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, we may have
difficulty realizing consistent and meaningful revenues and achieving
profitability.
We were incorporated on June 6, 2011, and we only began
producing and distributing alkaline bottled water in 2013. Since we have a
limited operating history, our ability to successfully develop our products and
to realize consistent and meaningful revenues and to achieve profitability has
not been established and cannot be assured. For us to realize consistent,
meaningful revenues and to achieve profitability, 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 products.
Our financial statements are prepared using generally accepted
accounting principles in the United States 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, 2019, we had an accumulated deficit of
$38,694,879. 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.
Our disclosure controls and procedures and internal
control over financial reporting are not effective, which may cause our
financial reporting to be unreliable and lead to misinformation being
disseminated to the public.
Our management evaluated our disclosure controls and procedures
as of March 31, 2019 and concluded that as of that date, our disclosure controls
and procedures were not effective. In addition, our management evaluated our
internal control over financial reporting as of March 31, 2019 and concluded
that that there were material weaknesses in our internal control over financial
reporting as of that date and that our internal control over financial reporting
was not effective as of that date. Our independent registered
public accounting firm audited our internal control over financial reporting as
of March 31, 2019 and disclaimed an opinion on our internal controls over financial
reporting as of that date. A material weakness is a control deficiency, or
combination of control deficiencies, such that there is a reasonable possibility
that a material misstatement of the financial statements will not be prevented
or detected on a timely basis.
We have not yet remediated these material weaknesses and we
believe that our disclosure controls and procedures and internal control over
financial reporting continue to be ineffective. Until these issues are
corrected, our ability to report financial results or other information required
to be disclosed on a timely and accurate basis may be adversely affected and our
financial reporting may continue to be unreliable, which could result in
additional misinformation being disseminated to the public. Investors relying
upon this misinformation may make an uninformed investment decision.
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We will need additional funds to continue producing,
marketing, and distributing our products.
We will have to spend additional funds to continue producing,
marketing and distributing our products. If we cannot raise sufficient capital,
we may have to cease operations. We will need
additional funds to continue to produce our products for distribution to our
target market.
We will have to continue 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 of our relative size, we must
limit our product development, marketing, and sales activities to the amount of capital we raise. 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.
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® Iced Tea, Vitaminwater®, Gatorade Perform®, and POWERADE®.
We compete indirectly with major international beverage
companies including but not limited to: The Coca-Cola Company®, PepsiCo, Inc.,
The Nestlé Group, Dr Pepper Snapple Group, Inc, Danone S.A., The Kraft Heinz
Company, and Unilever PLC. These companies have established market presence in
the United States and globally, and offer a variety of beverages that are
competitors to our products. 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 Naturally
Alkaline® Spring Water, Essentia®, CORE® Hydration, Icelandic Glacial, Real
Water®, AQUAhydrate®, Mount Valley Spring Water, QURE Water®, Penta® Water, 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 products, and to gain
sufficient market share in the United States and around the world 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.
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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 enough to allow our company to successfully market, distribute
and sell our products, or to successfully compete with current or future
competition, all of which may result in total loss of your investment.
A failure to introduce new products or product extensions
into new marketplaces successfully could prevent us from achieving long-term
profitability.
We compete in an industry characterized by rapid changes in
consumer preferences, so our ability to continue developing new products to
satisfy our consumers changing preferences will determine our long-term
success. A failure to introduce new products or product extensions into new
marketplaces successfully could prevent us from achieving long-term
profitability. In addition, customer preferences are also affected by factors
other than taste, such as the publicity. If we do not adjust to respond to these
and other changes in customer preferences, our sales may be adversely affected.
In addition, a failure to obtain any required regulatory approvals for our
proposed products could have a material adverse effect on our business,
operating results and financial condition.
Our growth and profitability depends on the performance
of third-party brokers and distributors and on our ongoing relationships 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 of your investment. To distribute our products, we use a
broker-distributor-retailer network whereby brokers represent our products to
distributors and retailers who will in turn sell our products to consumers. The
success of this network will depend on the performance of the brokers,
distributors and retailers within this network. There is a risk that a broker,
distributor, or retailer may refuse to or cease to market or carry our products.
