THE ALKALINE WATER COMPANY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Year Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
$
|
(3,454,600
|
)
|
$
|
(8,281,584
|
)
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in
operating
|
|
|
|
|
|
|
Depreciation
expense
|
|
359,556
|
|
|
318,328
|
|
Stock compensation expense
|
|
379,125
|
|
|
4,551,961
|
|
Amortization of
debt discount and accretion
|
|
556,330
|
|
|
639,524
|
|
Interest expense relating to
amortization of capital lease discount
|
|
103,009
|
|
|
102,781
|
|
Change in
derivative liabilities
|
|
(7,736
|
)
|
|
(43,968
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
(507,891
|
)
|
|
(495,017
|
)
|
Inventory
|
|
(385,280
|
)
|
|
(241,353
|
)
|
Prepaid expenses and other current assets
|
|
(296,441
|
)
|
|
6,694
|
|
Accounts payable
|
|
496,372
|
|
|
284,953
|
|
Accounts payable - related party
|
|
-
|
|
|
(43,036
|
)
|
Accrued expenses
|
|
204,303
|
|
|
91,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN
OPERATING ACTIVITIES
|
|
(2,553,253
|
)
|
|
(3,109,541
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
(253,170
|
)
|
|
(344,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH USED IN
INVESTING ACTIVITIES
|
|
(253,170
|
)
|
|
(344,961
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
-
|
|
|
2,075,000
|
|
Proceeds from
convertible note payable
|
|
1,260,000
|
|
|
435,000
|
|
Proceeds from revolving financing
|
|
960,810
|
|
|
232,398
|
|
Proceeds from sale
of common stock, net
|
|
425,000
|
|
|
3,751,200
|
|
Proceeds for the exercise of
warrants, net
|
|
300,000
|
|
|
-
|
|
Repayment of notes
payable
|
|
(440,078
|
)
|
|
(1,729,821
|
)
|
Repayment of capital lease
|
|
(243,623
|
)
|
|
(207,269
|
)
|
Repurchase of
common stock
|
|
(43,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY FINANCING
ACTIVITIES
|
|
2,219,109
|
|
|
4,556,508
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
(587,314
|
)
|
|
1,102,006
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
1,192,119
|
|
|
90,113
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
$
|
604,805
|
|
$
|
1,192,119
|
|
|
|
|
|
|
|
|
INTEREST PAID
|
$
|
367,115
|
|
$
|
152,557
|
|
Page 33
THE ALKALINE WATER COMPANY INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 by the Company,
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
The consolidated financial statements include the accounts of
The Alkaline Water Company Inc. (a Nevada Corporation), Alkaline Water Corp. (an
Arizona Corporation) and Alkaline 88, 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.
Reverse split
Effective December 30, 2015, the Company effected a fifty for
one reverse stock split of its authorized and issued and outstanding shares of
common stock. As a result, the authorized common stock has decreased from
1,125,000,000 shares of common stock, with a par value of $0.001 per share, to
22,500,000 shares of common stock, with a par value of $0.001 per share. All
shares and per share amounts have been retroactively restated to reflect such
split.
On January 21, 2016, stockholders of our company approved, by
written consents, an amendment to the articles of incorporation of our company
to increase the number of authorized shares of our common stock from 22,500,000
to 200,000,000.
The Company received written consents representing 20,776,000
votes from the holders of shares of its common stock and our Series A Preferred
Stock voting as a single class, representing approximately 61% of the voting
power of its outstanding common stock and its outstanding Series A Preferred
Stock voting as a single class as of the record date (January 12, 2016). On
January 21, 2016, there were no written consents received by the Company
representing a vote against, abstention or broker non-vote with respect to the
proposal.
Our authorized preferred stock was not affected by the reverse
stock split and continues to be 100,000,000 shares of preferred stock, with a
par value of $0.001 per share. In addition, the number of issued and outstanding
shares of Series A Preferred Stock continues to be 20,000,000. However, holders
of Series A Preferred Stock had 0.2 vote per share of Series A Preferred Stock,
instead of 10 votes per share of Series A Preferred Stock, as a result of the
reverse stock split.
Page 34
On January 22, 2016, the Company amended the certificate of
designation for our Series A Preferred Stock by filing an amendment to
certificate of designation with the Secretary of State of the State of Nevada.
The Company amended the certificate of designation for our Series A Preferred
Stock by deleting Section 2.2 of the certificate of designation, which
proportionately increases or decreases the number of votes per share of Series A
Preferred Stock in the event of any dividend or other distribution on our common
stock payable in its common stock or a subdivision or consolidation of the
outstanding shares of its common stock. Accordingly, holders of Series A
Preferred Stock will have 10 votes per share of Series A Preferred Stock,
instead of 0.2 votes per share of Series A Preferred Stock.
On March 30, 2016, the Company designated 3,000,000 shares of
the authorized and unissued preferred stock of our company as Series C
Preferred Stock by filing a Certificate of Designation with the Secretary of
State of the State of Nevada. Each share of the Series C Preferred Stock will be
convertible, without the payment of any additional consideration by the holder
and at the option of the holder, into one fully paid and non-assessable share of
our common stock at any time after (i) the Company achieves consolidated revenue
equal to or greater than $15,000,000 in any 12 month period, ending on the last
day of any quarterly period of our fiscal year; or (ii) a Negotiated Trigger
Event, defined as an event upon which the Series C Preferred Stock will be
convertible as may be agreed by our company and the holder in writing from time
to time.
On May 3, 2017, we designated 3,000,000 shares of the
authorized and unissued preferred stock of our company as Series D Preferred
Stock by filing a Certificate of Designation with the Secretary of State of the
State of Nevada. Each share of the Series D Preferred Stock will be convertible,
without the payment of any additional consideration by the holder and at the
option of the holder, into one fully paid and non-assessable share of our common
stock at any time after (i) we achieve the consolidated revenue of our company
and all of its subsidiaries equal to or greater than $40,000,000 in any 12 month
period, ending on the last day of any quarterly period of our fiscal year; or
(ii) a Negotiated Trigger Event, defined as an event upon which the Series D
Preferred Stock will be convertible as may be agreed by our company and the
holder in writing from time to time.
