Filed pursuant to Rule 424(b)(3)
Registration No. 333-209124
Prospectus
The Alkaline Water Company Inc.
Up to 3,900,000
Shares of Common Stock Underlying the Warrants
_________________________________
This prospectus relates to the issuance of up to 3,900,000
shares of our common stock upon the exercise of warrants with an exercise price
of $0.50 per share, which were issued by us as part of an offering that closed
on March 4, 2016 and which were included in our registration statement on Form
S-1 (File No. 333-209124).
Our common stock is quoted on the OTC Markets Groups OTCQB
under the symbol WTER. On December 5, 2017, the closing price of our common
stock on the OTCQB was $1.0202 per share.
Investing in our common stock involves risks. See Risk
Factors beginning on page 4.
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 December 5, 2017.
Table of Contents
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.
For investors outside the United States: we have not taken any
action that would permit this offering, or the possession or distribution of
this prospectus, in any jurisdiction where action for that purpose is required,
other than in the United States. Persons outside the United States who come into
possession of this prospectus must inform themselves about, and observe any
restrictions relating to, the offering of securities and the distribution of
this prospectus outside the United States.
All references in this prospectus to numbers of shares of
common stock and per share information give retroactive effect to the 50-for-1
reverse stock split of our shares of common stock effected as of December 30,
2015, unless otherwise specified.
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
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Securities offered
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Up to 3,900,000 shares of common stock issuable
upon exercise of the warrants.
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Use of proceeds
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We expect to use the net proceeds from the
exercise of the warrants for capital expenditures, working capital and
other general corporate purposes. See Use of Proceeds for more
information.
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OTCQB Symbol
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WTER.
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Risk Factors
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See Risk Factors beginning on page 4 and
other information in this prospectus for a discussion of the factors you
should consider before you decide to invest in our common stock.
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Our Business
Our company offers retail consumers bottled alkaline water in
500ml, 700ml, 1-liter, 3-liter and 1-gallon sizes under the trade name
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 minerals from Pink Himalayan Rock Salt.
Our product was designed to have a clean smooth taste using only purified water
and the Himalayan salt. Consumers drink our water because of the taste profile
and the perceived health benefits. We are now one of the largest (by sales
volume) alkaline water companies in the United States.
Alkaline 88, LLC, our operating subsidiary, operates primarily
as a marketing, distribution, and manufacturing company. Alkaline 88, LLC has
entered into one-year agreement(s) with six different bottling companies in
Virginia, Georgia, California, Texas and Arizona to act as co-packers for our
product. Our current capacity at all plants exceeds $2,900,000 per month
wholesale. 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, Vav Plastics Inc., Amcor Inc. and
Packaging Corporation of America.
2
Our product is currently at the 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 32,000 retail outlets throughout the United States. We are
presently in all 50 States and the District of Columbia, although over 50% of
our current sales are concentrated in the Southwest and Texas. We have
distribution agreements with large national distributors (UNFI, KeHe and
C&S), representing over 150,000 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/Safeway, Kroger companies, and
regional grocery chains such as Schnucks, Smart & Final, Jewel-Osco,
Sprouts, Bashas, Bristol Farms, Vallarta, Superior Foods, Brookshires, HEB and
other companies throughout the United States. In total we are now in 45 of the
top 75 (by sales) grocery retailers in 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). In the past fiscal year we have added a number of additional DSDs in the
Southwest and have expanded our product offering to include 500ml and 1 liter
bottles.
In order to continue our expansion, we anticipate that we will
be required, in most cases, to continue to give promotional deals throughout
2017 and in subsequent years on a quarterly basis ranging from a 5%-20% 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.
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 September 30, 2017, we had an accumulated deficit of $26,269,516.
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, 2017, 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 14646 N.
Kierland Blvd., Suite 255, Scottsdale, AZ 85254. Our telephone number is (480)
656-2423.
Summary of Financial Data
The following information represents selected audited financial
information for our company for the years ended March 31, 2017 and March 31,
2016 and selected unaudited financial information for our company for the six
months ended September 30, 2017 and September 30, 2016. 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 27 of this
prospectus.
Statements of
Operations
Data
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Six
Months Ended
September 30, 2017
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Six
Months Ended
September 30, 2016
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Year
Ended
March 31, 2017
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Year
Ended
March 31, 2016
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Revenue
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$10,021,722
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$5,954,287
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$12,763,630
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$7,088,806
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Cost of Goods Sold
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$5,705,823
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$3,686,825
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$7,350,394
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$4,432,459
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Total Operating Expenses
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$6,648,896
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$4,224,301
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$7,952,229
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$10,133,485
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3
Statements of
Operations
Data
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Six
Months Ended
September 30, 2017
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Six
Months Ended
September 30, 2016
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Year
Ended
March 31, 2017
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Year
Ended
March 31, 2016
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Net Loss
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$(2,879,482)
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$(2,289,307)
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$(3,454,600)
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$(8,281,584)
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Balance Sheets Data
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As of September 30,
2017
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As of March 31,
2017
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As of March 31,
2016
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Cash and Cash Equivalents
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$481,831
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$603,805
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$1,192,119
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Working Capital (Deficiency)
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$(720,614)
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$(279,116)
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$395,551
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Total Assets
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$4,459,219
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$4,270,469
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$3,775,557
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Total Liabilities
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$4,025,798
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$3,437,443
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$2,248,676
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Total Stockholders Equity (Deficit)
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$433,421
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$833,026
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$1,526,881
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Accumulated Deficit
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$(26,269,516)
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$(23,388,534)
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$(19,933,934)
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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 making an investment decision about our
company. 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.
Risks Related to This Offering
You will experience immediate and substantial dilution as
a result of this offering and may experience additional dilution in the future.
You will incur immediate and substantial dilution as a result
of this offering. After giving effect to the exercise of warrants to purchase up
to 3,900,000 shares of our common stock, the holders of the warrants who
exercise the warrants in this offering can expect an immediate dilution of
$0.4024 per share as of September 30, 2017, or 80% at the exercise price. We may
also acquire other assets or businesses by issuing equity, which may result in
additional dilution to our stockholders.
We will have immediate and broad discretion over the use
of the net proceeds from the exercise of the warrants and we may use these
proceeds in ways with which you may not agree.
We have considerable discretion in the application of the
proceeds of the exercise of the warrants. We currently expect to use the net
proceeds from exercise of the warrants for capital expenditures, working capital
and other general corporate purposes. However, there may be circumstances where,
for sound business reasons, a reallocation of funds may be necessary or
advisable. You must rely on our judgment regarding the application of the net
proceeds from exercise of the warrants. Our judgment may not result in positive
returns on your investment and you will not have an opportunity to evaluate the
economic, financial, or other information upon which we base our decisions.
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 begun
producing and distributing alkaline bottled water in 2013, 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.
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.
4
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.
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 September 30, 2017, we had an accumulated
deficit of $26,269,516. 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, 2017, 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.
5
Intense competition and increasing competition in the
commercial beverage market could hurt our business.
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 34% (23%,
and 11%, respectively) of accounts receivable at September 30, 2017, and 3
customers that together account for 43% (22%, 11%, and 10%, respectively) of the
total revenues earned for the quarter ended September 30, 2017. 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.
6
Our dependence on a limited number of vendors leaves us
vulnerable to having an inadequate supply of required products, price increases,
late deliveries, and poor product quality.
We have two vendors that accounted for 48% (37% and 11%
respectively) of purchases for the quarter ended September 30, 2017. Like other
companies in our industry, we occasionally experience shortages and are unable
to purchase our desired volume of products. Increasingly, our vendors are
combining and merging together, leaving us with fewer alternative sources. If we
are unable to maintain an adequate supply of products, our revenue and gross
profit could suffer considerably. Finally, we cannot provide any assurance that
our products will be available in quantities sufficient to meet customer demand.
Any limits to product access could materially and adversely affect our business
and results of operations.
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 minerals from Pink
Himalayan Rock 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
non-refillable, 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 non-refillable 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.
7
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.
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 $0.99 for a 500
milliliter bottle to $4.99 for a one-gallon 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, one-gallon bottle for an
SRP of $4.99, 700 milliliter single serving at an SRP of $1.19, 1 liter at an
SRP of $1.99 and a 500 milliliter at an SRP of $.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.
8
We are subject to periodic claims and litigation that
could result in unexpected expenses and could ultimately be resolved against us.
From time to time, we are involved in litigation and other
proceedings, including matters related to product liability claims, stockholder
class action and derivative claims, commercial disputes and intellectual
property, as well as trade, regulatory, employment, and other claims related to
our business. Any of these proceedings could result in significant settlement
amounts, damages, fines or other penalties, divert financial and management
resources, and result in significant legal fees. An unfavorable outcome of any
particular proceeding could exceed the limits of our insurance policies or the
carriers may decline to fund such final settlements and/or judgments and could
have an adverse impact on our business, financial condition, and results of
operations. In addition, any proceeding could negatively impact our reputation
among our guests and our brand image.
On April 7, 2017, our company terminated the employment of
Steven P. Nickolas for cause. In addition, our company removed Mr. Nickolas as
the president and chief executive officer of our company. Mr. Nicholas filed
multiple lawsuits against our company. On October 31, 2017, our company and its
subsidiaries entered into a Settlement Agreement and Mutual Release of Claims
with Steven P. Nickolas, the Nickolas Family Trust, Water Engineering Solutions,
LLC and Enhanced Beverages, LLC, companies and trust that are controlled or
owned by Mr. Nickolas, and McDowell 78, LLC and Wright Investments Group, LLC, a
company controlled or owned by Richard A. Wright. Pursuant to the Settlement
Agreement and Mutual Release of Claims, Mr. Nickolas and our company agreed to
file the stipulations to dismiss the complaints and counterclaim filed by each
of them with prejudice, with each side to bear its own costs and attorneys
fees. See Legal Proceedings below for more information on these lawsuits.
We rely on key executive officers, and their knowledge of
our business would be difficult to replace.
We are highly dependent on our two executive officers, Richard
A. Wright and David A. Guarino. We do not have key person life insurance
policies for any of our officers nor do we currently have directors &
officers insurance coverage. 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 Richard A. Wright, David
Guarino, Aaron Keay, and Bruce Leitch. 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 audit committee.
Risk Related to Our 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 200,000,000 shares of common
stock and 100,000,000 shares of preferred stock, of which 21,958,062 shares of
common stock are issued and outstanding,1,500,000 shares of Series C Preferred
Stock are issued outstanding, and 3,800,000 shares of Series D Preferred Stock
are issued and outstanding as of December 5, 2017. 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.
9
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 operated by the OTC
Markets Group. 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.
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.
10
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.
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 may receive up to a total of $1,950,000.00 in gross proceeds
upon exercise of the warrants to purchase shares of our common stock being
offered pursuant to this prospectus. We expect to use the net proceeds from the
exercise of the warrants for capital expenditures, working capital and other
general corporate purposes. However, we are unable to predict the timing or
amount of potential warrant exercises. The warrants may expire unexercised and
we may never receive any proceeds.
Determination of Offering Price
The exercise price of the warrants is fixed at $0.50 and such
price may be less than the market price for our common stock.
Our common stock is traded on the OTCQB operated by the OTC
Markets Group under the symbol WTER. On December 5, 2017, the closing price
for one share of our common stock on the OTCQB was $1.0202.
Dilution
If you exercise the warrants in this offering, your interest
will be diluted immediately to the extent of the difference between the exercise
price per share of our warrants and the pro forma net tangible book value per
share of our common stock after this offering. Our net tangible book value per
share is determined by dividing our total tangible assets, less total
liabilities, by the number of shares of our outstanding common stock. As of
September 30, 2017, our net tangible book value was $436,828, or $0.0213 per
share of common stock.
