activities |
|
2,155,763 |
|
|
600,000 |
|
Net increase in cash and cash equivalents |
$ |
617,366 |
|
$ |
320,093 |
|
Our cash flows for the year ended March 31, 2014 and the period
from inception (June 19, 2012) to March 31, 2013 are as follows:
|
|
|
|
|
Period from |
|
|
|
|
|
|
inception |
|
|
|
Year ended |
|
|
(June 19, 2012) to |
|
|
|
March 31, 2014 |
|
|
March 31, 2013 |
|
Net cash used in operating
activities |
$ |
(1,390,980 |
) |
$ |
(284,401 |
) |
Net cash used in investing activities |
|
(276,310 |
) |
|
(54,897 |
) |
Net cash provided by
financing activities |
|
1,605,348 |
|
|
403,905 |
|
Net increase in cash and cash equivalents |
$ |
(61,942 |
) |
$ |
64,607 |
|
Operating activities
Net cash used in operating activities was $1,018,235 for the
three months ended June 30, 2014, as compared to $188,888 used in operating
activities for the three months ended June 30, 2013. The increase in net cash
used in operating activities was primarily due to net loss from operations and
increase in inventory.
Net cash used in operating activities was $1,390,980 for the
year ended March 31, 2014, as compared to $284,401 used in operating activities
from period of inception (June 19, 2012) to March 31, 2013. The increase in net
cash used in operating activities was primarily due to development of markets,
and investment in accounts receivable and inventory.
Investing activities
Net cash used in investing activities was $520,162 for the
three months ended June 30, 2014, as compared to $91,019 used in investing
activities for the three months ended June 30, 2013. The increase in net cash
used by investing activities was primarily from the equipment deposits to
related parties.
Net cash used in investing activities was $276,310 for the year
ended March 31, 2014, as compared to $54,897 used in investing activities from
period of inception (June 19, 2012) to March 31, 2013. The increase in net cash
used by investing activities was primarily from purchase of production
equipment.
Financing activities
Net cash provided by financing activities for the three months
ended June 30, 2014 was $2,155,763, as compared to $600,000 for the three months
ended June 30, 2013. The increase of net cash provided by financing activities
was mainly attributable to capital provided through sales of our common stock.
Net cash provided by financing activities for the year ended
March 31, 2014 was $1,605,348, as compared to $403,905 from period of inception
(June 19, 2012) to March 31, 2013. The increase of net cash provided by
financing activities was mainly attributable to sale of common stock and
redeemable preferred stock.
Revolving Accounts Receivable Funding Agreement with
Gibraltar Business Capital, LLC
On February 20, 2014, our company, The Alkaline Water Company
Inc., and our 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, we
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.
31
We 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 (as defined below) 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, we
agreed to pay Gibraltar interest on the 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 owing 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) 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, we 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. We 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 to us,
which amount will be deducted from the first cash advances.
The Initial Indebtedness is $500,000. We may request an
increase to the Initial Indebtedness in $500,000 increments up to $5,000,000,
subject to our financial performance and/or projections are satisfactory to
Gibraltar, and absent an event of default.
We 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 February 20, 2014, Gibraltar made the first cash advance in
the amount of $32,645.48. On June 30, 2014, the amount borrowed on this facility
was $129,486.
Cash Requirements
We believe that our cash flows from operations will not meet
our present and near-term cash needs and thus we will require additional cash
resources, including the sale of equity or debt securities, to meet our planned
capital expenditures and working capital requirements for the next 12 months. We
estimate that our capital needs over the next 12 month will be $2,000,000 to
$5,000,000, depending on how we can continue to expand the distribution of our
products across the country. We will require additional cash resources to
purchase equipment, increase the production of our products, implement our
strategy to expand our sales and marketing initiatives and increase brand
awareness. If our own financial resources and then current cash-flows from
operations are insufficient to satisfy our capital requirements, we may seek to
sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity securities will result in dilution to
our stockholders. The incurrence of indebtedness will result in increased debt
service obligations and could require us to agree to operating and financial
covenants that could restrict our operations or modify our plans to grow the
business. Financing may not be available in amounts or on terms acceptable to
us, if at all. Any failure by us to raise additional funds on terms favorable to
us, or at all, will limit our ability to expand our business operations and
could harm our overall business prospects.