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 products in localities that may not be
receptive to our products. 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 products. 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 46% (28%
and 18%, respectively) of accounts receivable at March 31, 2019, and 2 customers
that together account for 43% (25% and 18%, respectively) of the total revenues
earned for the year ended March 31, 2019. There can be no assurance that such
customers will continue to order our products at 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 2 vendors that accounted for 50% (34% and 16%,
respectively) of purchases for the year ended March 31, 2019. 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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Our business is sensitive to public perception. If any
product proves to be harmful to consumers or if scientific studies provide
unfavorable findings regarding their safety or effectiveness, then our image in
the marketplace would be negatively impacted.
Our results of operations may be significantly affected by the
publics perception of our company and similar companies. Our business could be
adversely affected if any of our products or similar products distributed by
other companies proves to be harmful to consumers or if scientific studies
provide unfavorable findings regarding the safety or effectiveness of our
products or any similar products. If our products suffer from negative consumer
perception, it is likely to adversely affect our business and results of
operations.
Consumers may have preconceptions about the health
benefits of alkaline water; such health benefits are not guaranteed or
proven.
Health benefits of alkaline water are not guaranteed and have
not been proven. Although we do not market our products as having any potential
health benefits, 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. We are also prohibited from touting unconfirmed
health benefits in our advertising and promotional activities for the products,
both directly and indirectly through claims made by third-party endorsers when
those endorsers have a material connection to our company.
Water scarcity and poor quality could negatively impact
our production costs and capacity.
Water is the main ingredient in our products. 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 and 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, could 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 products 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.
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 products 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 products in the United States
could reduce our profitability.
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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 products and contribute to lower sales, which could have an adverse effect
on our results of operations for such periods.
We rely on third parties to produce and bottle our
products, which creates additional risk.
We do not own or operate bottling or co-packing facilities used
for the production of the various water products in our portfolio. We rely on
those third parties to ensure the quality, safety and integrity of our products.
If the third parties that we engage to produce and bottle our products fail to
meet our demands or are found by government agencies to be out of compliance
with applicable regulatory requirements, our supplies of those products and our
future profit margins could be adversely affected.
Product contamination or tampering or issues or concerns
with respect to product quality, safety and integrity could adversely affect our
business, reputation, financial condition or results of operations.
Product contamination or tampering, the failure to maintain
high standards for product quality, safety and integrity, including with respect
to raw materials and ingredients obtained from suppliers, or allegations
(whether or not valid) of product quality issues, mislabeling, misbranding,
spoilage, allergens, adulteration or contamination with respect to products in
our portfolio may reduce demand for such products, and cause production and
delivery disruptions or increase costs, each of which could adversely affect our
business, reputation, financial condition or results of operations. If any of
the products in our portfolio are mislabeled or become unfit for consumption or
cause injury, illness or death, or if appropriate resources are not devoted to
product quality and safety (particularly as we expand our portfolio into new
categories) or to comply with changing food safety requirements, we could decide
to, or be required to, recall products or withdraw from the marketplace and/or
we may be subject to liability or government action, which could result in
payment of damages or fines, cause certain products in our portfolio to be
unavailable for a period of time, result in destruction of product inventory, or
result in adverse publicity (whether or not valid), which could reduce consumer
demand and brand equity. Moreover, even if allegations of product contamination
or tampering or suggestions that our products were not fit for consumption are
meritless, the negative publicity surrounding assertions against us or products
in our portfolio or processes could adversely affect our reputation or brands.
Our business could also be adversely affected if consumers lose confidence in
product quality, safety and integrity generally, even if such loss of confidence
is unrelated to products in our portfolio. Any of the foregoing could adversely
affect our business, reputation, financial condition or results of operations.
In addition, if we do not have adequate insurance, if we do not have enforceable
indemnification from suppliers, bottlers, distributors or other third parties or
if indemnification is not available, the liability relating to such product
claims or disruption as a result of recall efforts could materially adversely
affect our business, financial condition or results of operations.
Our products are considered premium beverages and are
being sold at premium prices compared to our competitors products; 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, Core, 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 a suggested resale price or 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 products. We can provide no assurances that consumers
will continue to purchase our products or that they will not prefer to purchase
a competitive product.
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.
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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 regularly evaluate potential expansion into
international markets, and any expansion into such international operations
could subject us to risks and expenses that could adversely impact our business,
financial condition and results of operations.