Net tangible book value dilution per share represents the
difference between the exercise price per share of the warrants and the pro
forma net tangible book value per share in common stock immediately after
completion of the exercise of the warrants. After giving effect to the exercise
of warrants to purchase up to 3,900,000 shares of common stock at an exercise
price of $0.50 per share, our pro forma net tangible book value as of September
30, 2017 would have been $2,386,828 or $0.0976 per share. This represents an
immediate increase of net tangible book value of $0.0763 per share to our
existing stockholders and an immediate dilution in net tangible book value of
$0.4024 per share to holders of warrants who exercise the warrants in this
offering. The following table illustrates this per share dilution:
11
Exercise price per
share
|
$
|
0.50
|
|
Net tangible book value per share as of
September 30, 2017
|
$
|
0.0213
|
|
Increase in net tangible book
value per share attributable to exercise of warrants
|
$
|
0.0763
|
|
Pro forma net tangible book value per share
after exercise of warrants
|
$
|
0.0976
|
|
Dilution in net tangible book
value per share to holders of warrants
|
$
|
0.4024
|
|
The above discussion and table do not include the following:
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32,360 shares of our common stock reserved for future
issuance under our 2013 Equity Incentive Plan as of September 30, 2017 and
5,615,000 shares of our common stock issuable exercise of stock options
outstanding as of September 30, 2017 under our 2013 Equity Incentive Plan
with a weighted average exercise price of $0.7654 per share;
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292,918 shares of common stock issuable upon the exercise
of outstanding warrants (excluding warrants to purchase up to 3,900,000
shares of our common stock being offered pursuant to this prospectus) as
of September 30, 2017, with exercise prices ranging from $3.50 to $27.50
per share; and
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Subsequent issuance after September 30, 2017 totaling
1,400,000 shares of our common stock.
|
Plan of Distribution
The shares of common stock underlying the warrants are being
offered directly by us and the holders of such warrants may purchase the shares
of common stock directly from us by exercising their outstanding warrants at an
exercise price of $0.50 per share. The warrants were issued by us as part of an
offering that closed on March 4, 2016 and which were include in our registration
statement on Form S-1 (File No. 333-209124).
Description of Securities
Capital Stock
The aggregate number of shares that we have the authority to
issue is 300,000,000, of which 200,000,000 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. 3,000,000 shares of our authorized preferred
stock are designated as Series C Preferred Stock and have conversion rights.
5,000,000 shares of our authorized preferred stock are designated as Series D
Preferred Stock and have conversion rights.
As of December 5, 2017, there were 21,958,062 shares of our
common stock issued and outstanding, 1,500,000 shares of Series C Preferred
Stock issued and outstanding and 3,800,000 shares of Series D 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.
12
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;
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(b)
|
Whether shares may be redeemed, and, if so, the
redemption price and the terms and conditions of redemption;
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(c)
|
The amount payable upon shares in the event of voluntary
or involuntary liquidation;
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(d)
|
Sinking fund or other provisions, if any, for the
redemption or purchase of shares;
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(e)
|
The terms and conditions on which shares may be
converted, if the shares of any series are issued with the privilege of
conversion;
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(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
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(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.
|
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.
13
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 C Preferred Stock
3,000,000 shares of our authorized preferred stock are
designated as Series C Preferred Stock.
Series D Preferred Stock
5,000,000 shares of our authorized preferred stock are
designated as Series D Preferred Stock.
Warrants Being Exercised in This Offering
Up to 3,900,000 shares of our common stock underlying the
warrants are being offered directly by us and each warrant entitles the holder
to purchase one share of common stock at an exercise price of $0.50 per share.
The warrants are exercisable immediately upon issuance and expire on March 4,
2018.
The warrants provide for the adjustment of the exercise price
and number of shares issuable upon exercise of the warrants in connection with
stock dividends and splits, such that if and whenever the shares at any time
outstanding are subdivided into a greater or consolidated into a lesser number
of shares, the exercise price will be decreased or increased proportionately as
the case may be and the number of shares issuable upon exercise of the warrants
will be increased or decreased proportionately as the case may be.
In case of any capital reorganization or of any
reclassification of the capital of our company or in the case of the
consolidation, merger or amalgamation of our company with or into any other
company, each warrant will after such event confer the right to purchase the
number of shares or other securities of our company (or of the company resulting
from such event) which the warrant holder would have been entitled to if the
warrant holder had been a stockholder at the time of such event.
A warrant holder may not exercise the warrants if the number of
shares of our common stock to be issued pursuant to such exercise would exceed,
when aggregated with all other shares owned by such warrant holder at such time,
the number of shares of our common stock which would result in such warrant
holder beneficially owning (as determined in accordance with Section 13(d) of
the Securities Exchange Act of 1934 in excess of 4.99% or 9.99% of all of the
shares of our common stock outstanding at such time; provided, however, that
upon such warrant holder providing us with 61 days notice that such warrant
holder would like to waive this exercise restriction, this exercise restriction
will not apply to all or a portion of the warrants as requested by the warrant
holder; provided, further, that this exercise restriction will not apply during
61 days immediately preceding the expiration of the term of the warrants.
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 December 5, 2017, we had approximately 61
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.
14
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:
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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;
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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
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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:
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an aggregate market value equal to 5% or more of the
aggregate market value of the assets of the corporation;
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an aggregate market value equal to 5% or more of the
aggregate market value of all outstanding shares of the corporation; or
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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
The financial statements of our company included in this
prospectus have been audited by AMC Auditing, LLC to the extent and for the
periods set forth in its 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 has 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.
15
Information with respect to Our Company
Description of Business
Corporate Overview
Our company offers retail consumers bottled alkaline water in
500ml, 700ml, 1-liter, 3-liter and 1-gallon sizes under the trade name
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 minerals from Pink Himalayan Rock Salt.
Our product was designed to have a clean smooth taste using only purified water
and the Himalayan salt. Consumers drink our water because of the taste profile
and the perceived health benefits. We are now one of the largest (by sales
volume) alkaline water companies in the United States.
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.
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. At the time, the Series A Preferred Stock had 10 votes per
share. The Series A Preferred Stock 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 had, among other things, conversion rights, liquidation
preferences, dividend rights, redemption rights and conversion rights.
On December 30, 2015, we effected a 50-for-1 reverse stock
split of our authorized and issued and outstanding shares of common stock. As a
result of the reverse stock split, the number of authorized shares of common
stock of our company decreased from 1,125,000,000 to 22,500,000 and the number
of issued and outstanding shares of common stock of our company decreased
correspondingly. As a result of the reverse stock split, holders of our Series A
Preferred Stock had 0.2 votes per share of Series A Preferred Stock.
16
On January 21, 2016, we amended our Articles of Incorporation
to increase the number of authorized shares of our common stock from 22,500,000
to 200,000,000 by filing a Certificate of Amendment to Articles of Incorporation
with the Secretary of State of the State of Nevada. As a result, the aggregate
number of shares that we have the authority to issue is 300,000,000, of which
200,000,000 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 January 22, 2016, we 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. We 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 divided or other distribution on our common stock payable in our common
stock or a subdivision or consolidation of the outstanding shares of our common
stock. Accordingly, holders of Series A Preferred Stock had 10 votes per share
of Series A Preferred Stock, instead of 0.2 votes per share of Series A
Preferred Stock. On November 14, 2017, we withdrew the Certificate of
Designation establishing Series A Preferred Stock. There were no shares of
Series A Preferred Stock outstanding immediately prior to the withdrawal.
On March 30, 2016, we 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) we achieve the consolidated revenue of our company
and all of its subsidiaries 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 March 31, 2017, we withdrew the Certificate of Designation
establishing 10% Series B Convertible Preferred Stock. The withdrawal was
required under the Credit and Security Agreement dated February 1, 2017 with SCM
Specialty Finance Opportunities Fund, L.P. There were no shares of 10% Series B
Convertible Preferred Stock outstanding immediately prior to the withdrawal.
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. On November 2, 2017, we increased the number of authorized
shares of Series D Preferred Stock in our company to 5,000,000 shares by filing
an Amendment to the foregoing 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 principal offices of our company are located at 14646 N.
Kierland Blvd., Suite 255, Scottsdale, AZ 85254. Our telephone number is (480)
656-2423.
Operations
Alkaline 88, LLC, our operating subsidiary, operates primarily
as a marketing, distribution, and manufacturing company. Alkaline 88, LLC has
entered into one-year agreement(s) with six different bottling companies in
Virginia, Georgia, California, Texas and Arizona to act as co-packers for our
product. Our current capacity at all plants exceeds $2,900,000 per month
wholesale. 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, Vav Plastics Inc., Amcor Inc. and
Packaging Corporation of America.
Our product is currently at the 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 32,000 retail outlets throughout the United States. We are
presently in all 50 States and the District of Columbia, although over 50% of
our current sales are concentrated in the Southwest and Texas. We have distribution agreements with large national distributors (UNFI,
KeHe C&S), representing over 150,000 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/Safeway, Kroger
companies, and regional grocery chains such as Schnucks, Smart & Final,
Jewel-Osco, Sprouts, Bashas, Bristol Farms, Vallarta, Superior Foods,
Brookshires, HEB and other companies throughout the United States. In total we
are now in 45 of the top 75 (by sales) grocery retailers in the United
States.
17
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). In the past fiscal year we have added a number of additional DSDs in the
Southwest and have expanded our product offering to include 500ml..
In order to continue our expansion, we anticipate that we will
be required, in most cases, to continue to give promotional deals throughout
2017 and in subsequent years on a quarterly basis ranging from a 5%-20% 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.
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:
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Expansion of Broker Network
- We expect to
continue to develop our working relationship with our national broker
network. We continually meet train and go on sales call with our national
broker network in order to take advantage of the momentum currently being
created by their efforts. We anticipate a considerable amount of travel
and ongoing expenses at an estimated cost during that time of $300,000.
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Increase Manufacturing Capacity
- We expect to add
one or two new co-packer facilities, strategically located to reduce
freight costs and meet future growth objectives.
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Expand Retail Distribution
- We are currently in
negotiations or have received the new item paperwork from retailers that
will introduce our Alkaline 88 product line to retailers representing
approximately 45,000 store locations throughout North America. We believe
that by the end of fiscal year 2018, we will be in over 40,000 stores. The
cost of this retail expansion is expected to be up to $2,000,000 during
that time.
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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 two more people on the
corporate level, 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 $200,000 in salary and benefits over
the next twelve months.
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Capital Considerations
- Our business plan can be
adjusted based on the available capital to the business. We anticipate
that approximately $2,000,000 is necessary in the near term 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. To fund our expansion in the longer term, we anticipate that we
need at least $3,000,000 during the next 12 months.
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International Expansion
- We expect to begin
selling internationally over the next 12 months and have budgeted $160,000
towards our initial efforts.
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We believe that cash flow 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 months will be up to
$3,000,000. We will require additional cash resources to achieve the milestones
indicated above. If our own financial resources and future 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.
18
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 distribution agreements with large national
distributors (UNFI, KeHe and C&S), representing over 150,000 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/Safeway, Kroger companies, and regional grocery chains
such as Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas, Bristol
Farms, Vallarta, Superior Foods, Brookshires, HEB and other companies
throughout the United States. In total we are now in 45 of the top 75 (by sales)
grocery retailers in the United States.
Dependence on Few Customers
We have 2 major customers that together account for 34% (23%,
and 11%, respectively) of accounts receivable at September 30, 2017, and 3
customers that together account for 43% (22%, 11%, and 10%, respectively) of the
total revenues earned for the quarter ended September 30, 2017. 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.
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.
19
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 $0.99 for a half-liter
bottle to $4.99 for a one-gallon 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, one-gallon
bottle for an SRP of $4.99, 700 milliliter single serving at an SRP of $1.19, 1
liter at an SRP of $1.99 and a 500 milliliter at an SRP of $0.99.
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 Alkaline88 has been approved in the
USA and Canada and has been applied for in China.
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
Alkaline88, LLC currently has an in-house research and
development department that works on 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.
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.
