ALKALINE WATER Co INC 10-Q

Item 1. Legal Proceedings. Our company is aware that we have been named in a lawsuit filed on August 9, 2017, by Steven P. Nickolas, a stockholder of our company and our former president and chief executive officer and a former director of our company, in the Maricopa County, Arizona, Superior Court, styled as “Nickolas v. The Alkaline Water Company, Inc., et al.,” cause number CV2017-007786. In the complaint in that action, Mr. Nickolas seeks damages and injunctive relief compelling our company to issue a certificate for 1,500,000 shares of our common stock, which he alleges to have converted from the same number of Series C preferred stock on July 16, 2017. This lawsuit has been dismissed with prejudice pursuant to a Settlement Agreement and Mutual Release of Claims dated October 31, 2017 detailed below in this Item 1. Our company is a defendant in a lawsuit filed on April 11, 2017 by Steven P. Nickolas in the Maricopa County, Arizona, Superior Court, “Nickolas v. The Alkaline Water Company, Inc., et al.,” cause number CV2017-053064. Mr. Nickolas seeks damages arising out of the alleged breach of a written employment agreement between our company and Mr. Nickolas. Mr. Nickolas alleges that our company wrongfully terminated the employment agreement and has failed to pay wages due to him under the employment agreement. Our company denies the allegations of the claims, and has counterclaimed against Mr. Nickolas for damages suffered by our company as a result of numerous breaches of fiduciary duty owed to our company by Mr. Nickolas in his capacity as officer and director of our company, including diversion of corporate assets to personal matters, and actively interfering with our company’s suppliers and customers. This lawsuit against our company, along with our counterclaims, has been dismissed with prejudice pursuant to a Settlement Agreement and Mutual Release of Claims dated October 31, 2017 detailed below in this Item 1. 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 A. Wright, David Guarino, and Aaron Keay (current directors of our company), and Daniel Lorey (current employee of our company) and our company’s former accounting firm, Seale & Beers, LLC. The lawsuit is pending in the Maricopa County, Arizona, Superior Court, “Steven P. Nickolas, derivatively on behalf of the Alkaline Water Company, v. Richard A. 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 in this Item 1. Steven P. Nickolas also filed virtually an identical lawsuit to the Derivative Action in his individual capacity against Richard A. Wright, David Guarino, and Dan Lorey. The lawsuit was filed on April 6, 2017 and is pending in the Maricopa County, Arizona, Superior Court, “Steven P. Nickolas vs. Richard A. Wright et al.” cause number CV2017-005486 (the “Individual Action”). The allegations in the Individual Action are nearly identical to those in the Derivative Action. We anticipate that the defendants will defend the action vigorously, and are 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 individual parties has been dismissed with prejudice pursuant to a Settlement Agreement and Mutual Release of Claims dated October 31, 2017 detailed below in this Item 1. 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. Simultaneous with the full execution of the Settlement Agreement, we agreed to pay Mr. Nickolas $110,000 in one lump sum (paid); 2. 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; 3. Within three business date of the full execution of the Settlement Agreement, we agreed to instruct our transfer agent to issue to Mr. Nickolas 700,000 shares of our common stock (issued); 4. Within 10 business days of the full execution of the Settlement Agreement, we agreed to issue to Mr. Nickolas 300,000 shares of our Series D Preferred Stock (issued); 5. 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; 6. 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; 7. 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; 8. 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. 9. 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; 10. 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; 11. 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 12. The parties also agreed to mutual release of claims. 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. Item 1A. Risk Factors. Information regarding risk factors appears in our Annual Report on Form 10-K filed on July 14, 2017. There have been no material changes since July 14, 2017 from the risk factors disclosed in that Form 10-K.