To date, we have not undertaken substantial commercial
activities outside of the United States. We have evaluated, and continue to
evaluate, potential expansion into certain other international markets. If and
when we seek to expand internationally in the future, our sales and operations
would be subject to a variety of risks, including fluctuations in currency
exchange rates, tariffs, import restrictions and other trade barriers,
unexpected changes in legal and regulatory requirements, longer accounts
receivable payment cycles, potentially adverse tax consequences, and difficulty
in complying with foreign laws and regulations, as well as U.S. laws and
regulations that govern foreign activities. Economic uncertainty in some of the
geographic regions in which we might operate could result in the disruption of
commerce and negatively impact our operations in those areas. Also, if we choose
to pursue international expansion efforts, it may be necessary or desirable to
contract with third parties, and we may not be able to enter into such
agreements on commercially acceptable terms or at all. Further, such
arrangements may not perform to our expectations, and we may be exposed to
various risks as a result of the activities of our partners.
We rely on key executive officers who have extensive
knowledge of our business and the industry in which we operate; the loss of any
of these key executive officers would be difficult to replace and may adversely
affect our business.
We are highly dependent on three executive officers, Richard
Wright, David Guarino and Ronald DaVella, who have extensive knowledge of our
business and the industry in which we operate. We do not have key person life
insurance policies for either of these officers. The loss of Richard Wright,
David Guarino and/or Ronald DaVella 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.
If we are unable to protect our information systems
against service interruption, misappropriation of data or breaches of security,
our operations could be disrupted, we may suffer financial losses and our
reputation may be damaged.
We rely on networks and information systems and other
technology ( information systems ), including the Internet and
third-party hosted services, to support a variety of business processes and
activities, including procurement and supply chain, manufacturing, distribution,
invoicing and collection of payments, employee processes and consumer marketing.
We use information systems to process financial information and results of
operations for internal reporting purposes and to comply with regulatory
financial reporting and legal and tax requirements. In addition, we depend on
information systems for digital marketing activities and electronic
communications between our company and our bottlers and other customers,
suppliers and consumers. Because information systems are critical to many of our
operating activities, our business may be impacted by system shutdowns, service
disruptions or security breaches. These incidents may be caused by failures
during routine operations such as system upgrades or by user errors, as well as
network or hardware failures, malicious or disruptive software, unintentional or
malicious actions of employees or contractors, cyberattacks by common hackers,
criminal groups or nation-state organizations or social-activist (hacktivist)
organizations, geopolitical events, natural disasters, failures or impairments
of telecommunications networks, or other catastrophic events. In addition, such
incidents could result in unauthorized or accidental disclosure of material
confidential information or regulated individual personal data. If our
information systems suffer severe damage, disruption or shutdown and our
business continuity plans do not effectively resolve the issues in a timely
manner, we could experience delays in reporting our financial results, and we
may lose revenue and profits as a result of our inability to timely manufacture,
distribute, invoice and collect payments for concentrate or finished products.
Unauthorized or accidental access to, or destruction, loss, alteration,
disclosure, falsification or unavailability of, information could result in
violations of data privacy laws and regulations, damage to the reputation and
credibility of our company and, therefore, could have a negative impact on net
operating revenues. In addition, we may suffer financial and reputational damage
because of lost or misappropriated confidential information belonging to us, our
current or former employees, our bottling partners, other customers or
suppliers, or consumers or other data subjects, and may become exposed to legal
action and increased regulatory oversight. We could also be required to spend
significant financial and other resources to remedy the damage caused by a
security breach or to repair or replace networks and information systems.
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In addition, third-party providers of data hosting or cloud
services, as well as our bottling partners, distributors, retailers or
suppliers, may experience cybersecurity incidents that may involve data we share
with them. Although we have taken steps to prevent cybersecurity incidents,
there can be no assurance that such steps will be adequate. In order to address
risks to our information systems, we continue to make investments in personnel,
technologies and training of our personnel.
Risks Related to Regulations Applicable to our Industry
Changes in laws and regulations relating to beverage
containers and packaging could increase our costs and reduce our net operating
revenues or profitability.
We and our bottlers offer our products in non-refillable,
recyclable containers in the United States. Regulations 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. Current regulations or the adoption of future
regulations in the geographical regions in which we currently operate or intend
to operate could adversely 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 products 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 products relating to the content or perceived adverse health consequences of
our products. Federal laws may preempt some or all of these attempts by state or
localities to impose additional labeling or warning requirements. If these types
of requirements become applicable to our products under current or future
environmental or health laws or regulations, they may inhibit sales of our
products. Moreover, if we fail to meet compliance deadlines for any such new
requirements, our products may be deemed misbranded or mislabeled and could be
subject to enforcement action, or we could be exposed to private lawsuits
alleging misleading labels or product promotion.
