Item 5. Market for Registrant’s Common Equity
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been listed for trading on the Nasdaq
Capital Market since December 10, 2018 and on the TSX Venture Exchange since
April 25, 2018 under the symbol WTER. Until the listing of our common stock on
the Nasdaq Capital Market on December 10, 2018, our common stock was quoted on
the OTC Market Groups OTCQB.
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Transfer Agents
Our shares of common stock are issued in registered form. The
transfer agent and registrar for our common stock is Transhare Corporation,
located at 15500 Roosevelt Boulevard, Suite 302, Clearwater, Florida 33760. The
co-transfer agent for our common stock is TSX Trust Company, located at 650 West
Georgia Street, Suite 2700, Vancouver, British Columbia V6B 4N9, Canada.
Holders of Common Stock
As of June 28, 2019, there were approximately 48 holders of
record of our common stock. As of such date 41,347,512 shares were issued and
outstanding.
Dividends
The payment of dividends, if any, in the future, rests within
the sole discretion of our board of directors. The payment of dividends will
depend upon our earnings, our capital requirements and our financial condition,
as well as other relevant factors. We have not declared any cash dividends since
our inception and have no present intention of paying any cash dividends on our
common stock in the foreseeable future.
There are no restrictions in our articles of incorporation or
bylaws that prevent us from declaring dividends. The Nevada Revised Statutes,
however, do prohibit us from declaring dividends where, after giving effect to
the distribution of the dividend:
1.
We would not be able to pay our debts as they become due
in the usual course of business; or
2.
Our total assets would be less than the sum of our total
liabilities plus the amount that would be needed to satisfy the rights of
stockholders who have preferential rights superior to those receiving the
distribution.
Securities Authorized for Issuance under Equity Compensation
Plans
The following table summarizes certain information regarding
our equity compensation plans as of March 31, 2019 .
Plan category
Number of securities to be
issued upon exercise of
outstanding options,
warrants
and rights
(a)
Weighted-average exercise
price of outstanding
options, warrants and
rights
(b)
Number of securities
remaining
available for
future
issuance under equity
compensation plans
(excluding securities
reflected
in column (a))
(c)
Equity compensation plans
approved by security holders
(2013 Equity Incentive
Plan) (1)(2)
2,272,900
$0.92
Nil
Equity compensation plans
not approved by security
holders (2018 Stock Option
Plan) (3)
Nil
N/A
2,737,612
Total
2,272,900
$0.92
2,737,612
(1)
Effective October 7, 2013, our board of directors adopted
and approved our 2013 equity incentive plan. The plan was approved by a
majority of our stockholders on October 7, 2013. On October 31, 2014, our
board of directors amended our 2013 equity incentive plan to, among other
things, increase the number of shares of stock of our company available
for the grant of awards under the plan from 20,000,000 shares to
35,000,000 shares. The purpose of the plan is to (a) enable our company and any of our
affiliates to attract and retain the types of employees, consultants and
directors who will contribute to our companys long range success; (b)
provide incentives that align the interests of employees, consultants and
directors with those of the stockholders of our company; and (c) promote
the success of our companys business. Effective as of December 30, 2015,
we effected a 50-for-1 reverse stock split of our authorized and issued
and outstanding shares of common stock which decreased the number of
shares of stock of our company available for the grant of awards under the
plan from 35,000,000 shares to 700,000 shares. Effective as of January 20,
2016, our board of directors amended the plan to increase the number of
shares of stock of our company available for the grant of awards under the
plan from 700,000 to 7,700,000. The plan enabled us to grant awards of a
maximum of 7,700,000 shares of our stock and awards that may be granted
under the plan included incentive stock options, non-qualified stock
options, stock appreciation rights, restricted awards and performance
compensation awards.
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(2)
Our 2013 equity incentive plan has been suspended in
connection with our application to list our common stock on the TSX
Venture Exchange, but the suspension does not affect any awards, including
any stock options, already granted under the plan.