32
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
Changes in and Disagreements with Accountants
on
Accounting and Financial Disclosure
In connection with the closing of the share exchange agreement
with Alkaline Water Corp. on May 31, 2013, we changed our independent registered
public accounting firm from Sadler, Gibb & Associates to Seale and Beers,
CPAs. The appointment of Seale and Beers, CPAs was approved by our board of
directors.
Sadler, Gibb & Associates report on our financial
statements for the fiscal year ended August 31, 2012 and for the period from
inception on June 6, 2011 through August 31, 2011 did not contain an adverse
opinion or disclaimer of opinion, or qualification or modification as to
uncertainty, audit scope, or accounting principles, except that such report on
our financial statements contained an explanatory paragraph in respect to the
substantial doubt about our ability to continue as a going concern.
During the fiscal year ended August 31, 2012 and the period
from inception on June 6, 2011 through August 31, 2011 and in the subsequent
interim period through the date of resignation, there were no disagreements,
resolved or not, with Sadler, Gibb & Associates on any matter of accounting
principles or practices, financial statement disclosure, or audit scope and
procedures, which disagreement(s), if not resolved to the satisfaction of
Sadler, Gibb & Associates, would have caused Sadler, Gibb & Associates
to make reference to the subject matter of the disagreement(s) in connection
with its report.
During the fiscal year ended August 31, 2012 and the period
from inception on June 6, 2011 through August 31, 2011 and in the subsequent
interim period through the date of resignation, there were no reportable events
as described in Item 304(a)(1)(v) of Regulation S-K.
During the fiscal year ended August 31, 2012 and the period
from inception on June 6, 2011 through August 31, 2011 and in the subsequent
interim period through the date of appointment, we have not consulted with Seale
and Beers, CPAs regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, nor has Seale and
Beers, CPAs provided to us a written report or oral advice that Seale and Beers,
CPAs concluded was an important factor considered by us in reaching a decision
as to the accounting, auditing or financial reporting issue. In addition, during
such periods, we have not consulted with Seale and Beers, CPAs regarding any
matter that was either the subject of a disagreement (as defined in Item
304(a)(1)(iv) and the related instructions) or a reportable event (as described
in Item 304(a)(1)(v) of Regulation S-K).
Directors and Executive Officers
Directors and Executive Officers
All directors of our company hold office until the next annual
meeting of our stockholders or until their successors have been elected and
qualified, or until their death, resignation or removal. The executive officers
of our company are appointed by our board of directors and hold office until
their death, resignation or removal from office.
Our directors and executive officers, their ages, positions
held, and duration of such are as follows:
Name |
Position Held with Our Company |
Age |
Date First Elected or Appointed |
Steven P. Nickolas |
Chairman, President, Chief Executive Officer |
58 |
May 31, 2013 |
|
and
Director |
|
|
Richard A. Wright |
Vice-President, Secretary, Treasurer and |
55 |
May 31, 2013 |
|
Director |
|
|
33
Business Experience
The following is a brief account of the education and business
experience of directors and executive officers during at least the past five
years, indicating their principal occupation during the period, and the name and
principal business of the organization by which they were employed.
Steven P. Nickolas
In 2008, Mr. Nickolas was appointed President of Nutripure
Beverages, Inc., a small cap pink sheet company that intended to launch a
beverage product that was developed by him, on a national basis. The company was
unsuccessful in raising the necessary capital, at which time Mr. Nickolas
resigned his position after three months with the company and proceeded to
investigate other financial opportunities. From May 2008 to July 2010, Mr.
Nickolas was a founder of and acted as the president, secretary, treasurer and a
director of Northsight Capital, Inc., a publicly-traded financial holding
company (OTCBB: NCAP), which was sold in order to support the ongoing research
and development of various beverage products. During this time Mr. Nickolas
founded Jayger International, LTD, which involved the sale of a variety of
healthy products in Japan and other Asian countries. Mr. Nickolas also engaged
in a number of consulting activities with both large and small companies and
continued to remain active in the food and beverage industry. During this same
period of time Mr. Nickolas founded The Healthy Food Project, Inc., a 501(c)(3)
non-profit organization dedicated to promoting the development of healthy foods
and beverages for the public use. Over the past two years Mr. Nickolas has
focused his attention on the commercial development of the water electrolysis
process utilized in Alkaline 88, LLC.