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 currently marketed products
are subject to: the Federal Food, Drug, and Cosmetic Act; the Federal Trade
Commission Act; the Lanham Act; state food and drug laws; 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. 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.
If we fail to comply with personal data protection laws,
we could be subject to adverse publicity, government enforcement actions and/or
private litigation, which could negatively affect our business and operating
results.
In the ordinary course of our business, we receive, process,
transmit and store information relating to identifiable individuals
( personal data ), primarily employees and former employees. As a result,
we are subject to various U.S. federal and state and foreign laws and
regulations relating to personal data. These laws have been subject to frequent
changes, and new legislation in this area may be enacted in other jurisdictions
at any time. There is no assurance that our security controls over personal
data, the training of employees and vendors on data privacy and data security,
and the policies, procedures and practices we implemented or may implement in
the future will prevent the improper disclosure of personal data. Improper
disclosure of personal data in violation of applicable personal data protection
laws could harm our reputation, cause loss of consumer confidence, subject us to
government enforcement actions (including fines), or result in private
litigation against us, which could result in loss of revenue, increased costs,
liability for monetary damages, fines and/or criminal prosecution, all of which
could negatively affect our business and operating results.
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If we produce, market and/or sell beverages infused with
hemp, as defined under the Agriculture Improvement Act of 2018, we will be
subject to a myriad of different laws and regulations governing the use of hemp
in food and beverages and if we are unable to comply with such laws in a
cost-effective manner, our business could be adversely affected.
The production of a beverage infused with hemp, as hemp is
defined in the Agriculture Improvement Act of 2018 (also known as the 2018 Farm
Bill, Public Law 115-334), is contingent on U.S. Food and Drug Administration,
or the FDA, and state laws, regulations, and guidance. While the Agriculture
Improvement Act of 2018 removed hemp from Schedule I of the Controlled
Substances Act, the law did not change the FDAs authorities with respect to
food or drugs. As of June 28, 2019, the FDA has not made a determination that
the use of hemp in food is safe. The FDA has evaluated Generally Recognized as
Safe or GRAS notices for three hemp seed-derived food ingredients and determined
that the agency has no questions that those ingredients are GRAS under their
intended conditions of use. We intend to comply in full with all federal, state,
and local laws, rules and regulations as we develop our hemp alkaline water and
other product lines. We will not pursue the production or sale of hemp-infused
products until legally permitted.
Laws and regulations governing the use of hemp in food and
beverages in the United States are broad in scope; subject to evolving
interpretations; and subject to enforcement by a myriad of regulatory agencies
and law enforcement entities. Under the Agriculture Improvement Act of 2018, a
state or Indian tribe that desires to have primary regulatory authority over the
production of hemp in the state or territory of the Indian tribe must submit a
plan to monitor and regulate hemp production to the Secretary of the United
States Department of Agriculture or USDA. The Secretary must then approve the
state or tribal plan after determining if the plan complies with the
requirements set forth in the Agriculture Improvement Act of 2018. The Secretary
may also audit the state or Indian tribes compliance with the
federally-approved plan. If the Secretary does not approve the state or Indian
tribes plan, then the production of hemp in that state or territory of that
Indian tribe will be subject to a plan established by USDA. USDA has not yet
established such a plan. We anticipate that many states will seek to have
primary regulatory authority over the production of hemp. States that seek such
authority may create new laws and regulations that permit the use of hemp in
food and beverages.
Federal and state laws and regulations on hemp may address
production, monitoring, manufacturing, distribution, and laboratory testing to
ensure that that the hemp has a delta-9 tetrahydrocannabinol concentration of
not more than 0.3 percent on a dry weight basis. Federal laws and regulations
may also address the transportation or shipment of hemp or hemp products, as the
Agriculture Improvement Act of 2018 prohibits states and Indian tribes from
prohibiting the transportation or shipment of hemp or hemp products produced in
accordance with that law through the state or territory of the Indian tribe, as
applicable. Because we rely on a nationwide broker-distributor-retailer network
whereby brokers represent our products to distributors and retailers in turn
sell our product to consumers in the fifty states and the District of Columbia,
we may be subject to many different state-based regulatory regimens for hemp,
all of which could require us to incur substantial costs associated with
compliance requirements. In addition, violations of these laws, or allegations
of such violations, could disrupt our business and result in a material adverse
effect on our operations, as well as adverse publicity and potential harm to our
reputation. We and our suppliers and vendors must take significant enterprise
risk management steps to ensure that there is no commingling of hemp and
marihuana, as marihuana is defined in the federal Controlled Substances Act.