20
Employees
In addition to Richard A. Wright, who is our president, chief
executive officer and director, and David Guarino, who is our chief financial
officer, secretary, treasurer and director, we currently employ 11 full time
employees and 1 part-time employee. 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 14646 N.
Kierland Blvd., Suite 255, Scottsdale, AZ 85254 with the size of 3,352 square
feet are leased from a third party through November, 2020 at the rate of $7,344
per month
.
We believe that the condition of our principal offices is
satisfactory, suitable and adequate for our current needs.
Legal Proceedings
Our company is a nominal defendant in a lawsuit filed on April
6, 2017 by Steven P. Nickolas derivatively on behalf of our company against
Richard Wright, David Guarino, and Aaron Keay (current directors of our
company), and Daniel Lorey (current employee of our company) and our companys
former accounting firm, Seale & Beers, LLC. The lawsuit is pending in the
Maricopa County, Arizona, Superior Court, Steven Nickolas, derivatively on
behalf of the Alkaline Water Company, v. Richard Wright, et al. cause number
CV2017-005488 (the Derivative Action). Mr. Nickolas alleges a range of conduct
including breach of fiduciary and general duties owed to our company. Some of
these allegations were first raised by Mr. Nickolas in August, 2016 and, at that
time, our company appointed an independent director, Mr. Keay, to conduct an
investigation of the allegations. Mr. Keay conducted the investigation and
concluded that the claims were without merit. Though our company is a nominal
defendant in this action, our company believes the claims in the action are
baseless and has denied the claims. We anticipate that the other defendants will
defend the action vigorously, and is paying the cost of defending against the
claims, subject to a reservation of rights in the event of a finding the
principal defendants breached duties owed to our company and are not eligible
for indemnification. This lawsuit against all of the parties, including our
company as a nominal defendant, is currently in the process of being dismissed
with prejudice pursuant a Settlement Agreement and Mutual Release of Claims
dated October 31, 2017 detailed below.
On October 31, 2017, our company and its subsidiaries entered
into a Settlement Agreement and Mutual Release of Claims (the
Settlement
Agreement
) with Steven P. Nickolas, the Nickolas Family Trust, Water
Engineering Solutions, LLC and Enhanced Beverages, LLC, companies and trust that
are controlled or owned by Mr. Nickolas, (collectively, the
Nickolas
Parties
) and McDowell 78, LLC and Wright Investments Group, LLC, a company
controlled or owned by Richard A. Wright, (collectively,
Wright/McDowell
).
The Settlement Agreement provides, among other things, the
following:
1.
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Simultaneous with the full execution of the Settlement
Agreement, we agreed to pay Mr. Nickolas $110,000 in one lump sum
(paid);
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From the date of the Settlement Agreement, we agreed to
waive the application of our Insider Trading Policy as to Mr. Nickolas,
thereby removing any black-out periods for all future sales of our common
stock by Mr. Nickolas;
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3.
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Within three business date of the full execution of the
Settlement Agreement, we agreed to instruct our transfer agent to issue
Mr. Nickolas 700,000 shares of our common stock (issued);
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4.
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Within 10 business days of the full execution of the
Settlement Agreement, we agreed to issue Mr. Nickolas 300,000 shares of
our Series D Preferred Stock (issued);
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5.
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In exchange of 700,000 shares of our common stock and
300,000 shares of our Series D Preferred Stock described above, Mr.
Nickolas forfeited his 10,000,000 shares of our Series A Preferred Stock,
to be cancelled for no further consideration;
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6.
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Upon the full execution of the Settlement Agreement, Mr.
Nickolas and our company agreed to file the stipulations to dismiss the
complaints and counterclaim filed by each of them with prejudice, with
each side to bear its own costs and attorneys fees. In addition, our
company and Wright/McDowell agreed that they will effectuate the dismissal
of an arbitration proceeding against the Nickolas Parties with prejudice,
with each side to bear its own attorneys fees and costs;
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7.
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Mr. Nickolas surrendered all right, interest or claim to
the shares of our common stock owned by WIN Investments, LLC and Lifewater
Industries, LLC for no additional consideration;
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8.
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Mr. Nickolas acknowledged and agreed that the employment
agreement between Mr. Nickolas and our company was terminated as of April
7, 2017 and no further amounts are owed to Mr. Nickolas under the
employment agreement and we agreed to waive restrictive covenants set out
in the employment agreement.
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9.
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We agreed to assume financial responsibility for the
federal tax obligations in the total amount of $45,738.68 owed by Mr.
Nickolas and certain outstanding invoice in the amount of
$21,008.71;
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10.
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Mr. Nickolas acknowledged and agreed that 1,500,000 stock
options with an exercise price of $0.52 issued to Mr. Nickolas on or about
March 1, 2016 has expired and a total of 148,000 stock options issued to
Mr. Nickolas before 2016 will automatically expire 90 days from October 6,
2017, the date Mr. Nickolas ceased being a director of our
company;
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11.
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We agreed that Mr. Nickolas will have access to a
reasonable amount of Alkaline88 water, not to exceed 30 cases at the time
of pickup at our facility, for his personal consumption only at no cost
while Mr. Nickolas is a direct stockholder of our company and Mr. Nickolas
will be limited to an average of 20 cases per month for his personal
consumption; and
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12.
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The parties also agreed to mutual release of
claims.
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Our company was named as a defendant in a lawsuit filed on
April 6, 2017, by Douglas Horn in the Maricopa County, Arizona, Superior Court,
styled as Horn v. The Alkaline Water Company, Inc., et al., cause number
CV2017-005485. Mr. Horn sought damages arising out of the alleged breach of a
written employment agreement between our company and Mr. Horn. Mr. Horn alleged
that our company has failed to pay wages and to transfer stock allegedly owed to
him under the terms of his employment agreement. Our company denied the
allegations of the claims, and moved to dismiss pursuant to the terms of the
employment agreement which require that all disputes be resolved by arbitration.
In response, Mr. Horn filed a notice of dismissal of all claims in that court,
without prejudice. On September 21, 2017, Mr. Horn filed a Demand for
Arbitration with the American Arbitration Association, asserting the same
claims. The claim has been assigned No. 01-17-0005-6474. Our company has
responded, denying any liability to Mr. Horn. No date for arbitration has yet
been set. Our company intends to defend the claim vigorously.
Except as detailed above, 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.
Except as detailed above, 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.
22
Market Price of and Dividends on Our Common Equity
and
Related Stockholder Matters
Market Information
Our common stock is quoted on the OTC Markets Groups 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.
Set forth below are the range of high and low bid quotations
for the periods indicated as reported by the OTCQB. The market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions
and may not necessarily represent actual transactions.
Quarter Ended
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High Bid
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Low Bid
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September 30, 2017
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$1.55
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$1.10
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June 30, 2017
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$1.67
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$1.08
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March 31, 2017
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$1.08
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$0.88
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December 31, 2016
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$1.35
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$0.95
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September 30, 2016
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$1.80
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$1.23
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June 30, 2016
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$2.00
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$1.38
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March 31, 2016
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$1.95
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$0.52
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December 31, 2015
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$5.00
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$1.41
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September 30, 2015
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$8.50
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$4.50
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June 30, 2015
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$7.10
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$3.50
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On December 5, 2017, the closing price of our common stock as
reported by the OTCQB was $1.0202 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 December 5, 2017, there were approximately 61 holders of
record of our common stock. As of such date, 21,958,062 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.
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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.
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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
stockholders who have preferential rights superior to those receiving the
distribution.
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Financial Statements
Financial Statements For the Years Ended March 31, 2017 and
2016
Report of Independent Registered Public Accounting firm
Consolidated Balance Sheets
Consolidated Statement of Operations
Consolidated Statement of Stockholders Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statements For the Six Months Ended September 30,
2017 and 2016
Consolidated Balance Sheet
Consolidated Statement of Operations
Condensed Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
The
Alkaline Water Company Inc.
We have audited the accompanying balance sheets of The Alkaline
Water Company Inc. as of March 31, 2017 and the related statements of
operations, stockholders equity (deficit), and cash flows for the year ended
March 31, 2017. 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 companys 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. as of March 31, 2017 and the results of its operations and
its cash flows for the year ended ended March 31, 2017 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, 2017, 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. Managements 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/ AMC Auditing
AMC Auditing
Las Vegas, Nevada
July 11, 2017
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Alkaline Water Company Inc.
We have audited the accompanying consolidated balance sheet of The Alkaline Water Company Inc. as of March 31, 2016 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year ended March 31, 2016. 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. as of March 31, 2016 and the results of its operations and its cash flows for the year ended March 31, 2016 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 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/ AMC Auditing
AMC Auditing
Las Vegas, Nevada
November 21, 2017
F-2
THE ALKALINE WATER COMPANY INC.