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
$603,805 and $1,192,119 in cash and cash equivalents at March 31, 2017 and 2016,
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 March 31,
2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Trade receivables
|
$
|
1,419,281
|
|
$
|
911,390
|
|
Less: Allowance for doubtful accounts
|
|
(-0-
|
)
|
|
(-0-
|
)
|
Net accounts receivable
|
$
|
1,419,281
|
|
$
|
911,390
|
|
Page 35
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, 2017 and 2016, inventory consisted of the
following:
|
|
2017
|
|
|
2016
|
|
Raw materials
|
$
|
587,688
|
|
$
|
300,575
|
|
Finished goods
|
|
232,
300
|
|
|
134,133
|
|
Total inventory
|
$
|
819,988
|
|
$
|
434,708
|
|
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
|
Equipment under capital lease
|
3 years or term of the lease
|
Stock-Based Compensation
The Company accounts for stock-based compensation to employees
in accordance with Accounting Standards 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.
Advertising
Advertising costs are charged to operations when incurred.
Advertising expenses for the years ended March 31, 2017 and 2016 were $367,456
and $244,890, respectively.
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, the Company will provide credit to our
customers for damaged goods.
Page 36
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 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,
the Company records 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
The Company has 2 major customers that together account for 38%
(21% and 17% respectively) of accounts receivable at March 31, 2017, and 3
customers that together account for 58% (29% 15%, and 14%, respectively) of the
total revenues earned for the year ended March 31, 2017.
The Company has 2 vendors that accounted for 51% (37% and 14%
respectively) of purchases for the year ended March 31, 2017.
The Company has 3 major customers that together account for 57%
(24%, 17%, and 15% respectively) of accounts receivable at March 31, 2016, and 4
customers that together account for 60% (20%, 17%, and 12%, respectively) of the
total revenues earned for the year ended March 31, 2016.
The Company has 5 vendors that accounted for 74% (24%, 17%,
17%, and 16%, respectively) of purchases for the year ended March 31, 2016.
Page 37
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 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, 2017 and 2016, respectively.
Reclassification
Certain accounts in the prior period were reclassified to
conform to the current period financial statements presentation.
Newly Issued Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update No. 2015-11 (ASU 2015-11) "Simplifying the
Measurement of Inventory". According to ASU 2015-11 an entity should measure
inventory within the scope of this update at the lower of cost and net
realizable value. Net realizable value is the estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. Subsequent measurement is unchanged for inventory
measured using LIFO or the retail inventory method. The amendments in ASU
2015-11 more closely align the measurement of inventory in GAAP with the
measurement of inventory in International Financial Reporting Standards (IFRS).
The Board has amended some of the other guidance in Topic 330 to more clearly
articulate the requirements for the measurement and disclosure of inventory. However, the Board does not intend for
those clarifications to result in any changes in practice. Other than the change
in the subsequent measurement guidance from the lower of cost or market to the
lower of cost and net realizable value for inventory within the scope of ASU
2015-11, there are no other substantive changes to the guidance on measurement
of inventory. For public business entities, the amendments in ASU 2015-11 are
effective for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. For all other entities, the amendments in ASU
2015-11 are effective for fiscal years beginning after December 15, 2016, and
interim periods within fiscal years beginning after December 15, 2017. The
amendments in ASU 2015-11 should be applied prospectively with earlier
application permitted as of the beginning of an interim or annual reporting
period.
Page 38
The Board decided that the only disclosures required at
transition should be the nature of and reason for the change in accounting
principle. An entity should disclose that information in the first annual period
of adoption and in the interim periods within the first annual period if there
is a measurement-period adjustment during the first annual period in which the
changes are effective.
The Company has evaluated other recent accounting
pronouncements through June 2017 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, 2017 of ($23,388,534). 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, 2017
|
|
|
March 31, 2016
|
|
Machinery and Equipment
|
$
|
1,012,000
|
|
$
|
970,728
|
|
Machinery under Capital Lease
|
|
735,781
|
|
|
735,781
|
|
Office Equipment
|
|
79,681
|
|
|
53,631
|
|
Leasehold Improvements
|
|
3,979
|
|
|
3,979
|
|
Less: Accumulated
Depreciation
|
|
(897,149
|
)
|
|
(537,555
|
)
|
Fixed Assets, net
|
$
|
1,120,148
|
|
$
|
1,226,534
|
|
Depreciation expense for the years ended March 31, 2017 and
2016 was $359,556 and $318,328, respectively.
NOTE 4 EQUIPMENT DEPOSITS RELATED PARTY
The Company paid for equipment to Water Engineering Solutions,
LLC, a related party, $104,619 and $312,500 for the years ended March 31, 2017
and March 31, 2016. At March 31, 2017 and March 31, 2016, the Company owed $0.00
and $43,036 respectively to Water Engineering Solutions, LLC. The equipment was
being 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.
Page 39
NOTE 5 REVOLVING FINANCING
On February 1, 2017, The Alkaline Water Company Inc. and its
subsidiaries (the Company) entered into a Credit and Security Agreement (the
Credit Agreement) with SCM Specialty Finance Opportunities Fund, L.P. (the
Lender).
The Credit Agreement provides the Company with a revolving
credit facility (the Revolving Facility), the proceeds of which are to be used
to repay existing indebtedness of the Company, transaction fees incurred in
connection with the Credit Agreement and for working capital needs of the
Company.
Under the terms of the Credit Agreement, the Lender has agreed
to make cash advances to the Company in an aggregate principal at any one time
outstanding not to exceed the lesser of (i) $3 million (the Revolving Loan
Commitment Amount) and (ii) the Borrowing Base (defined to mean, as of any date
of determination, 85% of net eligible billed receivables plus 65% of eligible
unbilled receivables, minus certain reserves).
The Credit Agreement has a term of three years, unless earlier
terminated by the parties in accordance with the terms of the Credit Agreement.
The principal amount of the Revolving Facility outstanding
bears interest at a rate per annum equal to (i) a fluctuating interest rate per
annum equal at all times to the rate of interest announced, from time to time,
within Wells Fargo Bank at its principal office in San Francisco as its prime
rate, plus (ii) 3.25%, payable monthly in arrears.
To secure the payment and performance of the obligations under
the Credit Agreement, the Company granted to the Lender a continuing security
interest in all of the Companys assets and agreed to a lockbox account
arrangement in respect of certain eligible receivables.