Marihuana remains subject to the Controlled Substances Act and related
regulations.
Furthermore, if we decide to produce, market and sell beverages
infused with hemp outside of the United States, we will be subject to applicable
laws and regulations in those non-U.S. jurisdictions, which would require us to
expend significant costs associated with compliance.
In addition, it is possible that additional regulations may be
enacted in the future in the United States and globally that will be directly
applicable to our proposed product offerings infused with hemp. We cannot
predict the nature of any future laws, regulations, interpretations, or
applications, nor can we determine what effect additional governmental
regulations or administrative policies and procedures, when and if promulgated,
could have on our business.
FDAs current position is that the sale of food and
beverages that contain hemp-derived cannabidiol or CBD is prohibited under the
Federal Food, Drug, and Cosmetic Act; therefore, if we decide to produce, market
and/or sell beverages infused with hemp-derived cannabidiol, we may be subject
to federal enforcement actions which could adversely affect our business and
harm our reputation and brand.
13
The FDA has jurisdiction over drugs and foods that contain CBD,
including CBD derived from hemp. Under the Federal Food, Drug and Cosmetic Act
or the FDCA, it is a prohibited act to introduce or deliver for introduction
into interstate commerce any food (which the FDCA defines to include beverages)
that is adulterated. The FDCA therefore prohibits the introduction or delivery
for introduction of a food that contains CBD, because the FDCA deems a food to
be adulterated if it bears or contains any food additive that is unsafe and CBD
is presently an unsafe food additive under the FDCA and FDA regulations. The
FDCA also states that it is a prohibited act to introduce or deliver for
introduction into interstate commerce any food to which an FDA-approved drug has
been added, unless certain exceptions are met.The FDA has approved a drug in
which CBD is an active ingredient, and the agency has stated that based on
available evidence, none of the exceptions apply to CBD. One of the exceptions
addresses whether the drug was marketed in food before the FDA approved the drug
and before the institution of any substantial clinical investigations involving
the drug. The FDA has stated that interested parties may present the agency with
evidence that has bearing on the issue of whether CBD was marketed in food
before the FDA approved the CBD drug in 2018 or before the institution of
substantial clinical investigations involving the CBD drug. FDAs current
position is that this provision of the FDCA also prohibits the introduction or
delivery for introduction into interstate commerce of a food to which CBD has
been added.
Congress may decide to amend the FDCA to permit the use of
hemp-derived CBD in food. The FDA may also decide to issue regulations or
guidance that address the use of hemp-derived CBD in food or use its enforcement
discretion with respect to hemp-derived CBD products. On May 31, 2019, the FDA
held a public hearing, as well as providing a broader opportunity for written
public comment, for stakeholders to share their experiences and challenges with
CBD products, including information and views related to product safety. Based
on this hearing, any legislative or regulatory action could take years to
implement or finalize and may not include provisions that would enable our
company to produce, market and/or sell hemp beverages that contain hemp-derived
CBD. We risk becoming subject to adverse publicity and costly federal
enforcement actions should we decide to produce, market and/or sell beverages
infused with hemp-derived CBD in the United States. We may be required to expend
significant resources in defending our company from such actions which could
adversely affect our business and results of operations and divert the attention
of management. We may also incur the risk of sustaining considerable damage to
our reputation and brand should we become party to federal enforcement actions
resulting from the production, marketing or sale of hemp-derived CBD infused
beverages.
Accordingly, if Congress amended federal laws or FDA issued
regulations or guidance permitting the use of hemp-derived CBD in food or
announcing the agencys decision to use its enforcement discretion with respect
to hemp-derived CBD products, we and our suppliers and vendors would be required
to implement significant enterprise risk management measures to ensure that
there is no commingling of CBD derived from marihuana, as marihuana is defined
in the federal Controlled Substances Act, with any future commercial supply of
hemp-derived CBD that is used to produce our products.
The FDA could force the removal of our products from the
U.S. market.
The FDA has broad authority over the regulation of our
products. The FDA could, among other things, force us to remove our products
from the U.S. market, levy fines or change their regulations on advertising. Any
adverse action by the FDA could have a material adverse impact on our business.