CONSOLIDATED BALANCE SHEETS
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and
cash equivalents
|
$
|
603,805
|
|
$
|
1,192,119
|
|
Accounts receivable
|
|
1,419,281
|
|
|
911,390
|
|
Inventory
|
|
819,988
|
|
|
434,708
|
|
Prepaid expenses
|
|
307,247
|
|
|
10,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
3,150,321
|
|
|
2,549,023
|
|
|
|
|
|
|
|
|
Fixed assets - net
|
|
1,120,148
|
|
|
1,226,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
4,270,469
|
|
$
|
3,775,557
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts payable
|
$
|
1,343,824
|
|
$
|
847,452
|
|
Accrued
expenses
|
|
455,916
|
|
|
251,613
|
|
Revolving financing
|
|
1,436,083
|
|
|
475,273
|
|
Current
portion of capital leases
|
|
190,207
|
|
|
243,623
|
|
Note payable, net of debt
discount
|
|
-
|
|
|
283,120
|
|
Note
payable with original issue discount, net of debt discount
|
|
-
|
|
|
41,248
|
|
Derivative liability
|
|
3,407
|
|
|
11,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
3,429,437
|
|
|
2,153,472
|
|
|
|
|
|
|
|
|
Long-term Liabilities
|
|
|
|
|
|
|
Capitalized leases
|
|
8,006
|
|
|
95,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
8,006
|
|
|
95,204
|
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
3,437,443
|
|
$
|
2,248,676
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 100,000,000 shares authorized, Series A issued
20,000,000,
Series C
issued 3,000,000
|
|
23,000
|
|
|
23,000
|
|
Common
stock, Class A - $0.001 par value, 200,000,000 shares authorized
17,532,451 and
14,568,970 share issued and outstanding at March 31, 2017 and March 31,
2016, respectively
|
|
17,531
|
|
|
14,568
|
|
Additional paid in
capital
|
|
24,181,029
|
|
|
21,423,247
|
|
Accumulated deficit
|
|
(23,388,534
|
)
|
|
(19,933,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
833,026
|
|
|
1,526,881
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
$
|
4,270,469
|
|
$
|
3,775,557
|
|
F-3
THE ALKALINE WATER COMPANY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
For the Year Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Revenue
|
$
|
12,763,630
|
|
$
|
7,088,806
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
7,350,394
|
|
|
4,432,459
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
5,413,236
|
|
|
2,656,347
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Sales and marketing
expenses
|
|
4,428,572
|
|
|
2,931,870
|
|
General and administrative
|
|
3,164,101
|
|
|
6,883,287
|
|
Depreciation
|
|
359,556
|
|
|
318,328
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
7,952,229
|
|
|
10,133,485
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
(2,538,993
|
)
|
|
(7,477,138
|
)
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
Interest income
|
|
103
|
|
|
97
|
|
Interest expense
|
|
(367,115
|
)
|
|
(350,053
|
)
|
Amortization of debt discount and
accretion
|
|
(556,331
|
)
|
|
(498,458
|
)
|
Change in derivative
liability
|
|
7,736
|
|
|
43,968
|
|
|
|
|
|
|
|
|
Total other income
(expense)
|
|
(915,607
|
)
|
|
(804,446
|
)
|
|
|
|
|
|
|
|
Net loss
|
$
|
(3,454,600
|
)
|
$
|
(8,281,584
|
)
|
|
|
|
|
|
|
|
EARNINGS PER SHARE (Basic)
|
$
|
(0.22
|
)
|
$
|
(2.19
|
)
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic)
|
|
15,550,257
|
|
|
3,772,941
|
|
F-4
THE ALKALINE WATER COMPANY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Deficit
|
|
|
|
|
|
|
Number
|
|
|
Par
Value
|
|
|
Number
|
|
|
Par
Value
|
|
|
Paid-in Capital
|
|
|
Accumulated
|
|
|
Total
|
|
Balance, March 31, 2015
|
|
20,000,000
|
|
$
|
20,000
|
|
|
2,489,917
|
|
$
|
2,491
|
|
$
|
11,899,999
|
|
$
|
(11,652,350
|
)
|
|
270,140
|
|
Value of warrants issued with capital lease agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,031
|
|
|
|
|
|
78,031
|
|
Shares issued for cash private
placement
|
|
|
|
|
|
|
|
9,223,200
|
|
|
9,222
|
|
|
3,731,042
|
|
|
|
|
|
3,740,264
|
|
Shares issued in connection with note payable
|
|
|
|
|
|
|
|
871,246
|
|
|
871
|
|
|
1,053,279
|
|
|
|
|
|
1,054,150
|
|
Shares issued to contractors
|
|
|
|
|
|
|
|
1,600,000
|
|
|
1,600
|
|
|
2,124,541
|
|
|
|
|
|
2,126,141
|
|
Shares issued to employees
|
|
|
|
|
|
|
|
129,000
|
|
|
129
|
|
|
168,065
|
|
|
|
|
|
168,194
|
|
Warrant exercises
|
|
|
|
|
|
|
|
255,607
|
|
|
255
|
|
|
127,090
|
|
|
|
|
|
127,345
|
|
Stock Options issued to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,241,200
|
|
|
|
|
|
2,241,200
|
|
Preferred Stock issued to directors
|
|
3,000,000
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,281,584
|
)
|
|
(8,281,584
|
)
|
Balance, March 31, 2016
|
|
23,000,000
|
|
$
|
23,000
|
|
|
14,568,970
|
|
$
|
14,568
|
|
$
|
21,423,247
|
|
$
|
(19,933,934
|
)
|
|
1,526,881
|
|
Shares issued for cash private placement
|
|
|
|
|
|
|
|
425,000
|
|
|
425
|
|
|
424,575
|
|
|
|
|
|
425,000
|
|
Shares issued in connection with note
payable
|
|
|
|
|
|
|
|
1,240,000
|
|
|
1,240
|
|
|
1,698,380
|
|
|
|
|
|
1,699,620
|
|
Shares issued to contractors
|
|
|
|
|
|
|
|
251,220
|
|
|
251
|
|
|
378,874
|
|
|
|
|
|
379,125
|
|
Warrant exercises
|
|
|
|
|
|
|
|
814,518
|
|
|
814
|
|
|
299,185
|
|
|
|
|
|
299,999
|
|
Stock Options issued to employees
|
|
|
|
|
|
|
|
249,887
|
|
|
250
|
|
|
(250
|
)
|
|
|
|
|
-
|
|
Stock Repurchase
|
|
|
|
|
|
|
|
(17,144
|
)
|
|
(17
|
)
|
|
(42,982
|
)
|
|
|
|
|
(42,999
|
)
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,454,600
|
)
|
|
(3,454,600
|
)
|
Balance, March 31, 2017
|
|
23,000,000
|
|
$
|
23,000
|
|
|
17,532,451
|
|
$
|
17,531
|
|
$
|
24,181,029
|
|
$
|
(23,388,534
|
)
|
$
|
833,026
|
|
F-5
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
|
|
F-6
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.
F-7
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
|
|
F-8
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.
F-9
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.
F-10
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.
F-11
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.
F-12
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.
F-13
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.
F-14
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.
F-15
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.
F-16
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.
F-17
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.
F-18
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:
F-19
|
|
|
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.
F-20
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.
F-21
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
|
$
|
-
|
|
$
|
-
|
|
F-22
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.
F-23
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).
F-24
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.
F-25
THE ALKALINE WATER COMPANY INC.
|
CONSOLIDATED BALANCE SHEET
|
|
|
September 30, 2017
|
|
|
|
|
|
|
(unaudited)
|
|
|
March 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and
cash equivalents
|
$
|
481,831
|
|
$
|
603,805
|
|
Accounts receivable
|
|
1,848,845
|
|
|
1,419,281
|
|
Inventory
|
|
634,347
|
|
|
819,988
|
|
Prepaid expenses
|
|
340,161
|
|
|
307,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
3,305,184
|
|
|
3,150,321
|
|
|
|
|
|
|
|
|
Fixed assets - net
|
|
1,154,035
|
|
|
1,120,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
4,459,219
|
|
$
|
4,270,469
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts payable
|
$
|
1,451,780
|
|
$
|
1,343,824
|
|
Accrued
expenses
|
|
611,833
|
|
|
455,916
|
|
Revolving financing
|
|
1,846,026
|
|
|
1,436,083
|
|
Current
portion of capital leases
|
|
112,752
|
|
|
190,207
|
|
Derivative liability
|
|
3,407
|
|
|
3,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
4,025,798
|
|
|
3,429,437
|
|
|
|
|
|
|
|
|
Long-term Liabilities
|
|
|
|
|
|
|
Capitalized leases
|
|
-
|
|
|
8,006
|
|
Convertible notes payable, net of debt discount
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
liabilities
|
|
-
|
|
|
8,006
|
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
4,025,798
|
|
$
|
3,437,443
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 100,000,000 shares authorized, Series A issued
20,000,000,
Series C
issued 1,500,000, Series D issued 3,000,000
|
|
24,500
|
|
|
23,000
|
|
Common
stock, Class A - $0.001 par value, 200,000,000 shares authorized
20,540,918
and
17,532,451
shares issued and outstanding at September 30, 2017 and March 31, 2017
respectively
|
|
20,540
|
|
|
17,531
|
|
Additional paid in
capital
|
|
26,657,897
|
|
|
24,181,029
|
|
Accumulated deficit
|
|
(26,269,516
|
)
|
|
(23,388,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
433,421
|
|
|
833,026
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
$
|
4,459,219
|
|
$
|
4,270,469
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-26
THE ALKALINE WATER COMPANY INC.
|
CONSOLIDATED STATEMENT OF OPERATIONS
|
(unaudited)
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
4,841,528
|
|
$
|
3,007,538
|
|
$
|
10,021,722
|
|
$
|
5,954,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
2,753,879
|
|
|
1,896,112
|
|
|
5,705,823
|
|
|
3,686,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
2,087,649
|
|
|
1,111,426
|
|
|
4,315,899
|
|
|
2,267,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
expenses
|
|
1,818,344
|
|
|
1,060,390
|
|
|
3,488,361
|
|
|
2,146,389
|
|
General and administrative
|
|
877,584
|
|
|
1,056,741
|
|
|
2,967,976
|
|
|
1,897,515
|
|
Depreciation
|
|
96,280
|
|
|
90,958
|
|
|
192,559
|
|
|
180,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
2,792,208
|
|
|
2,208,089
|
|
|
6,648,896
|
|
|
4,224,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
(704,559
|
)
|
|
(1,096,663
|
)
|
|
(2,332,997
|
)
|
|
(1,956,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
-
|
|
|
4
|
|
|
-
|
|
|
102
|
|
Interest expense
|
|
(127,836
|
)
|
|
(100,043
|
)
|
|
(251,485
|
)
|
|
(212,644
|
)
|
Amortization of debt
discount and accretion
|
|
(275,333
|
)
|
|
(81,025
|
)
|
|
(295,000
|
)
|
|
(126,283
|
)
|
Change in derivative liability
|
|
-
|
|
|
2,051
|
|
|
-
|
|
|
6,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
(expense)
|
|
(403,169
|
)
|
|
(179,013
|
)
|
|
(546,485
|
)
|
|
(332,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(1,107,728
|
)
|
$
|
(1,275,676
|
)
|
$
|
(2,879,482
|
)
|
$
|
(2,289,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE (Basic)
|
$
|
(0.06
|
)
|
$
|
(0.08
|
)
|
$
|
(0.15
|
)
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic)
|
|
19,778,369
|
|
|
15,390,421
|
|
|
18,877,941
|
|
|
15,070,758
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-27
THE ALKALINE WATER COMPANY INC.
|
CONSOLIDATED STATEMENT OF CASH FLOWS
|
(unaudited)
|
|
|
For the Six Months
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
$
|
(2,879,482
|
)
|
$
|
(2,289,307
|
)
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating
|
|
|
|
|
|
|
Depreciation expense
|
|
192,559
|
|
|
180,397
|
|
Stock compensation expense
|
|
1,670,294
|
|
|
319,125
|
|
Amortization of debt
discount and accretion
|
|
295,000
|
|
|
137,369
|
|
Interest expense converted to equity
|
|
14,583
|
|
|
|
|
Interest expense relating
to amortization of capital lease discount
|
|
51,505
|
|
|
51,504
|
|
Change in derivative liabilities
|
|
-
|
|
|
(6,357
|
)
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
(429,564
|
)
|
|
(168,448
|
)
|
Inventory
|
|
185,641
|
|
|
(112,901
|
)
|
Prepaid expenses and other
current assets
|
|
(32,914
|
)
|
|
(10,294
|
)
|
Accounts
payable
|
|
107,956
|
|
|
110,383
|
|
Accrued expenses
|
|
155,917
|
|
|
138,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING
ACTIVITIES
|
|
(668,505
|
)
|
|
(1,650,263
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
(226,446
|
)
|
|
(79,696
|
)
|
Equipment Deposits -
related party
|
|
-
|
|
|
(104,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH USED IN INVESTING ACTIVITIES
|
|
(226,446
|
)
|
|
(184,315
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from notes
payable
|
|
-
|
|
|
510,000
|
|
Proceeds from convertible note payable
|
|
500,000
|
|
|
-
|
|
Proceeds from revolving
financing
|
|
409,943
|
|
|
87,918
|
|
Proceeds from sale of common stock, net
|
|
-
|
|
|
425,000
|
|
Proceeds from the exercise of warrants, net
|
|
-
|
|
|
300,000
|
|
Repayment of notes payable
|
|
-
|
|
|
(373,727
|
)
|
Repayment of capital lease
|
|
(136,966
|
)
|
|
(117,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY FINANCING
ACTIVITIES
|
|
772,977
|
|
|
832,170
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
(121,974
|
)
|
|
(1,002,408
|
)
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
603,805
|
|
|
1,192,119
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
$
|
481,831
|
|
$
|
189,711
|
|
|
|
|
|
|
|
|
INTEREST PAID
|
$
|
154,497
|
|
$
|
36,023
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-28
THE ALKALINE WATER COMPANY INC.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(unaudited)
|
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The 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. The interim financial statements are condensed and
should be read in conjunction with the Company's latest annual financial
statements and that interim disclosures generally do not repeat those in the
annual statements.
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.
F-29
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.
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. On November 2, 2017, we increased the number of authorized
shares of Series D Preferred Stock in our company to 5,000,000 shares by filing
an Amendment to the foregoing 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
$481,831 and $603,805 in cash and cash equivalents at September 30, 2017 and
March 31, 2017, 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.
F-30
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 September 30, 2017 and March, 31 2017, inventory
consisted of the following:
|
|
September 30,
2017
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
453,858
|
|
$
|
587,689
|
|
Finished goods
|
|
180,489
|
|
|
232,300
|
|
Total inventory
|
$
|
634,347
|
|
$
|
819,989
|
|
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
|
|
5 years
|
|
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 has elected to account for forfeitures as they occur.
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
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.
Fair value measurements
F-31
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.
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.
F-32
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.
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.