Effective as of May 31, 2013, Mr. Nickolas was appointed as
chairman, president, chief executive officer, secretary and a director of our
company. On August 7, 2013, our board of directors replaced Mr. Nickolas as
secretary of our company with Richard A. Wright.
Mr. Nickolas graduated from Claremont Mens College (Now
Claremont-Mckenna College) in 1977 with a Bachelor of Science Degree in
Economics and Political Philosophy. He did post-graduate studies at Cal Poly
Pomona in Psychology in 1978. He also attended Claremont Graduate School in 1978
in Government studies.
We believe that Mr. Nickolas is qualified to serve on our board
of directors because of his knowledge of our current operations in addition to
his education and business experiences described above.
Richard A. Wright
Mr. Wright is a Certified Public Accountant. He graduated
Magnum Cum Laude in 1978 from Mount Union University in Alliance, Ohio. He has
done graduate level MBA courses at Case Western Reserve College in Cleveland,
Ohio.
In 2008, Mr. Wright became the Chief Financial Officer for PCT
International. PCT is a leading worldwide developer and manufacturer of last
mile and access network solutions for broadband communication networks. PCT
focuses on innovative and cost-effective solutions that allow service providers
to improve system integrity and expand service offerings. It has manufacturing
plants in USA and China and sells their products in 42 countries.
In 2010 (through present), Mr. Wright began his own tax and
accounting CPA firm in Scottsdale, Arizona, Wright Tax Solutions PLC. Mr Wright
also began Wright Investment Group, LLC, a small equity participation firm that
helps provide seed capital through micro loans and financial expertise to
start-up enterprises.
Effective as of May 31, 2013, Mr. Wright was appointed as
vice-president, treasurer and a director of our company. On August 7, 2013, our
board of directors appointed Mr. Wright as secretary of our company.
We believe that Mr. Wright is qualified to serve on our board
of directors because of his knowledge of our current operations in addition to
his education and business experiences described above.
34
Family Relationships
There are no family relationships between any director or
executive officer.
Involvement in Certain Legal Proceedings
None of our directors and executive officers has been involved
in any of the following events during the past ten years:
|
(a) |
any petition under the federal bankruptcy laws or any
state insolvency laws filed by or against, or an appointment of a
receiver, fiscal agent or similar officer by a court for the business or
property of such person, or any partnership in which such person was a
general partner at or within two years before the time of such filing, or
any corporation or business association of which such person was an
executive officer at or within two years before the time of such
filing; |
|
|
|
|
(b) |
any conviction in a criminal proceeding or being subject
to a pending criminal proceeding (excluding traffic violations and other
minor offences); |
|
|
|
|
(c) |
being subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining such person from, or
otherwise limiting, the following activities: (i) acting as a futures
commission merchant, introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leverage transaction merchant, any
other person regulated by the Commodity Futures Trading Commission, or an
associated person of any of the foregoing, or as an investment adviser,
underwriter, broker or dealer in securities, or as an affiliated person,
director or employee of any investment company, bank, savings and loan
association or insurance company, or engaging in or continuing any conduct
or practice in connection with such activity; engaging in any type of
business practice; or (iii) engaging in any activity in connection with
the purchase or sale of any security or commodity or in connection with
any violation of federal or state securities laws or federal commodities
laws; |
|
|
|
|
(d) |
being the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any federal or state
authority barring, suspending or otherwise limiting for more than 60 days
the right of such person to engage in any activity described in paragraph
(c)(i) above, or to be associated with persons engaged in any such
activity; |
|
|
|
|
(e) |
being found by a court of competent jurisdiction (in a
civil action), the Securities and Exchange Commission to have violated a
federal or state securities or commodities law, and the judgment in such
civil action or finding by the Securities and Exchange Commission has not
been reversed, suspended, or vacated; |
|
|
|
|
(f) |
Being found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to have