Government reviews, inquiries, investigations, and
actions could harm our business or reputation.
As our product portfolio evolves, the regulatory environment
with regard to our business is also evolving. Government officials often
exercise broad discretion in deciding how to interpret and apply applicable laws
or regulations. We may in the future receive formal and informal inquiries from
various governmental regulatory authorities, as well as self-regulatory
organizations or consumer protection watchdog groups, about our business and
compliance with local laws, regulations, or standards. Any determination that
our products, operations or activities, or the activities of our employees,
contractors or agents, are not in compliance with existing laws, regulations or
standards, could adversely affect our business in a number of ways. Even if such
an inquiry does not result in the imposition of fines, interruptions to our
business, loss of suppliers or other third-party relationships, terminations of
necessary licenses and permits, or similar direct results, the existence of the
inquiry alone could potentially create negative publicity that could harm our
business and/or reputation.
Risks Related to Our Intellectual Property
It is difficult and costly to protect our intellectual
property.
Our commercial success will depend in part on obtaining and
maintaining trademark protection and trade secret/know-how protection of our
products and brands, as well as successfully defending that intellectual
property against third-party challenges. We will only be able to protect our intellectual
property related to our trademarks and brands to the extent that we have rights
under valid and enforceable trademarks, know-how or trade secrets that cover our
products and brands. Changes in either the trademark laws or in interpretations
of trademark and laws in the U.S. and other countries may diminish the value of
our intellectual property. Accordingly, we cannot predict the breadth of claims
that may be allowed or enforced in our issued trademarks. The degree of future
protection for our proprietary rights is uncertain because legal means afford
only limited protection and may not adequately protect our rights or permit us
to gain or keep our competitive advantage.
14
We may face intellectual property infringement claims
that could be time-consuming and costly to defend, and could result in our loss
of significant rights and the assessment of treble damages.
From time to time we may face intellectual property claims from
third parties. Some of these claims may lead to litigation. The outcome of any
such litigation can never be guaranteed, and an adverse outcome could affect us
negatively. For example, were a third party to succeed on an infringement claim
against us, we may be required to pay substantial damages (including up to
treble damages if such infringement were found to be willful). In addition, we
could face an injunction, barring us from conducting the allegedly infringing
activity. The outcome of the litigation could require us to enter into a license
agreement which may not be under acceptable, commercially reasonable, or
practical terms or we may be precluded from obtaining a license at all. It is
also possible that an adverse finding of infringement against us may require us
to dedicate substantial resources and time in developing non-infringing
alternatives, which may or may not be possible.
Finally, we may initiate claims to assert or defend our own
intellectual property against third parties. Any intellectual property
litigation, irrespective of whether we are the plaintiff or the defendant, and
regardless of the outcome, is expensive and time-consuming, and could divert our
managements attention from our business and negatively affect our operating
results or financial condition.
We may be subject to claims by third parties asserting
that our employees or our company has misappropriated their intellectual
property, or claiming ownership of what we regard as our own intellectual
property.
Although we try to ensure that our company, our employees, and
independent contractors (suppliers/vendors/distributors) do not use the
proprietary information or know-how of others in their work for us, we may be
subject to claims that our company, our employees, or independent contractors
(suppliers/vendors/distributors) have used or disclosed intellectual property in
violation of others rights. These claims may cover a range of matters, such as
challenges to our trademarks, as well as claims that our employees or
independent contractors are using trade secrets or other proprietary information
of any such employees former employer or independent contractors. As a result,
we may be forced to bring claims against third parties, or defend claims they
may bring against us, to determine the ownership of what we regard as our
intellectual property. If we fail in prosecuting or defending any such claims,
in addition to paying monetary damages, we may lose valuable intellectual
property rights or personnel. Even if we are successful in prosecuting or
defending against such claims, litigation could result in substantial costs and
be a distraction to management.
Risks 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 41,347,512 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, 2019. 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 Nasdaq Capital Market or TSX Venture
Exchange may be volatile, 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 listed on the Nasdaq Capital Market and the
TSX Venture Exchange. Trading of our common stock may experience 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.
15
A prolonged and substantial decline in the price of our
common stock could affect our ability to raise further working capital, thereby
adversely impacting our ability to continue operations.
A prolonged and substantial 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 and to meet
our existing and future financial obligations, 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
we may 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 our 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.
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.