(3)
On April 25, 2018, our board of directors adopted the
2018 Stock Option Plan, pursuant to which we may grant stock options to
acquire up to a total of 5,171,612 shares of our common stock, including
any other shares of our common stock which may be issued pursuant to any
other stock options granted by our company outside the plan. We adopted
the plan in connection with our application to list our common stock on
the TSX Venture Exchange. The purpose of the plan is to retain the
services of valued key employees and consultants of our company and such
other persons as our board of directors selects, and to encourage such
persons to acquire a greater proprietary interest in our company, thereby
strengthening their incentive to achieve the objectives of our
stockholders, and to serve as an aid and inducement in the hiring of new
employees and to provide an equity incentive to consultants and other
persons selected by our board of directors.
Recent Sales of Unregistered Securities
Since the beginning of our fiscal year ended March 31, 2019, we
have not sold any equity securities that were not registered under the
Securities Act of 1933 that were not previously reported in a quarterly report
on Form 10-Q or in a current report on Form 8-K.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
None
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements and the related notes that appear elsewhere in this annual
report. The following discussion contains forward-looking statements that
reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward looking statements. Factors that
could cause or contribute to such differences include those discussed below and
elsewhere in this annual report on Form 10-K.
Overview
We offer retail consumers bottled alkaline water in
500-milliliter, 700-milliliter, 1-liter, 1.5 -liter, 3-liter and 1-gallon sizes
under the trade name Alkaline88 ® . Our product is produced through an
electrolysis process that uses specialized electronic cells coated with a
variety of rare earth minerals to produce our 8.8 pH drinking water without the
use of any manmade chemicals. Our product also incorporates 84 trace minerals
from Himalayan pink rock salt. Our product is designed to have a clean smooth
taste using only purified water and the Himalayan pink rock salt. We believe
consumers drink our water because of the taste profile and the preconceived
health benefits (although we do not market our products as having any potential health benefits), as well as because of our brand and
trademark, which we believe is one of the most easily identifiable in the
category. Measured by sales volume in 2018, we believe we are now one of the
largest alkaline water companies in the United States.
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Our product is presently available in all 50 states and the
District of Columbia, although over 50% of our current sales are concentrated in
the Southwest and Texas. We distribute our product through several channels. We
sell through large national distributors, including UNFI, KeHE, C&S, and
Core-Mark. We also sell our product to retail clients, including convenience
stores, natural food products stores, large ethnic markets and national
retailers. Examples of our retail clients include Walmart, Food Lion,
Albertsons, Safeway, Kroger, Schnucks, Smart & Final, Jewel-Osco, Sprouts,
Bashas, Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta,
Superior Foods, Ingles, HEB and Brookshires. The majority of our sales to
retail clients are through brokers and distributors, however, sales to our
larger retail clients are often direct to the clients own warehouse
distribution network.
Our operating subsidiary, Alkaline 88, LLC, operates primarily
as a marketing, distribution, and manufacturing company. It has entered into
co-packing agreements with eight different bottling companies located in
Virginia, Georgia, California, Texas, Nevada and Arizona to act as co-packers
for our product. Our current capacity at all plants exceeds approximately $8.3
million per month wholesale.
Our component materials are readily available through multiple
vendors. Our principal suppliers are Vav Plastics Inc., Amcor Inc. and Packaging
Corporation of America.
A88 Infused Beverage Division, Inc.
In August 2018, we formed A88 Infused Beverage Division, Inc.,
or A88 Infused, a Nevada corporation and a wholly owned subsidiary of our
company. A88 Infuseds focus is brand extension and product innovations in the
wellness water category. We formed A88 Infused to meet what we believe is
increasing consumer demand for enhanced and functional (value-added) beverages.
We expect A88 Infused to capitalize on this and potential consumer demand with
the development and launch of new products focused on growing trends in the
beverage space.
To prepare for the launch of products by A88 Infused, we have
expanded our packaging capabilities. We announced in January, 2019 that
Nevada-based Western Group Packing has agreed to produce A88 Infuseds flavored
Alkaline88 ® water products and its planned hemp extract-infused water
product at its 150,000+ square foot facility located in North Las Vegas, NV. We
have received verbal confirmation from many of our current retail clients of
their interest in purchasing our flavored Alkaline88 ® waters. The
production of A88 Infuseds planned hemp extract product 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 extract in food is safe. The FDA has
evaluated Generally Recognized as Safe (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.
In early February 2019, at the Convenience EPPS trade show in
Chicago, Illinois and in May, 2019 at the Western Association of Food Chains
Convention, we sampled and offered up for sale Alkaline88 ®
Flavored, which is available in four different, all natural, sugar-free
flavors. We believe Alkaline88 ® Flavored is the first flavored
bottled alkaline water to be sold in the United States.