violated any federal commodities law, and the judgment in such civil
action or finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended or vacated; |
|
|
|
|
(g) |
being the subject of, or a party to, any federal or state
judicial or administrative order, judgment, decree, or finding, not
subsequently reversed, suspended or vacated, relating to an alleged
violation of: (i) any federal or state securities or commodities law or
regulation; or (ii) any law or regulation respecting financial
institutions or insurance companies including, but not limited to, a
temporary or permanent injunction, order of disgorgement or restitution,
civil money penalty or temporary or permanent cease- and-desist order, or
removal or prohibition order; or (iii) any law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity;
or |
35
|
(h) |
being the subject of, or a party to, any sanction or
order, not subsequently reversed, suspended or vacated, of any
self-regulatory organization (as defined in Section 3(a)(26) of the
Securities Exchange Act of 1934), any registered entity (as defined in
Section 1(a)(29) of the Commodity Exchange Act), or any equivalent
exchange, association, entity or organization that has disciplinary
authority over its members or persons associated with a
member. |
Executive Compensation
Summary Compensation
The particulars of compensation paid to the following persons:
|
(a) |
all individuals serving as our principal executive
officer during the year ended March 31, 2014; |
|
|
|
|
(b) |
each of our two most highly compensated executive
officers who were serving as executive officers at the end of the year
ended March 31, 2014; and |
|
|
|
|
(c) |
up to two additional individuals for whom disclosure
would have been provided under (b) but for the fact that the individual
was not serving as our executive officer at March 31,
2014, |
who we will collectively refer to as the named executive
officers, for all services rendered in all capacities to our company and
subsidiaries for the period from inception on June 19, 2012 through March 31,
2013 and the year ended March 31, 2014 are set out in the following summary
compensation table:
36
Summary Compensation Table Period from Inception on June
19, 2012 through March 31, 2013 and Year ended March 31, 2014
Name and Principal Position |
Year |
Salary
($) |
Bonus
($) |
Stock
Awards ($) |
Option
Awards ($) |
Non-Equity
Incentive Plan
Compensation ($) |
Nonqualified
Deferred Compensation Earnings ($) |
All
Other
Compensation ($) |
Total
($) |
Steven P. Nickolas President, Chief Executive Officer, Chairman and Director (1) |
2014
2013
|
39,119
50,000
|
Nil
Nil
|
10,000
Nil
|
1,112,868
Nil
|
Nil
Nil
|
Nil
Nil
|
21,291
19,732
|
1,183,278
69,732
|
Richard A. Wright Vice- President, Secretary, Treasurer and Director(2) |
2014
2013
|
24,948
Nil
|
Nil
Nil
|
10,000
Nil
|
1,112,868
Nil
|
Nil
Nil
|
Nil
Nil
|
3,385
2,875
|
1,151,201
2,875
|
Stephen Rolls Former President, Secretary, Treasurer, Chief Executive Officer and
Chief Financial Officer(3) |
2014
2013
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
|
Notes |
|
|
(1) |
Effective as of May 31, 2013, Mr. Nickolas was appointed
as chairman, president, chief executive officer, secretary and a director
of our company. On August 7, 2013, our board of directors replaced Mr.
Nickolas as secretary of our company with Richard A. Wright. |
|
|
(2) |
Effective as of May 31, 2013, Mr. Wright was appointed as
vice-president, treasurer and a director of our company. On August 7,
2013, our board of directors appointed Mr. Wright as secretary of our
company. |
|
|
(3) |
On March 18, 2013, we appointed Stephen Rolls, as our
president, secretary, treasurer, chief executive officer, chief financial
officer and as a director of our company. On May 31, 2013, Mr. Rolls
resigned as a director of our company and from all officer positions of
our company. |
For the period ended March 31, 2013 Steven P. Nickolas had an
oral agreement with Alkaline 88, LLC to provide executive level management
through his company, Beverage Science Laboratory, at the rate of $5,000 per
month. In addition, Alkaline 88, LLC provided health insurance, an auto
allowance and other benefits totaling $19,732.
37
For the year ended March 31, 2014 Steven P. Nickolas had an
oral agreement with Alkaline 88, LLC to provide executive level management
through his company, Beverage Science Laboratory, at the rate of $5,000 per
month. In addition, Alkaline 88, LLC provided health insurance, an auto
allowance and other benefits totaling $21,291.
For the year ended March 31, 2014 Steven P. Nickolas was paid
$30,000 though his consulting firm Beverage Science Laboratory LLC services.
For the period ended March 31, 2013 Richard A. Wright was paid
$2,875 though his CPA firm, Wright Tax Solutions PLC, for CPA services.
