NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles have been omitted. However,
in the opinion of management, all adjustments (which include only normal
recurring adjustments, unless otherwise indicated) necessary to present fairly
the financial position and results of operations for the periods presented have
been made. The results for interim periods are not necessarily indicative of
trends or of results to be expected for the full year. These financial
statements should be read in conjunction with the financial statements of the
Company for the year ended March 31, 2016 (including the notes thereto) set
forth on Form 10-K. The Company uses as guidance the Accounting Standard
Codification (ASC) as established by the Financial Accounting Standards Board
(FASB).
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.
6
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.
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
$88,540 and $1,192,119 in cash and cash equivalents at December 31, 2016 and
March 31, 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 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 December 31, 2016 and March, 31 2016, inventory consisted
of the following:
|
|
December 31,
2016
|
|
|
March 31,
2016
|
|
Raw materials
|
$
|
597,428
|
|
$
|
300,575
|
|
Finished goods
|
|
216,013
|
|
|
134,133
|
|
Total inventory
|
$
|
813,441
|
|
$
|
434,708
|
|
Property and equipment
7
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.
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
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.
|
8
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.
Reclassification
Certain accounts in the prior period were reclassified to
conform to the current period financial statements presentation.
Newly issued accounting pronouncements
During the period ended December 31, 2016, there were several
new accounting pronouncements issued by the Financial Accounting Standards
Board. Each of these pronouncements, as applicable, has been or will be adopted
by the Company. Management does not believe the adoption of any of these
accounting pronouncements has had or will have a material impact on the
Companys consolidated 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 December 31, 2016 of ($22,721,615). In addition, the Companys
development activities since inception have been financially sustained through
debt and equity financing.
9
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:
|
|
December 31, 2016
|
|
|
March 31, 2016
|
|
Machinery and Equipment
|
$
|
1,048,699
|
|
$
|
970,728
|
|
Machinery under Capital Lease
|
|
735,781
|
|
|
735,781
|
|
Machinery Construction in
progress
|
|
85,600
|
|
|
-
|
|
Office Equipment
|
|
58,891
|
|
|
53,631
|
|
Leasehold Improvements
|
|
3,979
|
|
|
3,979
|
|
Less: Accumulated Depreciation
|
|
(808,445
|
)
|
|
(537,585
|
)
|
Fixed Assets, net
|
$
|
1,124,505
|
|
$
|
1,226,534
|
|
Depreciation expense for the nine months ended December 31,
2016 and December 31 2015 was $270,860 and $214,333, respectively.
NOTE 4 EQUIPMENT DEPOSITS RELATED PARTY
During the nine month period ending December 31, 2016 the
company made a net deposit on equipment of $104,619 to Water Engineering
Solutions. During the nine month period ending December 31, 2015 the company
made a net deposit on equipment of $194,997 to Water Engineering Solutions.
Water Engineering Solutions LLC is an entity that is controlled and majority
owned by Steven P. Nickolas and Richard A. Wright for the production of our
alkaline water.
NOTE 5 REVOLVING FINANCING
On February 20, 2014, The Alkaline Water Company Inc., and
subsidiaries, Alkaline 88, LLC and Alkaline Water Corp., entered into a
revolving accounts receivable funding agreement with Gibraltar Business Capital,
LLC (Gibraltar). Under the agreement, from time to time, the Company agreed to
tender to Gibraltar all of our accounts (which is defined as our rights to
payment whether or not earned by performance, (i) for property that has been or
is to be sold, leased, licensed, assigned or otherwise disposed of, or (ii) for
services rendered or to be rendered, or (iii) as otherwise defined in the
Uniform Commercial Code of the State of Illinois). Gibraltar will have the
right, but will not be obligated, to purchase such accounts tendered in its sole
discretion. If Gibraltar purchases such accounts, Gibraltar will make cash
advances to us as the purchase price for the purchased accounts.
The Company assumed full risk of non-payment and
unconditionally guaranteed the full and prompt payment of the full face amount
of all purchased accounts. The Company also agreed to direct all parties
obligated to pay the accounts to send all payments for all accounts directly to
Gibraltar. All collections from accounts will be applied to our indebtedness,
which is defined as the amount owed by us to Gibraltar from time to time, i.e.,
all cash advances, plus all charges, plus all other amounts owning from us to
Gibraltar pursuant to the agreement, less all collections retained by Gibraltar
from either purchased accounts or from us which are applied to indebtedness,
unless Gibraltar elects to hold any such collections to establish reserves to
secure payment of any purchased accounts.