On March 30, 2016, the FASB issued Accounting Standards Update
(ASU) 2O16-09) Improvements to Employee Share-based Accounting which amends ASC
718, Compensation Stock Compensation . The ASU includes provisions intended to
simplify various provisions related to how share-based payments are
accounted for and presented in the financial statements. Compensation cost is
ultimately only recognized for awards with performance and/or service conditions
that vest (or for awards with market conditions for which the requisite service
period is satisfied). Under the new guidance, entities are permitted to make an
accounting policy election related to how forfeitures will impact the
recognition of compensation cost. Currently entities are required to develop an
assumption regarding the forfeiture rate on the grant date, which impacts the
estimated amount of compensation cost recorded over the requisite service
period. The forfeiture estimates are updated throughout the service period so
that compensation cost is ultimately only recognized for awards that vest.
Under the new guidance, entities are permitted to make an
accounting policy to either estimate forfeitures each period, as required today
or to account for forfeitures as they occur. The Company elects to account for
forfeitures as they occur. ASU 2O16-O9 is effective for public business entities
for annual reporting periods beginning after December 15, 2O16 and interim
periods within that reporting period.
The Company has evaluated other recent accounting
pronouncements through September 2017 and believes that none of them will have a
material effect on our financial statements.
F-33
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 September 30, 2017 of ($26,269,516). 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:
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
Machinery and Equipment
|
$
|
1,200,293
|
|
$
|
1,012,000
|
|
Machinery under Capital Lease
|
|
735,781
|
|
|
735,781
|
|
Machinery - Construction in Progress
|
|
224,662
|
|
|
185,848
|
|
Office Equipment
|
|
79,681
|
|
|
79,681
|
|
Leasehold Improvements
|
|
-
|
|
|
3,979
|
|
Less: Accumulated Depreciation
|
|
(1,086,382
|
)
|
|
(897,141
|
)
|
Fixed Assets, net
|
$
|
1,154,035
|
|
$
|
1,120,148
|
|
Depreciation expense for the six months ended September 30, 2017 and
September 30 2016 was $193,221and $180,397, respectively.
NOTE 4 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.
F-34
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.
NOTE 5 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
September 30, 2017 was $3,407.
NOTE 6 STOCKHOLDERS EQUITY
Preferred Shares
F-35
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 P. 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.
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 P. Nickolas and
Richard A. Wright (1,500,000 shares to each), pursuant to their employment
agreements dated effective March 1, 2016. On August 17, 2017, Steven P. Nickolas
converted his 1,500,000 shares of Series C Preferred Stock to 1,500,000 shares
of Common Stock.
Grant of Series D Convertible Preferred Stock
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. On November 2, 2017, we increased the number of authorized
shares of Series D Preferred Stock in our company to 5,000,000 shares by filing
an Amendment to the foregoing 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.
F-36
Common Stock
The Company was 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.
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.
Common Stock Issued for Services
Effective April 28, 2017, we issued 610,000 shares of common
stock to six 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.
In consideration for services rendered and to be rendered to
our company pursuant to a services agreement dated July 26, 2016, we issued
consultant 262,596 shares of our common stock on August 23, 2017.
NOTE 7 OPTIONS AND WARRANTS
Stock Option Awards
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 six and
one-half 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.
F-37
In June 2017, two option holders elected to exercise their
stock options. A total of 181,000 stock options were surrendered in exchange for
121,288 common stock shares.
NOTE 8 RELATED PARTY TRANSACTIONS
On November 18, 2016, our company provided notice to Steven P.
Nickolas, our then-president and chief executive officer, of our board of
directors finding that there was 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.
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.
On April 28, 2017, our board of directors appointed David
Guarino as chief financial officer, treasurer, secretary president of our
company.
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. Mr. Wright and Mr. Guarino were each issued 1,000,000 shares
each of the Series D Preferred Stock.
On September 14, 2017, Wright Investment Group LLC, an entity
controlled by Richard A. Wright, chief executive officer, president and
director, advanced $200,000 to the Company.
NOTE 9 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 and 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.
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 and 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 entered into a warrant agreement with the Lessor, pursuant to which
the Company agreed to cancel the previously issued warrant certificate for
72,000 warrants and issue a warrant certificate for warrants 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.
F-38
During the year ended March 31, 2015 the Company agreed to
lease 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 the lease is a
capital asset. As of September 30, 2017 the balance owed to Veterans Capital
Fund, LLC under the lease is $112,752.
NOTE 10 NOTES PAYABLE
On September 20, 2016, we entered into a loan facility
agreement (the Loan Agreement) with Turnstone Capital Inc., whereby Turnstone
Capital Inc. agreed to make available to our company a loan in the aggregate
principal amount of $1,500,000 (the Loan Amount). In June, 2017, the Loan
Agreement was amended to increase the Loan amount to $1,700,000. Pursuant to the
Loan Agreement, Turnstone Capital Inc. 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).
During the year ended March 31, 2017, Turnstone Capital Inc.
made advances totaling $1,000,000. This amount together with accrued interest of
$30,000 was converted to 1,030,000 shares of our common stock on March 31, 2017.
In June, 2017, Turnstone Capital Inc. advanced an additional
$500,000 under the Loan Agreement. The Company evaluated this transaction under
ASC 470-20-30 Debt liability and equity component
and determined that
a debt discount of $295,000 was provided and will be amortized over the
remaining term of the Loan Agreement.
On September 29, 2017, Turnstone Capital Inc. converted the
$500,000 plus accrued interest of 14,583 to 514,583 common shares.
NOTE 11 SUBSEQUENT EVENTS
On October 17, 2017, Wright Investment Group LLC, an entity
controlled by Richard A. Wright, advanced $400,000 to the Company.
On October 25, 2017, Richard A. Wright forfeited stock options
to purchase a total of 148,000 shares of the Companys common stock at prices
ranging between $5.75 and $7.50.
On October 31, 2017, our company and its subsidiaries entered
into a Settlement Agreement and Mutual Release of Claims (the
Settlement
Agreement
) with Steven P. Nickolas, the Nickolas Family Trust, Water
Engineering Solutions, LLC and Enhanced Beverages, LLC, companies and trust that
are controlled or owned by Mr. Nickolas, (collectively, the
Nickolas
Parties
) and McDowell 78, LLC and Wright Investments Group, LLC, a
company controlled or owned by Richard A. Wright, (collectively,
Wright/McDowell). The Settlement Agreement provides, among other things, the
following: a) simultaneous with the full execution of the Settlement Agreement,
we agreed to pay Mr. Nickolas $110,000 in one lump sum (paid); b) in exchange of
700,000 shares of our common stock and 300,000 shares of our Series D Preferred
Stock described above, Mr. Nickolas forfeited his 10,000,000 shares of our
Series A Preferred Stock, to be cancelled for no further consideration; c) upon
the full execution of the
Settlement Agreement, Mr. Nickolas and our company agreed to file the stipulations to dismiss the complaints and counterclaim filed by each of them with prejudice, with each side to bear its own costs and attorney’s fees. In addition, our
company and Wright/McDowell agreed that they will effectuate the dismissal of an arbitration proceeding against the Nickolas Parties with prejudice, with each side to bear its own attorneys’ fees and costs; e) Mr. Nickolas acknowledged and
agreed that the employment agreement between Mr. Nickolas and our company was terminated as of April 7, 2017 and no further amounts are owed to Mr. Nickolas under the employment agreement and we agreed to waive restrictive covenants set out in the
employment agreement; f) we agreed to assume financial responsibility for certain obligations owed by Mr. Nickolas; g) Mr. Nickolas acknowledged and agreed that 1,500,000 stock options with an exercise price of $0.52 issued to Mr. Nickolas on or
about March 1, 2016 has expired and a total of 148,000 stock options issued to Mr. Mr. Nickolas before 2016 will automatically expire 90 days from October 6, 2017, the date Mr. Nickolas ceased being a director of our company; and h) the parties also
agreed to mutual release of claims.
F-39
On November 8, 2017, Richard A. Wright and the Company entered in to an Exchange Agreement and Mutual Release of Claims (the “Exchange Agreement”). The Exchange Agreement provided, among other things, for the following: a) in exchange
for the issuance of 700,000 shares of our common stock and 300,000 shares of our Series D Preferred Stock described above, Richard A. Wright forfeited his 10,000,000 shares of our Series A Preferred Stock, to be cancelled for no further
consideration; and b) Richard A. Wright also agreed to a release of claims against the Company. Also on November 8, 2017, Richard A. Wright forfeited stock options to purchase 1,500,000 shares of our company’s common stock at an exercise price
of $0.52 per share in exchange for the Company agreeing to issue Richard A. Wright an additional 200,000 shares of Series D Preferred Stock.
On November 14, 2017, we withdrew the Certificate of Designation establishing Series A Preferred Stock. There were no shares of Series A Preferred Stock outstanding immediately prior to the withdrawal.
F-40
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 4 above and
Forward-Looking Statements beginning at page 11 above.
Overview
We offer retail consumers bottled alkaline water in 500ml,
700ml, 1-liter, 3-liter and 1-gallon sizes under the trade name
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 minerals from Pink Himalayan Rock
Salts.
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 September, 2017, we had an accumulated
deficit of $26,269,516. 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, 2017, 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 prospectus and eventually secure other sources of financing
and attain profitable operations.
Results of Operations
Our results of operations for the three months ended September
30, 2017 and September 30, 2016 are as follows:
|
|
Three
|
|
|
Three
|
|
|
|
Months Ended
|
|
|
Months
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
$
|
4,841,528
|
|
$
|
3,007,538
|
|
Cost of goods sold
|
|
2,753,879
|
|
|
1,896,112
|
|
Gross profit
|
|
2,087,649
|
|
|
1,111,426
|
|
Net Loss (after operating expenses and other
expenses)
|
|
(1,107,728
|
)
|
|
(1,275,676
|
)
|
27
Our results of operations for the six months ended September
30, 2017 and September 30, 2016 are as follows:
|
|
Six
|
|
|
Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30,
2016
|
|
Revenue
|
$
|
10,021,722
|
|
$
|
5,954,287
|
|
Cost of goods sold
|
|
5,705,823
|
|
|
3,686,825
|
|
Gross profit
|
|
4,315,899
|
|
|
2,267,462
|
|
Net Loss (after operating expenses and other
expenses)
|
|
(2,879,482
|
)
|
|
(2,289,307
|
)
|
Our results of operations for the years ended March 31, 2017
and March 31, 2016 are as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Revenue
|
$
|
12,763,630
|
|
$
|
7,088,806
|
|
Cost of goods sold
|
|
7,350,394
|
|
|
4,432,459
|
|
Gross profit
|
|
5,413,236
|
|
|
2,656,347
|
|
Net Loss (after operating expenses and other
expenses)
|
|
(3,454,600
|
)
|
|
(8,281,584
|
)
|
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the three months
ended September 30, 2017 of $4,841,528, as compared to $3,007,538 for the three
months ended September 30, 2016, an increase of 61% generated by sales of our
alkaline water. The increase in sales is due to the expanded distribution of our
products to additional retailers throughout the country. We had revenue from
sales of our product for the six months ended September 30, 2017 of $10,021,722,
as compared to $5,954,287 for the six months ended September 30, 2016, an
increase of 68% generated by sales of our alkaline water. The increase in sales
is due to the expanded distribution of our products to additional retailers
throughout the country. We had revenue from sales of our product for the year
ended March 31, 2017 of $12,763,630 as compared to $7,088,806 for the year ended
March 31, 2016, an increase of 80%, generated by sales of our alkaline water.
The increase in sales is due to the expanded distribution of our products to
additional retailers throughout the country.
As of September 30, 2017, the product is now available in all
50 states at an estimated 32,000 retail locations. As of September 30, 2016, the
product was available in all 50 states at an estimated 29,000 retail locations.