For the year ended March 31, 2014 Richard A. Wright had an oral
agreement with Alkaline 88, LLC to provide executive level management through
his company, Beverage Science Laboratory, at the rate of $4,000 per month. In
addition, Alkaline 88, LLC provided Mr. Wright an auto allowance and other
benefits totaling $3,385.
For the year ended March 31, 2014 Richard A. Wright was paid
$28,000 though his CPA firm, Wright Tax Solutions PLC, for CPA and consulting
services.
Effective 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. We estimated compensation expense of $2,225,736
on the stock options granted that vested during the year ended March 31, 2014,
divided equally between Steven P. Nickolas and Richard A. Wright in the amount
of $1,112,868 each. The aggregate intrinsic value of these options was $0 at
March 31, 2014.
We have not entered into any written employment agreement or
consulting agreement with our directors or executive officers.
Effective October 7, 2013, our board of directors adopted and
approved the 2013 Equity Incentive Plan. The plan was approved by a majority of
our stockholders on October 7, 2013. The purpose of the plan is to (a) enable
our company and any of our affiliates to attract and retain the types of
employees, consultants and directors who will contribute to our companys long
range success; (b) provide incentives that align the interests of employees,
consultants and directors with those of the stockholders of our company; and (c)
promote the success of our companys business. The plan enables us to grant
awards of a maximum of 20,000,000 shares of our stock and awards that may be
granted under the plan includes incentive stock options, non-qualified stock
options, stock appreciation rights, restricted awards and performance
compensation awards.
Effective October 8, 2013, we issued a total of 20,000,000
shares of non-convertible Series A Preferred Stock to Steven P. Nickolas and
Richard A. Wright (10,000,000 shares to each) 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 year ended March 31, 2014,
resulting in stock award compensation of $10,000 for Steven P. Nickolas and
Richard A. Wright each.
Effective May 12, 2014, we 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. 600,000 stock options
vested upon the date of grant.
Effective May 21, 2014, we 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 $0.1455 per
share for a period of ten years from the date of grant. 3,000,000 of these stock
options vested upon the date of grant and the other 3,000,000 stock options will
vest on November 21, 2014.
Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide
retirement or similar benefits for our directors or executive officers.
38
Resignation, Retirement, Other Termination, or Change in
Control Arrangements
We have no contract, agreement, plan or arrangement, whether
written or unwritten, that provides for payments to our directors or executive
officers at, following, or in connection with the resignation, retirement or
other termination of our directors or executive officers, or a change in control
of our company or a change in our directors or executive officers
responsibilities following a change in control.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth for each named executive officer
certain information concerning the outstanding equity awards as of March 31,
2014:
Name |
Option awards |
Stock awards |
Number
of securities underlying unexercised
options (#) exercisable |
Number
of securities underlying
unexercised options (#) unexercisable |
Equity incentive plan awards: Number
of securities underlying
unexercised unearned
options (#) |
Option exercise price ($) |
Option expiration date |
Number of shares or units of stock
that have not vested
(#) |
Market
value of shares of units of stock that have
not vested ($) |
Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) |
Equity incentive plan awards: Market or payout value
of unearned shares, units or other rights that have not vested ($) |
Steven P. Nickolas |
1,500,000
|
1,500,000
|
Nil
|
0.605
|
October 9, 2023 |
Nil
|
Nil
|
Nil
|
Nil
|
Richard A. Wright |
1,500,000
|
1,500,000
|
Nil
|
0.605
|
October 9, 2023 |
Nil
|
Nil
|
Nil
|
Nil
|
Stephen Rolls |
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Sergejs Belkovs |
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
|
Compensation of Directors
The table below shows the compensation of our directors who
were not our named executive officers for the fiscal year ended March 31, 2014:
Name |
Fees earned or paid in cash ($) |
Stock awards ($) |
Option awards ($) |
Non-equity incentive plan compensation ($) |
Nonqualified deferred compensation earnings ($) |
All
other compensation ($) |
Total ($) |
Sergejs Belkovs |
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
|
39
We have no formal plan for compensating our directors for their
services in their capacity as directors. Our directors are entitled to
reimbursement for reasonable travel and other out-of-pocket expenses incurred in
connection with attendance at meetings of our board of directors. Our board of
directors may award special remuneration to any director undertaking any special
services on their behalf other than services ordinarily required of a director.
Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of August 20, 2014, certain
information with respect to the beneficial ownership of our common stock by each
stockholder known by us to be the beneficial owner of more than 5% of any class
of our voting securities and by each of our current directors, our named
executive officers and by our current executive officers and directors as a
group.
Name of Beneficial Owner |
Title of Class |
Amount and
Nature of
Beneficial Ownership(1) |
Percentage
of
Class(2) |
Steven P. Nickolas 14301 North
87 St., Suite 109 Scottsdale, AZ 85260 |
Common Stock |
48,100,000(4) |
44.5% |
Series A Preferred Stock(3) |
10,000,000 |
50% |
Richard A. Wright 14301 N. 87th
Street, Suite 119 Scottsdale, AZ 85260 |
Common Stock |
5,100,000(5) |
4.7%
|
Series A (3) Preferred
Stock |
10,000,000 |
50% |
Stephen Rolls |
Common Stock |
Nil
|
Nil
|
All executive officers and
directors as a group (2 persons) |
Common Stock |
53,200,000 |
47.0% |
Series A Preferred
Stock(3) |
20,000,000 |
100% |
|
Notes |
|
|
(1) |
Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed above, based on information
furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where
applicable. Beneficial ownership is determined in accordance with the
rules of the SEC and generally includes voting or investment power with
respect to securities. Common stock subject to options or warrants
currently exercisable or exercisable within 60 days, are deemed
outstanding for purposes of computing the percentage ownership of the
person holding such option or warrants, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
|
|
|
(2) |
Percentage of common stock is based on 102,927,070 shares
of our common stock issued and outstanding as of August 20, 2014.
Percentage of Series A Preferred Stock is based on 20,000,000 shares of
Series A Preferred Stock issued and outstanding as of August 20, 2014.
|
|
|
(3) |
The Series A Preferred Stock has 10 votes per share and
is not convertible into shares of our common stock. |
|
|
(4) |
Consists of 5,100,000 stock options exercisable within 60
days, 21,500,000 shares of our common stock owned by WiN Investments, LLC
and 21,500,000 shares of our common stock owned by Lifewater Industries,
LLC. Steven P. Nickolas exercises voting and dispositive power with
respect to the shares of our common stock that are beneficially owned by
WiN Investments, LLC and Lifewater Industries, LLC. |
|
|
(5) |
Consists of 5,100,000 stock options exercisable within 60
days. |
40
Changes in Control
We are unaware of any contract or other arrangement the
operation of which may at a subsequent date result in a change in control of our
company.
Transactions with Related Persons, Promoters and Certain
Control Persons and Corporate Governance
Other than as disclosed below, there has been no transaction,
since April 1, 2011, or currently proposed transaction, in which our company was
or is to be a participant and the amount involved exceeds $3,543.40, being the
lesser of $120,000 or one percent of the average of our total assets at year end
for the last two completed fiscal years, and in which any of the following
persons had or will have a direct or indirect material interest:
|
(a) |
Any director or executive officer of our
company; |
|
|
|
|
(b) |
Any person who beneficially owns, directly or indirectly,
more than 5% of any class of our votingsecurities; |
|
|
|
|
(c) |
Any of our promoters and control persons; and |
|
|
|
|
(d) |
Any member of the immediate family (including spouse,
parents, children, siblings and in- laws) of anyof the foregoing
persons. |
During the period from June 19, 2012 to March 31, 2014, we
purchased $219,000 in equipment from Water Engineering Solutions, LLC, an entity
that is controlled and owned by Steven P. Nickolas and Richard A. Wright,
officers and directors of our company.
During the period from June 19, 2012 to March 31, 2014, we had
a total of $65,378 in general and administrative expenses with related parties.
Of the total, $33,592 was to four different entities consisting of consulting
fees to Beverage Science Laboratories ($25,000), Water Enhanced Technologies,
Inc. ($3,000) and WiN Investments, LLC ($2,000), entities controlled and owned
by Steven P. Nickolas, and Water Engineering Solutions, LLC ($3,592), an entity
controlled and owned by Steven P. Nickolas and Richard A. Wright. In addition,
$12,000 was rent to Steven P. Nickolas and $16,500 was professional fees to
Wright Tax Solutions, LLC ($12,500) and Wright Investment Group ($4,000),
entities controlled and owned by Richard A. Wright and $7,638 for health
insurance for Steven P. Nickolas $9,000 auto allowance for Steve A Nickolas and
$3,385 auto allowance for Richard A. Wright.