In consideration of Gibraltars purchase of the accounts, the
Company agreed to pay Gibraltar interest on the indebtedness outstanding at the
rate of 8% per annum plus the prime rate in effect at the end of each month with
the prime rate for these purposes never being less than 3.25% per
annum, calculated on a 360-day year and payable monthly. In addition, the
Company agreed to pay to Gibraltar a monthly collateral/management fee in the
amount of 0.5% calculated on the average daily borrowing amount for the given
month and an unused line fee of 0.25% monthly based on the difference between
the actual line of credit and the average daily borrowing amount for the given
month. The Company also agreed to pay to Gibraltar upon execution of the
agreement and as of the commencement of each renewal term, a closing cost of 1%
of the initial indebtedness in addition to the amount of any other credit
accommodations granted from Gibraltar, which amount will be deducted from the
first cash advances.
10
The initial indebtedness is $500,000 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 December 31, 2016 the amount borrowed on this
facility was $532,020.
NOTE 6 DERIVATIVE LIABILITY
On May 1, 2014, the Company sold 346,667 shares of our common
stock and warrants to purchase an aggregate of 173,333 shares of our common
stock, for aggregate gross proceeds of $2,599,999. Each share of common stock
sold in the offering was accompanied by a warrant to purchase one-half of a
share of common stock at an exercise price of $7.50 per share for a period of
five years from the date of issuance. Each share of common stock, together with
each warrant was sold at a price of $7.50. The warrants include down-round
provisions that reduce the exercise price of a warrant and convertible
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 to $5.00 per share. in consideration for the immediate
exercise of the Existing Warrants by the Holders and 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, provided that the
exercise price of the New Warrants will be $6.25 per share, subject to
adjustment in the New Warrants. Each New Warrant has a term of five years from
the date of issuance. Each share of common stock, together with each warrant was
sold at a price of $6.25. The warrants include down-round provisions that reduce
the exercise price of a warrant and convertible instrument. As required by ASC
815 Derivatives and Hedging , if the Company either issues equity shares for a
price that is lower than the exercise price of those instruments or issues new
warrants or convertible instruments that have a lower exercise price, the
investors will be entitled to down-round protection. The Company evaluated
whether its warrants and convertible debt instruments contain provisions that
protect holders from declines in its stock price or otherwise could result in
modification of either the exercise price or the shares to be issued under the
respective warrant agreements. The Company determined that a portion of its
outstanding warrants and conversion instruments contained such provisions
thereby concluding they were not indexed to the Companys own stock and
therefore a derivative instrument. As of December 31, 2016, one holder has 6,667
warrants and the derivative liability associated with these warrants is $1,101.
Pursuant to the engagement agreement dated March 12, 2014 with
H.C. Wainwright & Co., LLC (Wainwright), Wainwright agreed to act as our
exclusive placement agent in connection with the offering. Pursuant to the
engagement agreement, the Company, the Company issued warrants to purchase an
aggregate of 5.5% of the aggregate number of shares of our common stock sold in
the offering, or 19,067 to Wainwright and its designees. These warrants have an
exercise price of $9.38 per share and expire on April 16, 2019. The warrants
include down-round provisions that reduce the exercise price of a warrant and
convertible instrument. As required by ASC 815 Derivatives and Hedging the Company evaluated whether its
warrants and convertible debt instruments contain provisions that protect
holders from declines in its stock price or otherwise could result in
modification of either the exercise price or the shares to be issued under the
respective warrant agreements. The Company determined that a portion of its
outstanding warrants and conversion instruments contained such provisions
thereby concluding they were not indexed to the Companys own stock and
therefore a derivative instrument. As of December 31, 2016, six holders have
21,392 warrants and the derivative liability associated with these warrants is
$2,306.
11
The Company analyzed the warrants and conversion feature under
ASC 815 Derivatives and Hedging to determine the derivative liability. The
Company estimated the fair value of these derivatives using a multinomial
distribution (Lattice) valuation model. The fair value of these warrant
liabilities at March 31, 2016 was $11,143 at December 31, 2016 was $6,357.
Changes in the derivative liability for the period ended December 31, 2016
consist of:
|
|
Nine Months Ended
|
|
|
|
December 31, 2016
|
|
Derivative liability at March
31, 2016
|
$
|
11,143
|
|
Change in derivative liability mark to
market
|
|
(7,736
|
)
|
Derivative liability at
December 31, 2016
|
$
|
3,407
|
|
NOTE 7 STOCKHOLDERS EQUITY
Preferred shares
Grant of series A preferred stock
On October 8, 2013, the Company issued a total of 20,000,000
shares of non-convertible Series A Preferred Stock to Steven A. Nickolas and
Richard A. Wright (10,000,000 shares to each), our directors and executive
officers, in consideration for the past services, at a deemed value of $0.001
per share. The company valued these shares based on the cost considering the
time and average billing rate of these individuals and recorded a $20,000 stock
compensation cost for the year ended March 31, 2014.