A88 Infused is also developing and preparing for the initial
launch of its planned hemp extract product, which will be marketed under the
trademark Soothe . In the event the FDA issues appropriate regulations or
guidance or determines that it has no questions that hemp extract is GRAS under
intended conditions of use that would permit A88 Infused to market hemp extract
in water without food additive approval, we expect to produce and sell
Soothe as still water in bottles. We may also decide to market
Soothe in any states, districts or territories if applicable laws allow
for such sale or if a supplier meets and complies with the FDAs GRAS
regulations with respect to a self-certification regarding the safety and GRAS
status of the use of hemp extract. We expect to produce Soothe as a low
calorie or no calorie, hemp extract-infused water in three flavors. We
may change the composition of our planned hemp-extract-infused product as
necessary to comply with federal, state or local laws, regulations or guidance.
We intend to comply in full with all federal, state, and local
laws, rules and regulations as we develop our hemp extract alkaline water and
other product lines. We will not pursue the production or sale of hemp
extract-infused products until legally permitted.
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Cash Flows
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, however, as
a result of the net proceeds of $10,450,900 raised via a public offering of our
common stock in March, 2019, expected warrant exercises including $1,180,486
from warrant exercises received since March 31, 2019 to date, and our credit
line, we have sufficient cash to sustain operations through at least June 30,
2020. Our ability to continue as a going concern beyond June 30, 2020 is
dependent on our company obtaining additional capital to fund operating losses
until we become profitable. If we are unable to obtain additional capital, we
could be forced to significantly curtail or cease operations.
Results of Operations
Years Ended March 31, 2019 and March 31, 2018
The following summary of our results of operations should be
read in conjunction with our audited consolidated financial statements for the
years ended March 31, 2019 and March 31, 2018 which are included herein:
Year Ended
Year Ended
March 31, 2019
March 31, 2018
Revenue
$
32,199,528
$
19,812,199
Cost of goods sold
19,252,768
11,687,017
Gross profit
12,946,760
8,125,182
Net Loss (after operating expenses and other
expenses)
(8,617,565
)
(6,687,280
)
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the year ended
March 31, 2019 of $32,199,528 as compared to $19,812,199 for the year ended
March 31, 2018, an increase of 63%, generated by sales of our alkaline water.
The increase in sales is due to the expanded distribution of our products to
additional retailers throughout the country. We distribute our product through
several channels. We sell through large national distributors (UNFI, KeHe,
C&S, and Core-Mark), which together represent over 150,000 retail outlets.
We also sell our product directly to retail clients, including convenience
stores, natural food products stores, large ethnic markets and national
retailers. Some examples of retail clients are: Walmart, CVS, Albertson/Safeway,
Kroger, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas, Stater Bros.
Markets, Unified Grocers, Bristol Farms, Vallarta, Superior Foods, Ingles, HEB
Brookshires, Publix, Shaws, Raleys, Food Lion, Harris Teeter, and Festival
Foods.
Cost of goods sold is comprised of production costs, shipping
and handling costs. For the year ended March 31, 2019, we had cost of goods sold
of $19,252,768, or 60% of net sales, as compared to cost of goods sold of
$11,687,017, or 59% of net sales, for the year ended March 31, 2018. The
increase in cost of goods sold as a percentage of net sales compared to the same
period last year was due to increased raw material cost and associated freight
as a result of our east coast expansion.
Expenses
Our operating expenses for the years ended March 31, 2019 and
March 31, 2018 are as follows:
Year Ended
Year Ended
March 31, 2019
March 31, 2018
Sales and marketing expenses
$
13,009,384
$
7,211,399
General and administrative expenses
7,420,078
6,425,069
Depreciation expenses
580,669
418,777
Total operating expenses
$
21,010,131
$
14,055,245
During the year ended March 31, 2019, our total operating
expenses were $21,010,131 as compared to $14,055,245 for the year ended March
31, 2018. Sales and marketing expenses increased by $5.8 million primarily as a
result of increased outbound freight costs of $2,728,322 and increased marketing
spend of $1,885,139 due to the 63% increase in revenue. General and
administrative expenses increased by $995,009 primarily resulting from an
increase in professional fees, media fees and legal fees for new
stock exchange listings on NASDAQ and the TSX Venture Exchange of approximately
$3.9 million, offset by a decrease in stock compensation expenses of $2.9
million. In the year ended March 31, 2018 we incurred $1.7 million in stock
compensation expense due to the settlement with related parties as described in
Note 7 to the consolidated financial statement and $1.3 million in stock
compensation provided to contractors which did not occur in the year ended March
31, 2019.