In connection with the Credit Agreement, the Company paid to
the Lender a $30,000 facility fee. The Company agreed to pay to Lender monthly
an unused line fee in amount equal to 0.083% per month of the difference derived
by subtracting (i) the average daily outstanding balance under the Revolving
Facility during the preceding month, from (ii) the Revolving Loan Commitment
Amount. The unused line fee will be payable monthly in arrears. The Company also
agreed to pay the Lender as additional interest a monthly collateral management
fee equal to 0.35% per month calculated on the basis of the average daily
balance under the Revolving Facility outstanding during the preceding month. The
collateral management fee will be payable monthly in arrears. Upon a termination
of the Revolving Facility, the Company agreed to pay the Lender a termination
fee in an amount equal to 2% of the Revolving Loan Commitment Amount if the
termination occurs before February 1, 2020. The Company must also pay certain
fees in the event that receivables are not properly deposited in the appropriate
lockbox account.
The interest rate will be increased by 5% in the event of a
default under the Credit Agreement. Events of default under the Credit
Agreement, some of which are subject to certain cure periods, include a failure
to pay obligations when due, the making of a material misrepresentation to the
Lender, the rendering of certain judgments or decrees against the Company and
the commencement of a proceeding for the appointment of a receiver, trustee,
liquidator or conservator or filing of a petition seeking reorganization or
liquidation or similar relief.
The Credit Agreement contains customary representations and
warranties and various affirmative and negative covenants including the right of
first refusal to provide financing for the Company and the financial and loan
covenants, such as the loan turnover rate, minimum EBTDA, fixed charge coverage
ratio and minimum liquidity requirements.
As of February 1, 2017, the Company and Gibraltar
(Gilbralter) entered into a payoff agreement (the Payoff Agreement),
pursuant to which the Company agreed to pay an amount equal to the outstanding
indebtedness and obligations owing from the Company to Gibraltar (the Gibraltar
Obligations). The Payoff Agreement provided that the Payoff Agreement will confirm that, upon receipt via
wire transfer of immediately available funds to Gibraltar in the aggregate
amount of $628,782.94, all of the Gibraltar Obligations will be terminated and
satisfied in full as of the close of business on February 1, 2017.
Page 40
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 initial indebtedness is $500,000 and the Company increased
the amount available under the revolving accounts receivable funding agreement
to $900,000 on May 12, 2016. The Company may request further increase(s) to the
in $100,000 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, the Company gives Gibraltar notice of our
intention to terminate the agreement. In addition, the Company 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, 2016 the amount borrowed on this facility
was $475,273.
NOTE 6 DERIVATIVE LIABILITY
On May 1, 2014, the Company completed the offering and sale of
an aggregate of shares of our common stock and warrants. Each share of common
stock sold in the offering was accompanied by a warrant to purchase one-half of
a share of common stock. 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 were not indexed to the Companys own stock and therefore a
derivative instrument.
On August 20, 2014, the Company entered into a warrant
amendment agreement with certain holders of the Companys outstanding common
stock purchase warrants whereby the Company agreed to reduce the exercise price
of the Existing Warrants the Holders are to be issued new common stock purchase
warrants of the Company 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
The Company analyzed the warrants and conversion feature under
ASC 815 Derivatives and Hedging to determine the derivative liability as of
march 31, 2017 was $3,407.
Page 41
NOTE 7 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. The Series A Preferred
Stock had 10 votes per share (reduced to 0.2 votes per share as a result of the
fifty for one reverse stock split, which became effective as of December 30,
2015) and are not convertible into shares of our common stock.
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 Nickolas and
Richard 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.
Our authorized preferred stock was not affected by the reverse
stock split and continues to be 100,000,000 shares of preferred stock, with a
par value of $0.001 per share. In addition, the number of issued and outstanding
shares of Series A Preferred Stock continues to be 20,000,000. However, holders
of Series A Preferred Stock had 0.2 vote per share of Series A Preferred Stock,
instead of 10 votes per share of Series A Preferred Stock, as a result of the
reverse-stock split.
On January 22, 2016, the Company amended the certificate of
designation for our Series A Preferred Stock by filing an amendment to
certificate of designation with the Secretary of State of the State of Nevada.
The Company amended the certificate of designation for our Series A Preferred
Stock by deleting Section 2.2 of the certificate of designation, which
proportionately increases or decreases the number of votes per share of Series A
Preferred Stock in the event of any dividend or other distribution on our common
stock payable in its common stock or a subdivision or consolidation of the
outstanding shares of its common stock. Accordingly, holders of Series A
Preferred Stock will have 10 votes per share of Series A Preferred Stock,
instead of 0.2 votes per share of Series A Preferred Stock.
Grant of Series C Convertible Preferred Stock
On March 30, 2016, the Company designated 3,000,000 shares of
the authorized and unissued preferred stock of our company as Series C
Preferred Stock by filing a Certificate of Designation with the Secretary of
State of the State of Nevada. Each share of the Series C Preferred Stock will be
convertible, without the payment of any additional consideration by the holder
and at the option of the holder, into one fully paid and non-assessable share of
our common stock at any time after (i) the Company achieves consolidated revenue
equal to or greater than $15,000,000 in any 12 month period, ending on the last
day of any quarterly period of our fiscal year; or (ii) a Negotiated Trigger
Event, defined as an event upon which the Series C Preferred Stock will be
convertible as may be agreed by our company and the holder in writing from time
to time.
Effective March 31, 2016, the Company issued a total of
3,000,000 shares of our Series C Preferred Stock to Steven Nickolas and Richard
Wright (1,500,000 shares to each), pursuant to their employment agreements dated
effective March 1, 2016.
Common Stock
The Company is authorized to issue 1,125,000,000 shares of
$0.001 par value common stock. On May 31, 2013, the Company 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., the Company had 109,500,000 shares of
common stock issued and outstanding. On May 31, 2013, the Company 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 the Company 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.
Page 42
On December 30, 2015, the Company effected a fifty for one
reverse stock split of its authorized and issued and outstanding shares of
common stock. As a result, the authorized common stock has decreased from
1,125,000,000 shares of common stock, with a par value of $0.001 per share, to
22,500,000 shares of common stock, with a par value of $0.001 per share. All
shares and per share amounts have been retroactively restated to reflect such
split.
On January 21, 2016, stockholders of our company approved, by
written consents, an amendment to the articles of incorporation of our company
to increase the number of authorized shares of our common stock from 22,500,000
to 200,000,000.