This increase has occurred primarily through the addition of 5 of the top
national grocery retailers as customer during the year ended March 31, 2017. We
distribute our product through several channels. We sell through large national
distributors (UNFI, KeHe and C&S), which together represent over 150,000
retail outlets. We also sell our product directly to retail clients, including
convenience stores, natural food products stores, large ethnic markets and
national retailers. Some examples of retail clients are, Albertsons, Safeway,
Kroger, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas, Stater Bros.
Markets, Unified Grocers, Bristol Farms, Vallarta, Superior Foods, Ingles, HEB
and Brookshires.
Cost of goods sold is comprised of production costs, shipping
and handling costs. For the three months ended September 30, 2017, we had cost
of goods sold of $2,753,879, or 57% of revenue, as compared to cost of goods
sold of $1,896,112 or 63% of revenue, for the three months ended September 30,
2016. The increase in gross profit rate is a result of reduced raw material cost
through greater volume purchases from our suppliers. For the six months ended
September, 30, 2017, we had cost of goods sold of $5,705,823, or 57% of revenue,
as compared to cost of goods sold of $3,686,825 or 63% of revenue, for the six
months ended September 30, 2016. The increase in gross profit rate is a result
of reduced raw material cost through greater volume purchases from our
suppliers. For the year ended March 31, 2017, we had cost of goods sold of
$7,350,394, or 57.6% of net sales, as compared to cost of goods sold of
$4,432,459, or 62.5% of net sales, for the year ended March 31, 2016. The
decrease in cost of goods sold as a percentage of net sales compared to the same
period last year was due to reduced raw material cost through greater volume
purchases from our suppliers.
Expenses
28
Our operating expenses for the three months ended September 30,
2017 and September 30, 2016 are as follows:
|
|
Three
|
|
|
Three
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Sales and marketing expenses
|
$
|
1,818,344
|
|
$
|
1,060,390
|
|
General and administrative expenses
|
|
876,922
|
|
|
1,056,741
|
|
Depreciation expenses
|
|
96,942
|
|
|
90,958
|
|
Total operating expenses
|
$
|
2,792,208
|
|
$
|
2,208,089
|
|
Our operating expenses for the six months ended September 30,
2017 and September 30, 2016 are as follows:
|
|
Six
|
|
|
Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Sales and marketing expenses
|
$
|
3,488,361
|
|
$
|
2,146,389
|
|
General and administrative expenses
|
|
2,967,314
|
|
|
1,897,515
|
|
Depreciation expenses
|
|
193,221
|
|
|
180,397
|
|
Total operating expenses
|
$
|
6,648,896
|
|
$
|
4,224,301
|
|
Our operating expenses for the year ended March 31, 2017 and
March 31, 2016 are as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Sales and marketing expenses
|
$
|
4,428,672
|
|
$
|
2,931,870
|
|
General and administrative expenses
|
|
3,164,101
|
|
|
6,883,287
|
|
Depreciation expenses
|
|
359,556
|
|
|
318,328
|
|
Total operating expenses
|
$
|
7,952,229
|
|
$
|
10,133,485
|
|
For the three months ended September 30, 2017, our total
operating expenses were $2,792,208, as compared to $2,208,089 for the three
months ended September 30, 2016.
For the three months ended September 30, 2017, the total
included $1,818,344 of sales and marketing expenses and $876,922 of general and
administrative expenses, consisting primarily of approximately $330,792 of stock
option compensation expense, and $273,001 of professional fees.
For the three months ended September 30, 2016 the total
included $1,060,390 of sales and marketing expenses and $1,056,741 of general
and administrative expenses, consisting primarily of approximately $176,500 of
stock option compensation expense, and $370,118 of professional fees.
For the six months ended September 30, 2017, our total
operating expenses were $6,648,896, as compared to $4,224,301 for the six months
ended September 30, 2016.
For the six months ended September 30, 2017, the total included
$3,488,361 of sales and marketing expenses and $2,967,314 of general and
administrative expenses, consisting primarily of approximately $1,670,294 of
stock option compensation expense, and $572,348 of professional fees.
For the six months ended September 30, 2016 the total included
$2,146,389 of sales and marketing expenses and $1,897,515 of general and
administrative expenses, consisting primarily of approximately $319,125 of stock
option compensation expense, and $649,881 of professional fees.
For the year ended March 31, 2017, our total operating expenses
were $7,952,229, as compared to $10,133,485 for the year ended March 31, 2016.
For the year ended March 31, 2017, the total included $4,428,672 of sales and
marketing expenses and $3,164,101 of general and administrative expenses,
consisting primarily of $1,111,196 of wages and related expenses, $1,107,577 of
professional fees and $379,125 in stock compensation expense. Our stock
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.
29
For the year ended March 31, 2016, the total included
$2,931,870 of sales and marketing expenses and $6,883,287 of general and
administrative expenses, consisting primarily of approximately $4,039,291 in
stock compensation expense and $646,244 of professional fees. Our stock
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, 2016.
Liquidity and Capital Resources
Working Capital
|
|
|
At
|
|
|
At
|
|
|
At
|
|
|
|
|
September 30 ,
2017
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
|
Current assets
|
$
|
3,305,184
|
|
|
3,150,321
|
|
$
|
2,549,023
|
|
|
Current liabilities
|
|
4,025,798
|
|
|
3,429,437
|
|
|
2,153,472
|
|
|
Working capital (deficiency)
|
$
|
(720,614
|
)
|
|
(279,116
|
)
|
$
|
395,551
|
|
Current Assets
Current assets as of September 30, 2017 primarily relate to
$481,831 in cash, $1,848,845 in accounts receivable and $634,347 in inventory.
Current assets as of March 31, 2017 and March 31, 2016 primarily relate to
$603,805 and $1,192,119 in cash, $1,419,281 and $911,390 in accounts receivable
and $819,988 and $434,708 in inventory, respectively.
Current Liabilities
Current liabilities as of September 30, 2017 primarily relate
to $1,451,780 in accounts payable, revolving financing of $1,846,026, current
portion of capital leases of $112,752 and accrued expenses of $611,833. Current
liabilities as of March 31, 2017 and March 31, 2016 primarily relate to
$1,343,824 and $847,452 in accounts payable, revolving financing of $1,436,083
and $475,273, accrued expenses of $455,916 and $251,613, notes payable of $-0-
and $324,368, current portion of capital leases of $190,207 and $243,623 and
$3,407.
Cash Flow
Our cash flows for the six months ended September 30, 2017 and
September 30, 2016 are as follows:
|
|
|
Six Months
|
|
|
SixMonths
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Net Cash used in operating
activities
|
$
|
(668,505
|
)
|
$
|
(1,650,263
|
)
|
|
Net Cash used in investing activities
|
|
(226,446
|
)
|
|
(184,315
|
)
|
|
Net Cash provided by
financing activities
|
|
772,977
|
|
|
832,170
|
|
|
Net decrease in cash and cash equivalents
|
$
|
(121,974
|
)
|
$
|
(1,002,408
|
)
|
Our cash flows for the years ended March 31, 2017 and March 31,
2016 are as follows:
|
|
|
Year
|
|
|
Year
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2017
|
|
|
201
6
|
|
|
Net Cash used in operating
activities
|
$
|
(2,553,253
|
)
|
$
|
(3,109,541
|
)
|
|
Net Cash used in investing activities
|
|
(253,170
|
)
|
|
(344,961
|
)
|
|
Net Cash provided by
financing activities
|
|
2,219,109
|
|
|
4,556,508
|
|
|
Net decrease in cash and cash
equivalents
|
$
|
(587,314
|
)
|
$
|
1,102,006
|
|
30
Operating Activities
Net cash used in operating activities was $668,505 for the six
months ended September 30, 2017, as compared to $1,650,263 used in operating
activities for the six months ended September 30, 2016. The decrease in net cash
used in operating activities was primarily due to a $945,371 reduction of net
loss after adding back non cash adjustments in the six months ended September
30, 2017 compared to the six months ended September 30, 2016.
Net cash used in operating activities was $2,593,253 for the
year ended March 31, 2017, as compared to $3,109,541 used in operating
activities for the year ended March 31, 2016.
Investing Activities
Net cash used in investing activities was $226,446 for the six
months ended September 30, 2017, as compared to $184,315 used in investing
activities for the six months ended September 30, 2016. The increase in net cash
used by investing activities was the result of an increase of purchase of fixed
assets and equipment deposits.
Net cash used in investing activities was $253,170 for the year
ended March 31, 2017, as compared to $344,961 used in investing activities for
the year ended March 31, 2016. The net cash used by investing activities was
from purchase of production equipment.
Financing Activities
Net cash provided by financing activities for the six months
ended September 30, 2017 was $772,977, as compared to $832,170 for the six
months ended September 30, 2016. The decrease of net cash provided by financing
activities was mainly attributable to a decrease in proceeds received from
financing activities of $412,975 offset by a decrease in repayment from
financing activities of $353,782.
Net cash provided by financing activities for the year ended
March 31, 2017 was $2,258,109, as compared to $4,556,508 for the year ended
March 31, 2016. The decrease of net cash provided by financing activities was
mainly attributable to a reduced amount of sales of our common stock.
Cash Requirements
We believe that cash flow 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 months will be up to
approximately $3,000,000. We will require additional cash resources to, among
other things, expand broker network, increase manufacturing capacity, expand
retail distribution and add support staff. If our own financial resources and
future 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.
Off-Balance Sheet Arrangements
We have no 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.
31
Changes in and Disagreements with Accountants
on
Accounting and Financial Disclosure
We have been notified that Seale & Beers, CPAs was acquired
by AMC Auditing, LLC. As a result, effective as of November 18, 2016, Seale&
Beers, CPAs resigned as our independent registered public accounting firm and we
engaged AMC Auditing, LLC as our independent registered public accounting firm.
The change of our independent registered public accounting firm from Seale&
Beers, CPAs to AMC Auditing, LLC was approved by our board of directors.
The report of Seale & Beers, CPAs on our financial
statements for our fiscal years ended March 31, 2016 and 2015 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 our fiscal years ended March 31, 2016 and 2015 and in
the subsequent interim period through the date of resignation, there were no
disagreements, resolved or not, with Seale & Beers, CPAs on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures, which disagreement, if not resolved to the satisfaction of
Seale & Beers, CPAs, would have caused Seale & Beers, CPAs to make
reference to the subject matter of the disagreement in connection with its
report.
During our fiscal years ended March 31, 2016 and 2015 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 our fiscal years ended March 31, 2016 and 2015 and in
the subsequent interim period through the date of appointment, we have not
consulted with AMC Auditing, LLC 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 AMC
Auditing, LLC provided to us a written report or oral advice that AMC Auditing,
LLC 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 AMC Auditing, LLC regarding any matter
that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv)
of Regulation S-K 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:
32
Name
|
Position Held
with
Our Company
|
Age
|
Date First
Elected
or Appointed
|
Richard A. Wright
|
President, Chief Executive
Officer,
Vice-President, Chief
Operating Officer, and Director
|
59
|
May 31, 2013
|
David Guarino
|
Chief Financial Officer,
Secretary, Treasurer and
Director
|
53
|
April 28, 2017
|
Aaron Keay
|
Chairman of the Board and
Director
|
40
|
July 22, 2016
|
Bruce Leitch
|
Director
|
59
|
September 8, 2016
|
Business Experience
The following is a brief account of the education and business
experience of our current 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:
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, 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. On August
28, 2016, our board of directors appointed Mr. Wright as chief operating officer
of our company. On April 7, 2017, our board of directors appointed Mr. Wright as
president of our company. On April 28, 2017, Mr. Wright resigned as the
secretary and treasurer of our company and our board of directors appointed Mr.
Wright as the chief executive officer of our company.
David Guarino
On April 28, 2017, Mr. Guarino was appointed as the chief
financial officer, secretary and treasurer and a director of our company. Mr.
Guarino currently holds a bachelor of science in accounting and a masters of
accountancy from the University of Denver. From 2008 to 2013, Mr. Guarino was
President and a Director of Kahala Corp, a worldwide franchisor of multiple
quick service restaurant brands with locations in 49 states and over 25
countries. From 2014 to 2015, Mr. Guarino was President of HTI International
Holdings, Inc., a technology company focused on forward osmosis water filtration
technology. From 2015 until April, 2017, Mr. Guarino has been a consultant to
our company.