Alkaline Water Corp. has a month-to-month sub-rental
arrangement with Beverage Science Laboratories for $1,914 per month.
On January 17, 2014, we entered into an equipment lease
agreement with Water Engineering Solutions, LLC to lease alkaline generating
electrolysis machinery and equipment for the manufacture of our alkaline water
product line. The term of the lease is 60 months. The total cost for the unit is
$190,576. We agreed that there will be a down payment of $38,113.40 plus an
origination fee of $1,420.25. In addition, we agreed that the amount due at the
signing of the agreement is $39,542.69 with the balance of $123,868.60 at a rate
of 8% per annum for the term of the agreement and the residual amount of
$28,585.05. For the term of the agreement, we agreed to deliver to Water
Engineering Solutions, LLC lease payments in the amount of $2,511.61 per month.
On February 12, 2014, we entered into an amendment #1 to the
equipment lease agreement dated January 17, 2014 with Water Engineering
Solutions, LLC. The amendment provides that the term of the lease will commence
upon the actual installation and commercial operation of the equipment and
continue for 60 months. The amendment also provides that the equipment will be
leased for $190,576.00 at a rate of 8% per annum with the residual amount of
$1.00. And for the term of the agreement, we agreed to deliver to Water
Engineering Solutions, LLC lease payments in the amount of $3,864.19 per month,
commencing 30 days after the equipment is commercially operating but no later
than July 1, 2014. In addition, the amendment provides that the title will pass
to us upon completion of the term and payment of $1.00 residual amount.
On April 2, 2014, we entered into an equipment sale/lease back
agreement with Water Engineering Solutions, LLC for alkaline generating
electrolysis machinery and equipment with an original cost of $208,773.23
acquired in August 2013. Under the terms of the agreement, Water
Engineering Solutions, LLC bought back the equipment for $188,000 in April 2014
and the equipment was leased back to us for $188,000 at a rate of 8% per annum
for a term of 60 months with the residual amount of $1.00. For the term of the
agreement, we agreed to deliver to Water Engineering Solutions, LLC lease
payments in the amount of $3,811.96 per month, commencing on May 2, 2014. In
addition, the agreement provides that the title will pass to us upon completion
of the term and payment of $1.00 residual amount.
41
Compensation for Executive Officers and Directors
For information regarding compensation for our executive
officers and directors, see Executive Compensation.
Director Independence
We currently act with two directors consisting of Steven P.
Nickolas and Richard A. Wright. Our common stock is quoted on the OTCQB operated
by the OTC Markets Group, which does not impose any director independence
requirements. Under NASDAQ rule 5605(a)(2), a director is not independent if he
or she is also an executive officer or employee of the corporation or was, at
any time during the past three years, employed by the corporation. Using this
definition of independent director, we do not have any independent director.
Where You Can Find More Information
We are not required to deliver an annual report to our
stockholders unless our directors are elected at a meeting of our stockholders
or by written consents of our stockholders. If our directors are not elected in
such manner, we are not required to deliver an annual report to our stockholders
and will not voluntarily send an annual report.
We file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. Such filings
are available to the public over the Internet at the Securities and Exchange
Commissions website at http://www.sec.gov.
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act of 1933 with respect
to the securities offered under this prospectus. This prospectus, which forms a
part of that registration statement, does not contain all information included
in the registration statement. Certain information is omitted and you should
refer to the registration statement and its exhibits.
You may review a copy of the registration statement at the
Securities and Exchange Commissions public reference room at 100 F Street, N.E.
Washington, D.C. 20549 on official business days during the hours of 10 a.m. to
3 p.m. You may obtain information on the operation of the public reference room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. You may
also read and copy any materials we file with the Securities and Exchange
Commission at the Securities and Exchange Commissions public reference room.
Our filings and the registration statement can also be reviewed by accessing the
Securities and Exchange Commissions website at http://www.sec.gov.
42
|
|
3,488,373 Shares |
|
The Alkaline Water Company Inc. |
|
Common Stock |
|
Prospectus |
|
August 21, 2014 |
|
|
43
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