The Company received written consents representing 20,776,000
votes from the holders of shares of its common stock and our Series A Preferred
Stock voting as a single class, representing approximately 61% of the voting
power of its outstanding common stock and its outstanding Series A Preferred
Stock voting as a single class as of the record date (January 12, 2016). On
January 21, 2016, there were no written consents received by the Company
representing a vote against, abstention or broker non-vote with respect to the
proposal.
Sale of Restricted Shares
On June 10, 2016, the Company entered into loan agreements with
five lenders, pursuant to which the Company issued promissory notes in the
aggregate principal amount of $260,000 in exchange for the loan in the amount of
$260,000. The promissory notes bear interest at the rate of 10% per annum,
payable quarterly. Payment of the principal and interest is due and payable on
or before June 10, 2017. The lenders have the option to convert the amount due
under the promissory notes into shares of our common stock at a conversion price
of $1.00 per share.
On June 14, 2016, pursuant to the May Exchange Agreement, the
Company issued an aggregate of 163,202 shares of our common stock upon exchange
of the above mentioned May Warrants valued at the market value on that date of
$1.98 per share.
On July 6, 2016, the Company issued an aggregate of 425,000
shares of our common stock to three investors in a private placement, at a
purchase price of $1.00 per share for gross proceeds of $425,000.
Common Stock Issued for Services
In the year ended March 31, 2016, the company issued 1,645,000
shares of restricted common stock to consultants for services rendered that were
valued at 2,177,860. 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.
In the year ended March 31, 2017, the company issued 251,200
shares of restricted common stock to consultants for services rendered that were
valued at 379,125. 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.
Common Stock Issued in Conjunction with Notes and Warrant
Exchanges
On May 22, 2015, the Company issued 20,000 restricted common
shares in conjunction with a $250,000 note payable that were valued at the
market value on that date of $3.95 per share.
On August, 20, 2015, the Company issued 20,000 restricted
common shares in conjunction with a $240,000 note payable that were valued at
the market value on that date of $5.75 per share.
Page 43
On October 28, 2015, the Company issued 10,000 restricted
common shares in conjunction with a $62,000 note payable that were valued at the
market value on that date of $4.25 per share.
On March 30, 2016 pursuant to a convertible note issued
September 28, 2015 the $89,100 of principal balance was converted to 270,000
common shares of the Company Stock.
On March 31, 2016, the Company entered into a promissory note
and warrant exchange agreement (the March Exchange Agreement) with six holders
of our promissory notes (each, a Note) in the aggregate principal amount of
$310,000 and warrants (each, a March Warrant) to purchase an aggregate of
88,563 shares of our common stock, whereby we exchanged the holders Notes and
March Warrants, for no additional consideration, for an aggregate of 551,246
shares of our common stock (the March Exchange), and following the March
Exchange, the Notes and March Warrants were automatically cancelled and
terminated and the holders have no further rights pursuant to the Notes, March
Warrants and any agreement or instrument pursuant to which such Notes or March
Warrants were issued. Pursuant to the March Exchange Agreement, the Company
issued an aggregate of 551,246 shares of our common stock upon exchange of the
above mentioned Notes and March Warrants.
On of May 16, 2016, the Company entered into a warrant exchange
agreement (the May Exchange Agreement) with six holders of our warrants (each,
a May Warrant) to purchase an aggregate of 163,202 shares of our common stock,
whereby the Company exchanged the holders May Warrants, for no additional
consideration, for an aggregate of 163,202 shares of our common stock (the May
Exchange), and following the May Exchange, the May Warrants were automatically
cancelled and terminated and the holders have no further rights pursuant to the
May Warrants and any agreement or instrument pursuant to which such May Warrants
were issued.
As of March 31, 2017, pursuant to a Note Exchange Agreements,
we issued an aggregate of 210,000 shares of our common stock upon exchange of
the above mentioned Notes. In issuing these shares, we relied on an exemption
from the registration requirements of the Securities Act of 1933 provided by
Section 3(a)(9) and/or Section 4(a)(2) of the Securities Act of 1933.
As of March 31, 2017, pursuant to a Warrant Exchange
Agreements, we issued an aggregate of 25,716 shares of our common stock upon
exchange of the above mentioned Warrants. In issuing these shares, we relied on
an exemption from the registration requirements of the Securities Act of 1933
provided by Section 3(a)(9) and/or Section 4(a)(2) of the Securities Act of
1933.
NOTE 9 OPTIONS AND WARRANTS
Stock Option Awards
On January 29, 2016, the Company granted a total of 1,310,000
stock options to certain employees. The stock options are exercisable at the
exercise price of $0.52 per share for a period of 7.6 years from the date of
grant and vested upon the date of grant.
On January 29, 2016, the Company granted a total of 3,000,000
stock options Steven A. Nickolas and Richard A. Wright (1,500,000 stock options
to each). The stock options are exercisable at the exercise price of $0.52 per
share for a period of 7.6 years from the date of grant and vested upon the date
of grant.
On March 4, 2016, the Company completed the offering and sale
of an aggregate of 9,000,000 shares of our common stock the offering included
warrants to purchase an aggregate of 4,500,000 shares of our common stock, at an
exercise price of $0.50 per share for a period of two years from the date of
issuance.