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 votes 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.
12
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.
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 affected 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 affected 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
During the period from May 7, 2015 through December 31, 2015,
the Company sold units of our securities at a price of $3.50 per unit. Each unit
consists of one share of our common stock and one non-transferable common stock
purchase warrant, with each common stock purchase warrant entitling the holder
to acquire one additional share of our common stock at a price of $5.00 per
share for a period of two years. The Company sold 223,200 units during the
period ended December 31, 2015 consisting of 223,200 shares of common stock and
223,200 warrants for gross proceeds of $781,200.
The evaluated these transaction using ASC 480-10
Distinguishing liabilities from equity and ASC 505 -10 Equity. The Company
sold 223,200 units and issued 223,200 shares of common stock and issued 223,200
warrants. The warrants were valued using the Black-Scholes option pricing model
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
|
|
|
|
|
13
The proceeds were allocated as follows:
Common stock
|
$
|
414,036
|
|
Warrant
|
|
367,164
|
|
Total proceeds
|
$
|
781,200
|
|
On March 4, 2016, the Company completed the offering and sale
of an aggregate of 9,000,000 shares of our common stock and warrants to purchase
an aggregate of 4,500,000 shares of our common stock, for aggregate gross
proceeds of $2,970,000. Each share of common stock the Company sold in the
offering was accompanied by one-half of a warrant to purchase one share of
common stock at an exercise price of $0.50 per share for a period of two years
from the date of issuance. Each share of common stock and accompanying one-half
of one warrant was sold at a price of $0.33.
These securities have been registered under the Securities Act
of 1933 pursuant to our registration statement on Form S-1, as amended (No.
333-209124), which was declared effective by the Securities and Exchange
Commission on February 11, 2016.
Also on March 4, 2016, the Company used the proceeds of the
Offering to repay loans in the aggregate principal amounts of $1,500,000 In
connection with the repayment of loans in the aggregate principal amounts of
$1,500,000 on March 4, 2016, 526,316 shares of our common stock issued to Neil
Rogers and held in escrow and 1,500,000 shares of our common stock issued to
Turnstone Capital Inc. and held in escrow were cancelled effective as of March
31, 2016.
In June 2016, the Company issued an aggregate of 425,000 shares
of our common stock to six 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
On April 1, 2016, the Company issued 5,000 common shares to
consultant for services rendered that were valued at the market value on that
date of $1.65 per share.
On April 1, 201, the Company issued 12,500 common shares to
consultant for services rendered that were valued at the market value on that
date of $1.65 per share.
On June 1, 2016, the Company issued 65,000 common shares to
consultant for services rendered that were valued at the market value on that
date of $1.75 per share.
On August 18, 2016, the Company issued 50,000 common shares to
consultant for services rendered that were valued at the market value on that
date of $1.53 per share.
On September 20, 2016, the Company agreed to issue 58,720
common shares to consultant for services rendered that were valued at the market
value on that date of $1.70 per share
.
Warrant Exercised
In July 2016, the Company issued 25,600 shares of our common
stock in connection with a cashless exercise of a warrant and cancelled 32,000
warrants were cancelled.
In August 2016 two warrant holders exercised 600,000 warrants
to acquire 600,000 common shares at an exercise price of $0.50 per share.
14
Options Exercised
In August 2016 option holders exercised 85,000 options in a
cashless exercise to acquire 56,705 common shares.
NOTE 8 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.
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
|
|
343,400
|
|
$
|
7.00
|
|
|
8.2
|
|
Granted
|
|
4,310,000
|
|
$
|
0.52
|
|
|
7.8
|
|
Exercised
|
|
-
|
|
$
|
-
|
|
|
-
|
|
Expired/Forfeited
|
|
-
|
|
$
|
-
|
|
|
-
|
|
Outstanding at March 31, 2016
|
|
4,653,400
|
|
$
|
0.92
|
|
|
7.7
|
|
Granted
|
|
-
|
|
$
|
-
|
|
|
-
|
|
Exercised
|
|
(85,000
|
)
|
$
|
0.52
|
|
|
6.4
|
|
Expired/Forfeited
|
|
(8,800
|
)
|
$
|
1.91
|
|
|
6.4
|
|
Outstanding at December 31, 2016
|
|
4,559,600
|
|
$
|
0.92
|
|
|
5.7
|
|
Exercisable at December 31,
2016
|
|
4,559,600
|
|
$
|
0.92
|
|
|
5.7
|
|
Warrants
For the nine months period ended warrants activity at December
31, 2016 is presented in the table below:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
|
of
Warrant
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
|
|
|
|
|
|
|
(years)
|
|
Outstanding at March 31, 2016
|
|
4,988,118
|
|
$
|
0.96
|
|
|
.94
|
|
Granted
|
|
-
|
|
$
|
-
|
|
|
-
|
|
Exercised
|
|
(795,202
|
)
|
$
|
1.58
|
|
|
.13
|
|
Expired/Forfeited
|
|
-
|
|
$
|
5.00
|
|
|
.05
|
|
Outstanding at December 31, 2016
|
|
4,192,916
|
|
$
|
0.84
|
|
|
.67
|
|
Exercisable at December 31,
2016
|
|
4,192,916
|
|
$
|
0.84
|
|
|
.67
|
|
15
In July 2016, the Company issued 25,600 shares of our common
stock in connection with a cashless exercise of a warrant and cancelled 32,000
warrants were cancelled.
