Item 1A. Risk Factors
ITEM 1A. 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 report in evaluating our
company and its business before purchasing our securities. Our business,
operating results and financial condition could be seriously harmed as a result
of the occurrence of any of the following risks. You could lose all or part of
your investment due to any of these risks.
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.
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 March 31, 2018, we had an accumulated
deficit of $30,077,314. 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, 2018, 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.
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We will need additional funds to produce, market, and
distribute our product.
We will have to spend additional funds to produce, market and
distribute our product. If we cannot raise sufficient capital, we may have to
cease operations and you could lose your investment. We will need additional
funds to produce our product for distribution to our target market. Even after
we have produced our product, we will have to spend substantial funds on
distribution, marketing and sales efforts before we will know if we have
commercially viable and marketable/sellable products.
There is no guarantee that sufficient sale levels will be
achieved.
There is no guarantee that the expenditure of money on
distribution and marketing efforts will translate into sufficient sales to cover
our expenses and result in profits. Consequently, there is a risk that you may
lose all of your investment.
Our development, marketing, and sales activities are
limited by our size.
Because we are small and do not have much capital, we must
limit our product development, marketing, and sales activities. As such, we may
not be able to complete our production and business development program in a
manner that is as thorough as we would like. We may not ever generate sufficient
revenues to cover our operating and expansion costs and you may, therefore, lose
your entire investment.
Changes in the non-alcoholic beverage business
environment and retail landscape could adversely impact our financial results.
The non-alcoholic beverage business environment is rapidly
evolving as a result of, among other things, changes in consumer preferences,
including changes based on health and nutrition considerations and obesity
concerns; shifting consumer tastes and needs; changes in consumer lifestyles;
and competitive product and pricing pressures. In addition, the non-alcoholic
beverage retail landscape is very dynamic and constantly evolving, not only in
emerging and developing markets, where modern trade is growing at a faster pace
than traditional trade outlets, but also in developed markets, where discounters
and value stores, as well as the volume of transactions through e-commerce, are
growing at a rapid pace. If we are unable to successfully adapt to the rapidly
changing environment and retail landscape, our share of sales, volume growth and
overall financial results could be negatively affected.
Intense competition and increasing competition in the
commercial beverage market could hurt our business.
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: Core Hydration, SoBe;
Snapple; Arizona Ice Tea; 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.
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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 3 major customers that together account for 51% (25%,
16% and 10%, respectively) of accounts receivable at March 31, 2018, and 3
customers that together account for 47% (25%, 12%, and 10%, respectively) of the
total revenues earned for the year ended March 31, 2018. 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.
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% (35% and 13%
respectively) of purchases for the year ended March 31, 2018. 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.
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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
Himalayan salts, packaging materials for bottles such as plastic and paper
products. The prices for these ingredients, other raw materials and packaging
materials fluctuate depending on market conditions. Substantial increases in the
prices of our or our bottlers ingredients, other raw materials and packaging
materials, to the extent they cannot be recouped through increases in the prices
of finished beverage products, would increase our operating costs and could
reduce our profitability. Increases in the prices of our finished products
resulting from a higher cost of ingredients, other raw materials and packaging
materials could affect the affordability of our product and reduce sales.
An increase in the cost, a sustained interruption in the
supply, or a shortage of some of these ingredients, other raw materials, or
packaging materials and containers that may be caused by a deterioration of our
or our bottlers relationships with suppliers; by supplier quality and
reliability issues; or by events such as natural disasters, power outages, labor
strikes, political uncertainties or governmental instability, or the like, could
negatively impact our net revenues and profits.
Changes in laws and regulations relating to beverage
containers and packaging could increase our costs and reduce demand for our
products.
We and our bottlers intend to offer our product in
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.
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.
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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 half-liter
bottle to $4.99 for a one-gallon bottle, and volumes ranging from half-liter
bottles to one-gallon bottles. We currently offer our product in a one-gallon
bottle for an SRP of $4.99, three-liter bottle for an SRP of $3.99, 1.5 liter at
an SRP of $2.49, 1 liter at an SRP of $1.99, 700 milliliter single serving at an
SRP of $1.19, and a 500 milliliter at an SRP of $0.99. 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.
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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.
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 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.
Our board of directors consists of Richard A. Wright, David A.
Guarino, Aaron Keay, and Bruce Leitch. The activities of our executive officers
are not subject to the review of an independent board of directors.
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 30,989,727 shares of
common stock are issued and outstanding, 1,500,000 shares of Series C Preferred
Stock are issued and outstanding, and 3,800,000 shares of Series D Preferred
Stock are issued and outstanding as of June 28, 2018. Our board of directors has
the authority to cause us to issue additional shares of common stock and
preferred stock, and to determine the rights, preferences and privileges of
shares of our preferred stock, without consent of our stockholders.
Consequently, the stockholders may experience more dilution in their ownership
of our stock in the future.
Trading on the OTCQB or TSX Venture Exchange 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 and listed on the TSX Venture Exchange. Trading in stock quoted on
the OTCQB or TSX Venture Exchange is often 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,
trading of securities on the OTCQB or TSX Venture Exchange is often more
sporadic than the trading of securities listed on a stock exchange like the
NASDAQ, the NYSE or the Toronto Stock Exchange. 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.
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Because we do not intend to pay any cash dividends on our
shares of common stock in the near future, our stockholders will not be able to
receive a return on their shares unless they sell them.
We intend to retain any future earnings to finance the
development and expansion of our business. We do not anticipate paying any cash
dividends on our common stock in the near future. The declaration, payment and
amount of any future dividends will be made at the discretion of the board of
directors, and will depend upon, among other things, the results of operations,
cash flows and financial condition, operating and capital requirements, and
other factors as the board of directors considers relevant. There is no
assurance that future dividends will be paid, and if dividends are paid, there
is no assurance with respect to the amount of any such dividend. Unless we pay
dividends, our stockholders will not be able to receive a return on their shares
unless they sell them.
Our stock is a penny stock. Trading of our stock may be
restricted by the SECs penny stock regulations, which may limit a stockholders
ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange
Commission ( SEC ) has adopted Rule 15g-9 which generally defines penny
stock to be any equity security that has a market price (as defined in Rule
15g-9) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors. The term accredited investor refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC, which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customers
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customers confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules; the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchasers written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a
stockholders ability to buy and sell our stock.
In addition to the penny stock rules promulgated by the SEC,
the Financial Industry Regulatory Authority (FINRA) has adopted rules that
require that in recommending an investment to a customer, a broker-dealer must
have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customers financial status, tax status, investment
objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.