Page 44
For the years ended March 31, 2017 and March 31, 2016 the
Company has recognized compensation expense of $0 and $2,425,495 respectively,
on the stock options granted that vested. The fair value of the unvested shares
is $0 as of March, 2017. The aggregate intrinsic value of these options was $0
at March 31, 2016. 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, 2015
|
|
343,000
|
|
$
|
7.00
|
|
|
8.5
|
|
Granted
|
|
4,310,000
|
|
|
0.52
|
|
|
8.9
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
9.2
|
|
Expired/Forfeited
|
|
-
|
|
|
-
|
|
|
8.2
|
|
Outstanding at March 31, 2016
|
|
4,653,400
|
|
|
0.92
|
|
|
8.2
|
|
Granted
|
|
-
|
|
|
-
|
|
|
7.8
|
|
Exercised
|
|
(485,000
|
)
|
|
0.52
|
|
|
-
|
|
Expired/Forfeited
|
|
(192,600
|
)
|
|
0.52
|
|
|
-
|
|
Outstanding at March 31, 2017
|
|
4,145,800
|
|
|
0.92
|
|
|
7.7
|
|
Exercisable at March 31, 2017
|
|
4,145,800
|
|
|
0.92
|
|
|
7.7
|
|
Warrants
The following is a summary of the status of all of our warrants
as of March 31,
2017 and changes during the period ended on
that date:
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of Warrants
|
|
|
Exercise Price
|
|
Outstanding at March 31, 2015
|
|
460,608
|
|
$
|
7.00
|
|
Granted
|
|
4,858,057
|
|
|
1.22
|
|
Exercised
|
|
(254,763
|
)
|
|
8.00
|
|
Cancelled or Expired
|
|
(75,780
|
)
|
|
6.00
|
|
Outstanding at March 31, 2016
|
|
4,988,116
|
|
|
1.39
|
|
Granted
|
|
-
|
|
|
-
|
|
Exercised
|
|
(600,000
|
)
|
|
0.50
|
|
Cancelled or Expired
|
|
(195,200
|
)
|
|
1.50
|
|
Outstanding at March 31, 2017
|
|
4,192,916
|
|
|
0.79
|
|
Warrants exercisable at March 31, 2017
|
|
4,192,916
|
|
|
0.79
|
|
The following table summarizes information about stock warrants
outstanding and exercisable at March 31, 2017:
STOCK WARRANTS OUTSTANDING AND EXERCISABLE
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
|
|
Warrants
|
|
|
Remaining Contractual
|
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Life in Years
|
|
$
|
27.50
|
|
|
2,326
|
|
|
1.07
|
|
|
9.375
|
|
|
19,067
|
|
|
2.55
|
|
|
6.25
|
|
|
6,667
|
|
|
2.05
|
|
|
5.00
|
|
|
233,429
|
|
|
1.02
|
|
|
3.50
|
|
|
31,429
|
|
|
1.02
|
|
|
0.50
|
|
|
3,900,000
|
|
|
0.91
|
|
On October 22, 2014, the Company entered into a master lease
agreement with Veterans Capital Fund, LLC (the Lessor) for the secured lease
line of credit financing in an amount not to exceed $600,000. The lease is
expected to be secured by three new alkaline generating electrolysis system
machines. Our wholly-owned subsidiary, Alkaline 88, LLC, and Water Engineering Solutions, LLC acted as
co-lessees. Water Engineering Solutions, LLC is 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. Pursuant to the master lease agreement, the Lessor agreed to
lease to us the equipment described in any equipment schedule signed by us and
approved by the Lessor. It is expected that any lease under the master lease
agreement will be structured for a three-year lease term with fixed monthly
lease rental payments based on a monthly lease rate factor of 3.4667% of the
Lessors capital cost. In connection with the entering into the master lease
agreement, the Company also entered into a warrant agreement with the Lessor,
pursuant to which the Company agreed to issue a warrant to purchase 72,000
shares of our common stock to the Lessor and/or its affiliates at an exercise
price of $6.25 per share for a period of five years. 18,000 shares vested.
Page 45
On February 25, 2015, the Company amended the master lease
agreement with Veterans Capital Fund, LLC for the increase in the secured lease
line of credit financing to an amount not to exceed $800,000. The lease was
secured by new alkaline generating electrolysis system machines by our
wholly-owned subsidiary, Alkaline 88, LLC, and Water Engineering Solutions, LLC.
Water Engineering Solutions, LLC is 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. Pursuant to the master lease agreement, the Lessor agreed to lease to
us the equipment described in any equipment schedule signed by us and approved
by the Lessor. It is expected that any lease under the master lease agreement
will be structured for a three-year lease term with fixed monthly lease rental
payments based on a monthly lease rate factor of 3.4667% of the Lessors capital
cost. In connection with the entering into the master lease agreement, the
Company entered into a warrant agreement with the Lessor, pursuant to which the
Company agreed to cancel the previous issued warrant for 72,000 and issue a
warrant to purchase 102,000 shares of our common stock to the Lessor and/or its
affiliates at an exercise price of $5.00 per share for a period of five years.
18,000 shares vested on October 22, 2014, 13,316 shares on October 28, 2014,
13,606 shares on December 22, 2014, 6,945 shares on February 3, 2015 and 15,799
shares on March 5, 2015. The remaining 18,105 shares will vest on a pro rata
basis according to any mounts the Lessor funds pursuant to any lease schedules
under the master lease agreement, provided that if we draw on 90% or more of the
total lease line under the master lease agreement, then all such shares will be
deemed to be vested. The Company recorded the bifurcated value of $309,028 of
the warrants issued as additional paid in capital, the value was determine using
a Black-Scholes, a level 3 valuation measure.
The fair value of the warrants granted during the year ended
March 31, 2017 was estimated at the date of agreement using the Black-Scholes
option-pricing model and a level 3 valuation measure, with the following
assumptions:
Market value of stock on purchase date
|
$3.75
|
to
|
$7.10
|
Risk-free interest rate
|
.26%
|
to
|
1.42%
|
Dividend yield
|
|
0.00%
|
|
Volatility factor
|
116%
|
to
|
161%
|
Weighted average expected life (years)
|
|
2
|
|
NOTE 10 RELATED PARTY TRANSACTIONS
On October 31, 2014, the Company amended the 2013 Equity
Incentive Plan to, among other things, to increase the number of shares of stock
of the Company available for the grant of awards under the plan from 20,000,000
shares to 35,000,000 shares.
On October 31, 2014, the Company reduced the exercise price of
an aggregate of 120,000 stock options granted to Steven P. Nickolas and Richard
A. Wright, , to $7.50 per share as noted below:
Page 46
|
|
|
New Exercise
|
|
|
|
|
Old Exercise
|
Price per
|
|
Number of Stock
|
Name of Optionee
|
Grant Date
|
Price per Share
|
Share
|
Expiration Date
|
Options
|
Steven P. Nickolas
|
October 9, 2013
|
$30.25
|
$7.50
|
October 9, 2023
|
60,000
|
Richard A. Wright
|
October 9, 2013
|
$30.25
|
$7.50
|
October 9, 2023
|
60,000
|
On May 21, 2014, the Company granted a total of 120,000 stock
options Steven A. Nickolas and Richard A. Wright (60,000 stock options to each).
The stock options are exercisable at the exercise price of $7.275 per share for
a period of ten years from the date of grant. 60,000 stock options vested upon
the date of grant and 60,000 stock options will vest on November 21, 2014.
On October 9, 2013, the Company granted a total of 120,000
stock options to Steven A. Nickolas and Richard A. Wright (60,000 stock options
to each). The stock options are exercisable at the exercise price of $30.25 per
share for a period of ten years from the date of grant. For each individual, the
stock options vest as follows: (i) 20,000 upon the date of grant; and (ii)
10,000 per quarter until fully vested.