On August 20, 2016 two warrant holder exercised 600,000
warrants to acquire 600,000 common shares at an exercise price of $0.50 per
share
NOTE 9 RELATED PARTY TRANSACTIONS
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
On August 1, 2013, the Company entered into a 3-year sub-lease
agreement requiring a monthly payment of $2,085 for office space in Scottsdale,
Arizona, with a basic monthly lease increase of 8% and 7% on each anniversary
date. The Company or the landlord can cancel the lease with 30 days notice. The
sub-lessor is an entity owned by the Companys Chief Executive Officer and
President.
During the nine month period ending December 31, 2016 the
company made a net deposit on equipment of $104,619 to Water Engineering
Solutions. During the nine month period ending December 31, 2015 the company
made a net deposit on equipment of $139,997 to Water Engineering Solutions.
Water Engineering Solutions LLC is an entity that is controlled and majority
owned by Steven P. Nickolas and Richard A. Wright for the production of our
alkaline water.
NOTE 10 INCOME TAXES
The Company accounts for income taxes under ASC 740-10, which
provides for an asset and liability approach of accounting for income taxes.
Under this approach, deferred tax assets and liabilities are recognized based on
antic The Company accounts for income taxes under ASC 740-10, which provides for
an asset and liability approach of accounting for income taxes. Under this
approach, deferred tax assets and liabilities are recognized based on
anticipated future tax consequences, using currently enacted tax laws,
attributed to temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts calculated for
income tax purposes.
For the years ended March 31, 2016 and 2015, the Company
incurred net operating losses and, accordingly, no provision for income taxes
has been recorded. In addition, no benefit for income taxes has been recorded
due to the uncertainty of the realization of any deferred tax assets.
Based on the available objective evidence, including the
Companys history of losses, management believes it is more likely than not that
any net deferred tax assets will not be fully realizable. Accordingly, the
Company provided for a full valuation allowance against its net deferred tax
assets at December 31, 2016 and March 31, 2016, respectively.
In accordance with ASC 740, the Company has evaluated its tax
positions and determined that there are no uncertain tax positions.
16
NOTE 11 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 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.
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 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 12 NOTES PAYABLE
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
bears requires monthly payments of $20,000 per month, along with a final payment
due on August 20, 2016.
On November 2, 2015 the Company issued a promissory note to a
lender in the amount of $125,000. The note requires weekly payments of $2,451
plus interest. The final payment is due on November 19, 2016.
Between June 10, 2016 and June 20, 2016, the Company entered
into loan agreements with various lenders pursuant to which the Company issued
convertible promissory notes of our company in the aggregate principal amount of
$260,000, The convertible promissory note bears interest at the rate of 10% per
annum and matures on June 10, 2017 and is convertible into common shares at
$1.00 per share. The Company evaluated this transaction under ASC 470-20-30
Debt liability and equity component
determine that a Debt Discount of $240,100 was provided and will be
amortized over the 1-year term of the note. As of December 31, 2016, the
unamortized debt discount was $100,041.
17
On September 20, 2016 the Company agreed to a $1,000,000 loan
facility which also included a conversion right of principal and/or accrued
interest the convertible note bears interest at the rate of 10% per annum and
matures on December 20, 2018 and is convertible into common shares at $1.00 per
share. As of December 31, 2016 the Company had drawn $750,000 of the facility.
The Company evaluated this transaction under ASC 470-20-30
Debt liability
and equity component
determine that a Debt Discount of $219,520 was
provided and will be amortized over the 2-year term of the note. As of December
31, 2016, the unamortized debt discount was $189,854.
NOTE 13 SUBSEQUENT EVENTS
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.
18
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.
On February 1, 2017, the Company drew $686,080.94 from the
Revolving Facility, to be disbursed as follows: $628,782.94 to pay off the
amount borrowed from Gibraltar Business Capital, LLC (Gibraltar) under the
revolving accounts receivable funding agreement dated February 20, 2014 (paid
off on February 1, 2017) and the balance for the closing costs.
As of February 1, 2017, the Company and Gibraltar 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
19