Aaron Keay
Mr. Keay has been the President and Managing Partner of Inform
Capital Partner, a corporate finance advisory and merchant banking firm, from
2008 to present. He was the Chairman, CEO and director of Inform Resources
Corp., a mining company listed on the TSX Venture Exchange (the
TSXV
),
from August 2010 until July 10, 2014. Mr. Keay was the CEO, President and
director of IDM Mining Ltd. (formerly Revolution Resources), a mining company
listed on the Toronto Stock Exchange, from 2009 until January 7, 2015. He was a
director of OrganiGram Holdings Inc., an industrial company specializing in the production of condition
specific medical marihuana under license from Health Canada listed on the TSXV,
from September 14, 2010 until July 17, 2014. Mr. Keay was a director of Plateau
Uranium Inc. (formerly Macusani Yellowcake Inc.), a uranium exploration and
development company listed on the TSXV, from April 5, 2013 until September 4,
2014. He was a director of Aftermath Silver Inc. (formerly Full Metal Zinc
Ltd.), a mineral exploration and development company listed on the TSXV, from
February 2011 until December 12, 2013. Mr. Keay holds a Bachelor of Human
Kinetics from the University of British Columbia. On July 22, 2016, Mr. Keay was
appointed as a director of our company and on August 17, 2017, Mr. Keay was
appointed as the Chairman of the Board.
33
Bruce Leitch
Mr. Leitch has been a director of our company since September
8, 2016. During the past five years Mr. Leitch has been actively engaged as a
management consultant with respect to business development strategies and
overseeing the corporate governance requirements for various private companies.
The bulk of his time has been spent as the V.P. Corporate Finance and a Director
for Citadel LED Lighting Corp., a private company engaged in the importation of
innovative LED lighting products with applications in the retail, hospitality,
outdoor lighting and commercial buildings and facilities market sectors.
Mr. Leitch has extensive experience with consumer products
companies, and is well versed in all aspects of branding, marketing, cross
marketing through strategic relationships, interacting with advertising agencies
to create highly focused and effective sales campaigns, along with being very
conversant in wholesale distribution networks, logistics, managing multiple
channels of product distribution and supply chain management. Mr. Leitch has
extensive experience in the capital markets and the securities industry, having
worked for several major financial services institutions as well as having been
an officer, director and principal of several public and private companies.
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;
|
34
|
(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
|
|
|
|
|
(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, 2017
|
|
|
|
|
(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, 2017; 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,
2017,
|
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 years ended March 31, 2017 and 2016 are set out in the
following summary compensation table:
Summary Compensation Table
Years ended March 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
Non-
|
|
|
|
|
|
|
|
|
Equity
|
qualified
|
|
|
|
|
|
|
|
|
Incentive
|
Deferred
|
All
|
|
Name
|
|
|
|
|
|
Plan
|
Compensa-
|
Other
|
|
and
|
|
|
|
Stock
|
Option
|
Compensa-
|
tion
|
Compensa-
|
|
Principal
|
|
Salary
|
Bonus
|
Awards
|
Awards
|
tion
|
Earnings
|
tion
|
Total
|
Position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|
|
|
|
|
|
|
|
|
|
Steven P. Nickolas
|
2017
|
180,000
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
24,035
|
204,035
|
Former President,
|
2016
|
144,000
|
35,000
|
Nil
|
780,000
|
Nil
|
Nil
|
27,640
|
986,640
|
Chief Executive
|
|
|
|
|
|
|
|
|
|
Officer and
|
|
|
|
|
|
|
|
|
|
Director
(1)
|
|
|
|
|
|
|
|
|
|
Richard A. Wright
|
2017
|
168,000
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
22,002
|
190,002
|
President, Chief
|
2016
|
132,000
|
35,000
|
Nil
|
780,000
|
Nil
|
Nil
|
19,544
|
966,544
|
Executive Officer,
|
|
|
|
|
|
|
|
|
|
Vice-President,
|
|
|
|
|
|
|
|
|
|
Chief Operating
|
|
|
|
|
|
|
|
|
|
Officer, Director
|
|
|
|
|
|
|
|
|
|
and Former
|
|
|
|
|
|
|
|
|
|
Secretary and
|
|
|
|
|
|
|
|
|
|
Treasurer
(1)
|
|
|
|
|
|
|
|
|
|
35
Notes:
(1)
|
On April 7, 2017, our company removed Mr. Nickolas as the
president and chief executive officer of our company. On October 6, 2017,
Mr. Nickolas resigned as a director of our company.
|
|
|
(2)
|
On April 7, 2017, our board of directors appointed Mr.
Wright as president of our company. On April 28, 2017, Mr. Wright resigned
as the secretary and treasurer of our company and our board of directors
appointed Mr. Wright as the chief executive officer of our
company.
|
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. On October 31, 2014, our board of directors
amended the 2013 Equity Incentive Plan to, among other things, increase the
number of shares of stock of our company available for the grant of awards under
the plan from 20,000,000 shares to 35,000,000 shares. 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. Effective as of
December 30, 2015, we effected a 50-for-1 reverse stock split of our authorized
and issued and outstanding shares of common stock which decreased the number of
shares of stock of our company available for the grant of awards under the plan
from 35,000,000 shares to 700,000 shares. Effective as of January 20, 2016, our
board of directors amended the plan to increase the number of shares of stock of
our company available for the grant of awards under the plan from 700,000 to
7,700,000. The plan enables us to grant awards of a maximum of 7,700,000 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 9, 2013, we granted a total of 6,000,000
stock options to Steven P. Nickolas and Richard A. Wright (3,000,000 stock
options to each). The stock options were exercisable at the exercise price of
$0.605 per share for a period of ten years from the date of grant. The stock
options vested as follows: (i) 1,000,000 upon the date of grant; and (ii)
500,000 per quarter until fully vested. On October 31, 2014, we reduced the
exercise price of these stock options to $0.15 per share.
Effective May 12, 2014, we granted a total of 1,200,000 stock
options Steven P. 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 P. 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
vested on November 21, 2014.
Effective February 18, 2015, we granted a total of 1,600,000
stock options to Steven P. Nickolas and Richard A. Wright (800,000 stock options
each). The stock options are exercisable at the exercise price of $0.115 per
share for a period of five years from the date of grant. All of these stock
options vested upon the date of grant.
Effective January 29, 2016, we granted a total of 3,000,000
stock options to Steven P. Nickolas and Richard A. Wright (1,500,000 stock
options each). The stock options are exercisable at the exercise price of $0.52
per share until October 7, 2023. All of these stock options vested effective
January 29, 2016.
We estimated compensation expense of $1,560,000 on the stock
options granted that vested during the year ended March 31, 2016, divided
equally between Steven P. Nickolas and Richard A. Wright in the amount of
$780,000 each. The aggregate intrinsic value of these options was $4,290,000 at
March 31, 2016.
36
Employment Agreement with Steven P. Nickolas
On March 30, 2016, we entered into an employment agreement
dated effective March 1, 2016 with Steven P. Nickolas, our former president and
chief executive officer and a former director of our company, 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, we 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). We 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.
In addition, we agreed to (i) provide Mr. Nickolas 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.
Nickolas 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. Nickolas as he
sees fit, including without limitation, the funding of non-qualified retirement
plans; (iii) reimburse Mr. Nickolas for any expenses that he incurs in
connection with his duties under his employment agreement.
On November 18, 2016, our company provided notice to Mr.
Nickolas 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. On October
6, 2017, Mr. Nickolas resigned as a director of our company.
On October 31, 2017, our company and its subsidiaries entered
into the Settlement Agreement with Steven P. Nickolas, the Nickolas Family
Trust, Water Engineering Solutions, LLC and Enhanced Beverages, LLC, companies
and trust that are controlled or owned by Mr. Nickolas, and McDowell 78, LLC and
Wright Investments Group, LLC, a company controlled or owned by Richard A.
Wright. The Settlement Agreement provides that Mr. Nickolas acknowledged and
agreed that the employment agreement between Mr. Nickolas and our company was
terminated as of April 7, 2017 and no further amounts are owed to Mr. Nickolas
under the employment agreement and we agreed to waive restrictive covenants set
out in the employment agreement.
Cash Bonus to Steven P. Nickolas
Effective March 15, 2016, we agreed to pay Mr. Nickolas a cash
bonus in the amount of $35,000 for past services that he has provided to our
company.
Employment Agreement with Richard A. Wright
On March 30, 2016, we 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, we 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). We 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, we 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.
37
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
we do not provide such plans at any time, we agreed to reimburse Mr. Wright for
the reasonable cost of any such plans obtained privately. We 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.
Provided that Mr. Wright has acted within the scope of his
authority, we 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 we 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, we 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 28, 2017, Richard A. Wright resigned as the secretary
and treasurer of our company and he was appointed as the chief executive officer
of our company.
Cash Bonus to Richard A. Wright
Effective March 15, 2016, we agreed to pay Mr. Wright a cash
bonus in the amount of $35,000 for past services that he has provided to our
company.
Grant of Series C Convertible Preferred Stock
On March 30, 2016, we 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) we achieve the consolidated revenue of our company
and all of its subsidiaries 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.
38
Effective March 31, 2016, we issued a total of 3,000,000 shares
of our Series C Preferred Stock (1,500,000 shares to each) to Steven P.
Nickolas, a former director and executive officer of our company, and Richard A.
Wright, a director and executive officer of our company, pursuant to their
employment agreements dated effective March 1, 2016.
On August 17, 2017, we issued 1,500,000 shares of our common
stock to Steven P. Nickolas upon conversion of 1,500,000 shares of our Series C
Preferred Stock held by Mr. Nickolas. The shares of our Series C Preferred Stock
became convertible into shares of our common stock without the payment of any
additional consideration by Mr. Nickolas and at the option of Mr. Nickolas
because the termination of the employment agreement between our company and Mr.
Nickolas was an event constituting a Negotiated Trigger Event as defined in
the Certificate of Designation for our Series C Preferred Stock.
Grant of Series D Convertible Preferred Stock
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.
Effective May 3, 2017, we issued a total of 1,000,000 shares of
our Series D Preferred Stock to Richard A. Wright.
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.
Resignation, Retirement, Other Termination, or Change in
Control Arrangements
Other than the provisions of the employment agreement with Mr.
Wright described below, 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.
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 we 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.
We 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, we 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,
we 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 we 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, we agreed to pay to Mr. Wright the severance
referred to above.
39
We 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.