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 January 29, 2016, the Company granted a total of 3,000,000
stock options Steven A. Nickolas and Richard A. Wright (1,500,000 stock options
to each). The stock options are exercisable at the exercise price of $0.52 per
share for a period of 7.6 years from the date of grant and vested upon the date
of grant.
Effective March 31, 2016, the Company issued a total of
3,000,000 shares of our Series C Preferred Stock to Steven P. Nickolas and
Richard A. Wright (1,500,000 shares to each), our directors and executive
officers, pursuant to their employment agreements dated effective March 1, 2016.
Employment Agreement with Steven P. Nickolas
On March 30, 2016, the Company entered into an employment
agreement dated effective March 1, 2016 with Steven P. Nickolas, our president,
chief executive officer and director, pursuant to which Mr. Nickolas agreed to
perform such duties as are regularly and customarily performed by the president
and chief executive officer of a corporation, and any other duties consistent
with Mr. Nickolass position in our company. Pursuant to the terms of the
employment agreement, the Company have agreed to (i) pay Mr. Nickolas $15,000
per month or such other amount as may be determined by our board of directors
from time to time; and (ii) issue to Mr. Nickolas 1,500,000 shares of our Series
C Preferred Stock (issued effective as of March 31, 2016). The Company also
agreed that each of the following events constitute a Negotiated Trigger Event
as defined in the Certificate of Designation for the Series C Preferred Stock:
(i) the occurrence of a change of control event; (ii) the death of Mr. Nickolas;
and (iii) the termination of the employment agreement for any reason.
On November 18, 2016, our company provided notice to Steven
Nickolas, our CEO and President, of our board of directors finding that there
is just cause for termination of Mr. Nickolass employment and of our
companys intent to terminate the employment of Mr. Nickolas for just cause
pursuant to the provision of the Employment Agreement with Mr. Nickolas dated
March 1, 2016. Under the Employment Agreement, Mr. Nickolas had 30 days to cure
the failures and breaches creating just cause for termination. Mr. Nickolas
failed to cure such failure and breaches and, on April 7, 2017, our company
terminated the employment of Mr. Nickolas for cause. In addition, our company
removed Mr. Nickolas as the President and Chief Executive Officer of our
company.
Page 47
Employment Agreement with Richard A. Wright
On March 30, 2016, the Company entered into an employment
agreement dated effective March 1, 2016 with Richard A. Wright, our
vice-president, secretary, treasurer and director, pursuant to which Mr. Wright
agreed to perform such duties as are regularly and customarily performed by the
vice president, secretary and treasurer of a corporation, and any other duties
consistent with Mr. Wrights position in our company. Pursuant to the terms of
the employment agreement, the Company have agreed to (i) pay Mr. Wright $14,000
per month or such other amount as may be determined by our board of directors
from time to time; and (ii) issue to Mr. Wright 1,500,000 shares of our Series C
Preferred Stock (issued effective as of March 31, 2016). The Company also agreed
that each of the following events constitute a Negotiated Trigger Event as
defined in the Certificate of Designation for the Series C Preferred Stock: (i)
the occurrence of a change of control event; (ii) the death of Mr. Wright; and
(iii) the termination of the employment agreement for any reason.
In addition, the Company may (i) grant awards under our 2013
equity incentive plan to Mr. Wright from time to time and (ii) pay to Mr. Wright
an annual discretionary performance bonus in an amount to be determined by our
board of directors in its sole discretion. Mr. Wright will also be eligible to
participate in other bonus programs offered by our company to our senior staff
from time to time.
In addition, Mr. Wright will be entitled to participate in all
of our employee benefit plans provided by our company to our senior officers. If
the Company do not provide such plans at any time, the Company agreed to
reimburse Mr. Wright for the reasonable cost of any such plans obtained
privately. The Company also agreed to (i) provide Mr. Wright with vehicle leased
in our companys name, with lease payments not exceeding $700/month or such
other amount as may be determined by our board of directors; (ii) pay Mr. Wright
an allowance of $5,000 per month or such other amount as may be determined by
our board of directors, which may be used by Mr. Wright as he sees fit,
including without limitation, the funding of non-qualified retirement plans;
(iii) reimburse Mr. Wright for any expenses that he incurs in connection with
his duties under his employment agreement. Mr. Wright will be entitled in each
year to five weeks paid vacation, in addition to weekends and statutory
holidays, to be taken in installments of no more than three consecutive weeks of
paid time off.
The initial term of the employment agreement is three years
and, on the third anniversary of the effective date of the employment and on
each annual anniversary date thereafter, the term of the employment agreement
will automatically be extended by one additional year unless either party gives
90 days written notice to the other of its intention not to renew the
employment agreement.
If, within 90 days of the occurrence of a change of control
event, Mr. Wright resigns from his employment relationship with our company or
our company terminates his employment agreement for any reason other than for
just cause, then the Company agreed to pay Mr. Wright severance in an amount
equal to the following: 36 months salary plus an amount, if any, equal to the
following: one months salary multiplied by the number of calendar years,
starting on the effective date of the employment agreement, that Mr. Wright is
employed by our company under his employment agreement.
The Company may terminate Mr. Wrights employment at any time
for other than just cause by delivering to Mr. Wright written notice of
termination. In such a case, the Company agreed to pay Mr. Wright severance in
an amount equal to the following: 36 months salary plus an amount, if any,
equal to the following: one months salary multiplied by the number of calendar
years, starting on the effective date of the employment, that Mr. Wright is
employed by our company under his employment agreement.
Subject to applicable employment laws or similar legislation,
the Company may terminate Mr. Wrights employment in the event he has been
unable to perform his duties for a period of eight consecutive months or a
cumulative period of 12 months in any consecutive 24 month period, because of a
physical or mental disability. Mr. Wrights employment will automatically
terminate on his death. In the event Mr. Wrights employment with our company
terminates by reason of Mr. Wrights death or disability, then upon and
immediately effective on the date of termination the Company agreed to promptly
pay and provide Mr. Wright (or in the event of Mr. Wrights death, Mr. Wrights estate); any unpaid salary and any outstanding and
accrued regular and special vacation pay through the date of termination;
reimbursement for any unreimbursed expenses incurred through to the date of
termination; and any outstanding amounts due under any awards which will be
dealt with in accordance with our 2013 equity incentive plan and the award
agreement. In the event Mr. Wrights employment is terminated due to a
disability, the Company agreed to pay to Mr. Wright the severance referred to
above.
Page 48
The Company may terminate Mr. Wrights employment for just
cause at any time by delivering to Mr. Wright written notice of termination. In
the event that Mr. Wrights employment with our company is terminated by our
company for just cause, Mr. Wright will not be entitled to any additional
payments or benefits (except as otherwise provided in his employment agreement),
other than for amounts due and owing to Mr. Wright by our company as of the date
of termination, except for any awards under our 2013 equity incentive plan will
be dealt with in accordance with the plan and award agreement.
Provided that Mr. Wright has acted within the scope of his
authority, the Company agreed to indemnify and save harmless Mr. Wright
(including his heirs and legal representatives) against any and all costs,
claims and expenses (including any amounts paid to settle any actions or satisfy
any judgments) which: he may suffer or incur by reason of any matter or thing
which he may in good faith do or have done or caused to be done as an employee,
officer or director of our company, any of its subsidiaries or of any of their
respective affiliates; or was reasonably incurred by him in respect of any
civil, criminal or administrative action or proceeding to which he is made a
party by reason of being or having been an employee, officer or director of our
company, any of its subsidiaries or of any of their respective affiliates;
provided that, the foregoing indemnification will apply only if: he acted
honestly and in good faith with a view to the best interests of our company, any
of its subsidiaries or any of their respective affiliates; and in the case of a
criminal or administrative action or proceeding that is enforced by a monetary
penalty, he had reasonable grounds for believing that his conduct was lawful.
Mr. Wright agreed to indemnify and save harmless our company
against, and agree to hold it harmless from, any and all damages, injuries,
claims, demands, actions, liability, costs and expenses (including reasonable
legal fees) incurred or made against our company arising from or connected with
the performance or non-performance of his employment by him or the beach of any
warranty, representation or covenant herein by him, other than claims by him
pursuant to his employment agreement.
If and to the extent the Company maintain directors and
officers liability insurance for the protection of our executives in connection
with acts and omissions occurring during their employment with our company, the
Company agreed that Mr. Wright will be included as an officer and director who
is covered by such policy on a basis no less favorable than made available to
other executives of our company.
On April 7, 2017, our board of directors appointed Richard A.
Wright as president of our company. On April 28, 2017, Mr. Wright resigned as
the secretary and treasurer of our company and he was appointed as the chief
executive officer of our company.
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, 2017:
|
|
2017
|
|
|
201
6
|
|
Deferred income tax assets:
|
$
|
3,850,000
|
|
$
|
2,100,000
|
|
Valuation allowance
|
|
(3,850,000
|
)
|
|
(2,100,000
|
)
|
Net total
|
$
|
-
|
|
$
|
-
|
|
Page 49
At March 31, 2017, the Company had net operating loss
carryforwards of approximately $11,000,000 and net operating loss carryforwards
expire in 2023 through 2037.
The valuation allowance was increased by $1,750,000 during the
year ended March 31, 2017. The current income tax benefit of $1,750,000 and
$1,270,000 generated for the years ended March 31, 2017 and 2016, 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,
2017, 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 September 30, 2017. At
March 31, 2017, future minimum contractual obligations were as follows:
|
|
Facilities
|
|
|
Equipment
|
|
|
|
|
|
|
|
|
Year ending March 31, 2018
|
$
|
75,750
|
|
$
|
4,348
|
|
Total Minimum Lease Payments:
|
$
|
75,750
|
|
$
|
4,348
|
|
On October 3, 2014, the Company entered into a 3-year sub-lease
agreement requiring a monthly payment of $5,000 for office space in Scottsdale,
Arizona, with a basic monthly lease increase to $6,000 per month in second year
of the lease and to $7,000 per month in the third year of the lease. The Company
shall have the option to extend this lease for one (1) additional three (3) year
term for increased monthly rent.
On August 2, 2013, the Company entered into a 4-year lease
agreement for certain office equipment requiring a monthly payment of $870.
On April 1, 2016, the Company entered into an 18-month lease
agreement for certain warehouse space requiring a monthly payment of $1,125.
On December 1, 2016, the Company entered into a 16-month lease
agreement for certain warehouse space requiring a monthly payment of $2,250.
NOTE 13 CAPITAL LEASE
On October 22, 2014, the Company entered into a master lease
agreement with Veterans Capital Fund, LLC (the Lessor) for the secured lease
line of credit financing in an amount not to exceed $600,000. The lease is
expected to be secured by three new alkaline generating electrolysis system
machines. Our wholly-owned subsidiary, Alkaline 88, LLC, and Water Engineering
Solutions, LLC acted as co-lessees. Water Engineering Solutions, LLC is an
entity that is controlled and owned by our former President, Chief Executive
Officer, Steven P. Nickolas, and our current President and Chief Executive
Officer, Richard A. Wright. Pursuant to the master lease agreement, the Lessor
agreed to lease to us the equipment described in any equipment schedule signed
by us and approved by the Lessor. It is expected that any lease under the master
lease agreement will be structured for a three year lease term with fixed
monthly lease rental payments based on a monthly lease rate factor of 3.4667% of
the Lessors capital cost. In connection with the entering into the master lease
agreement, the Company also entered into a warrant agreement with the Lessor,
pursuant to which the Company agreed to issue a warrant to purchase 72,000
shares of our common stock to the Lessor and/or its affiliates at an
exercise price of $6. 25 per share for a period of five years, 18,000 shares
vested.
Page 50
On February 25, 2015, the Company amended the master lease
agreement with Veterans Capital Fund, LLC for the increase in the secured lease
line of credit financing to an amount not to exceed $800,000. The lease was
secured by new alkaline generating electrolysis system machines by our
wholly-owned subsidiary, Alkaline 88, LLC, and Water Engineering Solutions, LLC.