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,
2017:
40
|
Option awards
|
Stock awards
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
incentive
|
|
|
|
|
|
|
|
|
Equity
|
plan
|
|
|
|
|
|
|
|
|
incentive
|
awards:
|
|
|
|
|
|
|
|
|
plan
|
Market
|
|
|
|
Equity
|
|
|
|
Market
|
awards:
|
or
|
|
|
|
incentive
|
|
|
|
value
|
Number
|
payout
|
|
|
|
plan
|
|
|
Number
|
of
|
of
|
value of
|
|
|
|
awards:
|
|
|
of
|
shares
|
unearned
|
unearned
|
|
Number
|
Number
|
Number
|
|
|
shares
|
of
|
shares,
|
shares,
|
|
of
|
of
|
of
|
|
|
or units
|
units
of
|
units
or
|
units
|
|
securities
|
securities
|
securities
|
|
|
of stock
|
stock
|
other
|
or other
|
|
underlying
|
underlying
|
underlying
|
|
|
that
|
that
|
rights
|
rights
|
|
unexercised
|
unexercised
|
unexercised
|
Option
|
|
have
|
have
|
that have
|
that
|
|
options
|
options
|
unearned
|
exercise
|
Option
|
not
|
not
|
not
|
have not
|
|
(#)
|
(#)
|
options
|
price
|
expiration
|
vested
|
vested
|
vested
|
vested
|
Name
|
exercisable
|
unexercisable
|
(#)
|
($)
|
date
|
(#)
|
($)
|
(#)
|
($)
|
Steven P. Nickolas
(1)
|
60,000
|
Nil
|
Nil
|
7.50
|
October 9,
2023
(2)
|
Nil
|
Nil
|
Nil
|
Nil
|
|
12,000
|
Nil
|
Nil
|
8.25
|
May 12,
2019
(2)
|
Nil
|
Nil
|
Nil
|
Nil
|
|
60,000
|
Nil
|
Nil
|
7.275
|
May 21,
2024
(2)
|
Nil
|
Nil
|
Nil
|
Nil
|
|
16,000
|
Nil
|
Nil
|
5.75
|
February 18,
2020
(2)
|
Nil
|
Nil
|
Nil
|
Nil
|
|
1,500,000
|
Nil
|
Nil
|
0.52
|
October 7,
2023
(2)
|
Nil
|
Nil
|
Nil
|
Nil
|
Richard A. Wright
|
60,000
|
Nil
|
Nil
|
7.50
|
October 9,
2023
(3)
|
Nil
|
Nil
|
Nil
|
Nil
|
|
12,000
|
Nil
|
Nil
|
8.25
|
May 12,
2019
(3)
|
Nil
|
Nil
|
Nil
|
Nil
|
|
60,000
|
Nil
|
Nil
|
7.275
|
May 21,
2024
(3)
|
Nil
|
Nil
|
Nil
|
Nil
|
|
16,000
|
Nil
|
Nil
|
5.75
|
February 18,
2020
(3)
|
Nil
|
Nil
|
Nil
|
Nil
|
|
1,500,000
|
Nil
|
Nil
|
0.52
|
October 7,
2023
(4)
|
Nil
|
Nil
|
Nil
|
Nil
|
Notes:
(1)
|
On April 7, 2017, our company removed Mr. Nickolas as the
president and chief executive officer of our company. On October 6, 2017,
Mr. Nickolas resigned as a director of our company.
|
(2)
|
Pursuant to the Settlement Agreement entered into on
October 31, 2017, Mr. Nickolas acknowledged and agreed that 1,500,000
stock options with an exercise price of $0.52 issued to Mr. Nickolas on or
about March 1, 2016 has expired and a total of 148,000 stock options
issued to Mr. Nickolas before 2016 will automatically expire 90 days from
October 6, 2017, the date Mr. Nickolas ceased being a director of our
company.
|
(3)
|
Effective August 17, 2017, these stock options were
cancelled without consideration in connection with the grant of 1,000,000
shares of Series D Preferred Stock to Mr. Wright, effective May 3,
2017.
|
(4)
|
Pursuant to the Stock Option Forfeiture & General
Release dated November 8, 2017 executed by Richard A. Wright and Sharon
Wright, Mr. Wrights spouse, Mr. Wright acquired 200,000 shares of our
Series D Preferred Stock in exchange for forfeiting, terminating and
cancelling Mr. Wrights stock options to purchase 1,500,000 shares of our
common stock at an exercise price of $0.52 per share, effective as of
November 8, 2017.
|
41
Compensation of Directors
During the fiscal year ended March 31, 2017, directors who were
not our named executive officers did not receive any compensation.
Effective April 28, 2017, we granted 350,000 stock options to
Aaron Keay, a director of our company. These stock options are exercisable at
the exercise price of $1.29 per share for a period of ten years from the date of
grant and vest as follows: (i) 87,500 upon the date of grant; and (ii) 87,500 on
each anniversary date of grant.
Effective April 28, 2017, we granted 100,000 stock options to
Bruce Leitch, a director of our company. These stock options are exercisable at
the exercise price of $1.29 per share for a period of ten years from the date of
grant and vest as follows: (i) 25,000 upon the date of grant; and (ii) 25,000 on
each anniversary date of grant.
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 December 5, 2017,
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 directors, our executive
officers and by our 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
|
2,348,000
(3)
|
10.62%
|
Series D
Preferred
Stock
(6)
|
300,000
|
7.89%
|
Richard A. Wright
14646 N. Kierland Blvd.
Suite 255
Scottsdale, AZ 85254
|
Common Stock
|
1,038,872
(4)
|
4.73%
|
Series C
Preferred
Stock
(5)
|
1,500,000
|
100%
|
Series D
Preferred
Stock
(6)
|
1,500,000
|
39.47%
|
David Guarino
|
Common Stock
|
740,000
|
3.37%
|
Series D
Preferred
Stock
(6)
|
1,000,000
|
26.32%
|
Aaron Keay
|
Common Stock
|
87,500
(7)
|
*
|
Bruce Leitch
|
Common Stock
|
25,000
(8)
|
*
|
All executive officers and
directors as a group (4 persons)
|
Common Stock
|
1,891,372
|
8.57%
|
Series C
Preferred Stock
(5)
|
1,500,000
|
100%
|
Series D
Preferred Stock
(6)
|
2,500,000
|
65.79%
|
Notes
* Less than 1%.
42
(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 Securities and Exchange Commission 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 21,958,062 shares
of our common stock issued and outstanding as of December 5, 2017.
Percentage of Series C Preferred Stock is based on 1,500,000 shares of
Series C Preferred Stock issued and outstanding as of December 5, 2017.
Percentage of Series D Preferred Stock is based on 3,800,000 shares of
Series D Preferred Stock issued and outstanding as of December 5,
2017.
|
|
|
(3)
|
Consists of 2,200,000 shares of our common stock and
148,000 stock options exercisable within 60 days. Except for the number of
stock options, these numbers are approximate numbers based on information
currently available to our company.
|
|
|
(4)
|
Consists of 700,000 shares of our common stock, 169,572
shares of our common stock owned by Lifewater Industries, LLC and 169,300
shares of our common stock owned by WiN Investments, LLC. Richard A.
Wright exercises voting and dispositive power with respect to the shares
of our common stock that are beneficially owned by Lifewater Industries,
LLC and WiN Investments, LLC.
|
|
|
(5)
|
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) we achieve
the consolidated revenue of our company and all of its subsidiaries 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.
|
|
|
(6)
|
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.
|
|
|
(7)
|
Consists of 87,500 stock options exercisable within 60
days.
|
|
|
(8)
|
Consists of 25,000 stock options exercisable within 60
days.
|
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, 2014, or currently proposed transaction, in which our company was
or is to be a participant and the amount involved exceeds $40,230.13, 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 voting securities;
|
|
|
|
|
(c)
|
Any person who acquired control of our company when it
was a shell company or any person that is part of a group, consisting of
two or more persons that agreed to act together for the purpose of
acquiring, holding, voting or disposing of our common stock, that acquired
control of our company when it was a shell company; and
|
|
|
|
|
(d)
|
Any member of the immediate family (including spouse,
parents, children, siblings and in- laws) of any of the foregoing
persons.
|
Related Party Transactions with Water Engineering Solutions,
LLC
On April 2, 2014, we entered into an equipment sale/lease back
agreement with Water Engineering Solutions, LLC for specialized equipment with
an original cost of $208,773 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.
43
Under the terms of the exclusive manufacturing agreement
entered into on April 15, 2013 between our company and Water Engineering
Solutions LLC, we paid $690,000 on May 1, 2014 and $21,500 on June 27, 2014,
$115,000 on July 1, 2014, $10,000 on August 2, 2014 and $100,000 on August 22,
2014 for specialized equipment used in the production of our alkaline water.
Under the terms of the exclusive manufacturing agreement
entered into on April 15, 2013 between our company and Water Engineering
Solutions LLC, an entity that is controlled and majority owned by Steven P.
Nickolas, a stockholder who beneficially owns, directly or indirectly, more than
5% of a class of our voting securities and a former officer and director of our
company, and Richard A. Wright, an officer, director and stockholder of our
company, and during the years ended March 31, 2017 and March 31, 2016, we paid
$104,619 and $312,500, respectively, to Water Engineering Solutions LLC for
custom engineered equipment used in the production of our alkaline water.
Other Related Party Transactions
On August 1, 2013 we 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
sub-lessor was an entity owned by Steven P. Nickolas, a stockholder who
beneficially owns, directly or indirectly, more than 5% of a class of our voting
securities, and a former officer and director. This sub-lease agreement was
terminated at the end of the 3-year term.
During the period from June 19, 2012 to June 30, 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, a stockholder who beneficially owns, directly or indirectly,
more than 5% of a class of our voting securities, and a former officer and
director, 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.
On November 8, 2017, we entered into an Exchange Agreement and
Mutual Release of Claims (the
Exchange Agreement
) with Richard A.
Wright, our president, chief executive officer and director.
The Exchange Agreement provides, among other things, the
following:
|
1.
|
Within five business date of the full execution of the
Exchange Agreement, we agreed to instruct our transfer agent to issue Mr.
Wright 700,000 shares of our common stock (issued on November 9,
2017);
|
|
|
|
|
2.
|
Within 10 business days of the full execution of the
Exchange Agreement, we agreed to issue 300,000 shares of our Series D
Preferred Stock (issued on November 9, 2017);
|
|
|
|
|
3.
|
In exchange of 700,000 shares of our common stock and
300,000 shares of our Series D Preferred Stock described above, Mr. Wright
forfeited his 10,000,000 shares of our Series A Preferred Stock, to be
cancelled for no further consideration; and
|
|
|
|
|
4.
|
The parties also agreed to mutual release of
claims.
|
On November 8, 2017, Richard A. Wright and Sharon Wright, Mr.
Wrights spouse, executed a Stock Option Forfeiture & General Release (the
Stock Option Forfeiture Agreement
).
The Stock Option Forfeiture Agreement provides, among other
things, the following:
|
1.
|
In exchange for, among other things, receipt of 200,000
shares of our Series D Preferred Stock (issued on November 9, 2017), Mr.
Wright agreed that Mr. Wrights stock options to purchase 1,500,000 shares
of our common stock at an exercise price of $0.52 per share were
forfeited, terminated and otherwise cancelled as of November 8, 2017;
and
|
|
|
|
|
2.
|
Mr. Wright also agreed to release of claims against our
company.
|
44
On November 8, 2017, Mr. Wrights stock options to purchase
1,500,000 shares of our common stock at an exercise price of $0.52 per share
were forfeited, terminated and otherwise cancelled.
On October 31, 2017, our company and its subsidiaries entered
into a Settlement Agreement and Mutual Release of Claims with Steven P.
Nickolas, the Nickolas Family Trust, Water Engineering Solutions, LLC and
Enhanced Beverages, LLC, companies and trust that are controlled or owned by Mr.
Nickolas, and McDowell 78, LLC and Wright Investments Group, LLC, a company
controlled or owned by Richard A. See Legal Proceedings above for more
information on the Settlement Agreement and Mutual Release of Claims.
On September 14, 2017, Wright Investment Group LLC, an entity
controlled by Richard A. Wright, our president, chief executive officer and
director, advanced $200,000 to our company. On October 17, 2017, Wright
Investment Group LLC advanced $400,000 to our company.
Compensation for Executive Officers and Directors
Effective April 28, 2017, we issued 130,000 shares of common
stock to David Guarino, who was appointed as the chief financial officer,
secretary, treasurer and a director of our company on the same date. These
shares are restricted from transfer for a period of two years. In addition,
effective May 3, 2017, we issued 1,000,000 shares of our Series D Preferred
stock to Mr. Guarino.
For additional information regarding compensation for our
executive officers and directors, see Executive Compensation.
Director Independence
We currently act with four directors consisting of Richard A.
Wright, David Guarino, Aaron Keay, and Bruce Leitch. 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 have two
independent directors, Aaron Keay and Bruce Leitch.
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
.
45
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The Alkaline Water Company Inc.
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Prospectus
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Up to 3,900,000 Shares of Common Stock Underlying the
Warrants
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December 5, 2017
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46
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