Water Engineering Solutions, LLC is an entity that is controlled and owned by
our former President, Chief Executive Officer, Steven P. Nickolas, and our
Vice-President, Secretary, Treasurer and director, Richard A. Wright. Pursuant
to the master lease agreement, the Lessor agreed to lease to us the equipment
described in any equipment schedule signed by us and approved by the Lessor. It
is expected that any lease under the master lease agreement will be structured
for a three year lease term with fixed monthly lease rental payments based on a
monthly lease rate factor of 3.4667% of the Lessors capital cost. In connection
with the entering into the master lease agreement, the Company entered into a
warrant agreement with the Lessor, pursuant to which the Company agreed to
cancel the previous issued warrant for72,000 and issue a warrant to purchase
102,000 shares of our common stock to the Lessor and/or its affiliates at an
exercise price of $5.00 per share for a period of five years. 18,000 shares
vested on October 22, 2014, 13,316 shares on October 28, 2014, 13,606 shares on
December 22, 2014, 6,945 shares on February 3, 2015 and 15,799 shares on March
5, 2015. The remaining 18,105 shares will vest on a pro rata basis according to
any mounts the Lessor funds pursuant to any lease schedules under the master
lease agreement, provided that if the Company draws on 90% or more of the total
lease line under the master lease agreement, then all such shares will be deemed
to be vested. The Company recorded the bifurcated value of $309,028 of the
warrants issued as additional paid in capital, the value was determine using a
Black-Scholes, a level 3 valuation measure.
During the year ended March 31, 2015 the Company agreed to
lease the specialized equipment used to make our alkaline water with a value of
$735,781 under the above Master Lease agreement. The Company evaluated this
lease under ASC 840-30 Leases- Capital Leases and concluded that these lease
where a capital asset.
NOTE 14 NOTES PAYABLE
On May 11, 2015, the Company entered into a securities purchase
agreement with Assurance Funding Solutions LLC, pursuant to which the Company
issued a secured term note of our company in the aggregate principal amount of
$250,000, together with 20,000 shares of our common stock, in consideration for
$250,000. The secured term note bears interest at the rate of 15% per annum and
matured on May 11, 2016. The Company prepaid the note by paying the holder 110%
of the principal amount outstanding together with accrued but unpaid interest
thereon, the Company provided written notice to the holder at least 30 days
prior to the date of prepayment which occurred in May, 2016. Pursuant to the
securities purchase agreement, the Company paid Assurance Funding Solutions LLC
$10,000 for legal fees incurred by it and granted it piggyback registration
rights. In connection with the securities purchase agreement, the Company also
entered into a general security agreement dated May 11, 2015 with Assurance
Funding Solutions LLC. The Company evaluated this transaction under ASC
470-20-30
Debt liability and equity component
determine that a Debt
Discount of $79,000 was provided and will be amortized over the 1-year term of
the note. As of March 31, 2016, $13.167 was unamortized and amortization of debt
discount for the year was $65,833.
On August 19, 2015, the Company entered into a securities
purchase agreement pursuant to which the Company issued a secured term note of
our company in the aggregate principal amount of $240,000, together with 20,000
shares of our common stock, in consideration for $200,000. The secured term note
requires monthly payments of $20,000 per month, along with a final payment on
August 20, 2016.
On September 20, 2016, we entered into a loan facility
agreement (the Loan Agreement) with Turnstone Capital Inc. (the Lender),
whereby the Lender agreed to make available to our company a loan in the
aggregate principal amount of $1,500,000 (the Loan Amount). Pursuant to the
Loan Agreement, the Lender agreed to make one or more advances of the Loan
Amount to our company as requested from time to time by our company in an amount
to be agreed upon by our company and the Lender (each, an Advance).
Page 51
During the year ended March 31, 2017, the lender made advances
totaling $1,000,000. This amount together with accrued interest of $30,000 was
converted to 1,030,000 common shares on March 31, 2017.
NOTE 15 CONVERTIBLE NOTES PAYABLE
During the year ended March, 31 2017, the Company entered into
a promissory notes totaling $360,000 of which $50,000 was repaid and the
remaining amount of $310,000 was converted into equity on March 31, 2016.
During the year ended March 31, 2017, the Company entered into
promissory notes totaling $260,000 of which $50,000 was repaid and the remaining
amount of $260,000 was converted into equity on March 31, 2017.
On March 31, 2016, the Company entered into a promissory note
and warrant exchange agreement (the
March Exchange Agreement) with six
holders of our promissory notes (each, a Note) in the aggregate principal
amount of $310,000 and warrants (each, a March Warrant) to purchase an
aggregate of 88,563 shares of our common stock, whereby the Company exchanged
the holders Notes and March Warrants, for no additional consideration, for an
aggregate of 551,246 shares of our common stock (the March Exchange), and
following the March Exchange, the Notes and March Warrants were automatically
cancelled and terminated and the holders have no further rights pursuant to the
Notes, March Warrants and any agreement or instrument pursuant to which such
Notes or March Warrants were issued.
NOTE 16 SUBSEQUENT EVENTS
Effective April 28, 2017, we granted a total of 1,790,000 stock
options to our directors, officers, consultants employees. The stock options are
exercisable at the exercise price of $1.29 per share for a period of ten years
from the date of grant. 360,000 of the stock options vest as follows: (i)
120,000 upon the date of grant; and (ii) 120,000 on each anniversary date of
grant. 1,430,000 of the stock options vest as follows: (i) 357,500 upon the date
of grant; and (ii) 357,500 on each anniversary date of grant. We granted the
stock options to 12 U.S. Persons and 3 non U.S. Persons (as that term is defined
in Regulation S of the Securities Act of 1933) and in issuing securities we
relied on the registration exemption provided for in Regulation S and/or Section
4(a)(2) of the Securities Act of 1933.
Effective April 28, 2017, we issued 585,000 shares of common
stock to five persons, one of whom is a director and officer of our company. Of
these shares, 560,000 are restricted from transfer for a period of two years.
On May 3, 2017, the Company designated 3,000,000 shares of the
authorized and unissued preferred stock of our company as Series D Preferred
Stock by filing a Certificate of Designation with the Secretary of State of the
State of Nevada. Each share of the Series D Preferred Stock will be convertible,
without the payment of any additional consideration by the holder and at the
option of the holder, into one fully paid and non-assessable share of our common
stock at any time after (i) we achieve the consolidated revenue of our company
and all of its subsidiaries equal to or greater than $40,000,000 in any 12 month
period, ending on the last day of any quarterly period of our fiscal year; or
(ii) a Negotiated Trigger Event, defined as an event upon which the Series D
Preferred Stock will be convertible as may be agreed by our company and the
holder in writing from time to time. The company then issued a total of
3,000,000 shares of our Series D Preferred Stock to our directors, officers,
consultants and employees. We issued these shares relying on the registration
exemption provided for in Section 4(a)(2) of the Securities Act of 1933.
Page 52