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For the year ended March 31, 2019, the total of $7,420,078 of
general and administrative expenses consisted primarily of $4,511,325 of
professional fees, media fees and legal fees, $1,423,245 in wage expense and $478,043 in stock compensation
expense, relating to stock option expense and stock expense relating to
endorsement
For the year ended March 31, 2018, the total of $6,425,069 of
general and administrative expenses consisted primarily of $1,255,183 of
professional fees and $3,385,340 in stock compensation expense, relating to an
agreement to retire Series A preferred stock in exchange for Series D preffered
stock and common stock, issuance of common stock to consultants and stock option
expense
Liquidity and Capital Resources
Working Capital
At March 31, 2019
At March 31, 2018
Current assets
$
16,537,343
$
4,886,491
Current liabilities
7,125,695
5,595,885
Working capital (deficiency)
$
9,411,648
$
(709,394
)
Current Assets
Current assets as of March 31, 2019 and March 31, 2018
primarily relate to $11,032,451 and $988,905 in cash, $3,068,181 and $2,599,095
in accounts receivable and $2,058,012 and $1,002,020 in inventory, respectively.
Current assets primarily increased as a result of the capital raise in March 2019 of $10,450,900 and increases in accounts receivable and inventory resulting from the 63% increase in revenues.
Current Liabilities
Current liabilities as of March 31, 2019 and March 31, 2018
primarily relate to $2,898,958 and $2,052,988 in accounts payable, revolving
financing of $3,131,279 and $2,592,015, and accrued expenses of $1,095,458 and
$819,011, respectively. Current liabilities primarily increased as a result of the 63% increase in revenues.
Cash Flow
Our cash flows for the years ended March 31, 2019 and March 31,
2018 are as follows:
Year
Year
Ended
Ended
March 31,
March 31,
2019
2018
Net Cash used in operating
activities
$
(8,128,613
)
$
(2,625,849
)
Net Cash used in investing activities
(1,356,299
)
(317,855
)
Net Cash provided by
financing activities
19,528,458
3,328,804
Net increase in cash and cash equivalents
$
10,043,546
$
385,100
Operating Activities
Net cash used in operating activities was $8,128,613 for the
year ended March 31, 2019, as compared to $2,625,849 used in operating
activities for the year ended March 31, 2018. The increase in net cash used was
primarily due to the funding of the additional professional fees, media fees and legal fees, freight and
marketing expenses and the reduction in stock compensation discussed in the
expense section above.
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Investing Activities
Net cash used in investing activities was $1,356,299 for the
year ended March 31, 2019, as compared to $317,855 used in investing activities
for the year ended March 31, 2018. The increase net cash used by investing
activities was from increased purchases of production equipment due to the
increase in our revenue.
Financing Activities
Net cash provided by financing activities for the year ended
March 31, 2019 was $19,528,458, as compared to $3,328,804 for the year ended
March 31, 2018. The increase of net cash provided by financing activities was
mainly attributable to the sale of our common stock for total net proceeds to
our company of $17,238,430 and warrant exercises for net proceeds of
$1,882,348.
Cash Requirements
We believe that between the net proceeds of $10,450,900 raised
via a public offering of our common stock in March, 2019 discussed above,
expected warrant exercises including $1,180,486 from warrant exercises received
to date, and our credit line, we will have sufficient cash to sustain operations
including our cash needs for the above milestones through at least June 30,
2020. If our own financial resources and future cash-flows from operations
beyong June 30, 2020 are insufficient to sustain operations, we may seek to sell
additional equity or debt securities or obtain additional credit facilities. The
sale of additional equity securities will result in dilution to our
stockholders. The incurrence of indebtedness will result in increased debt
service obligations and could require us to agree to operating and financial
covenants that could restrict our operations or modify our plans to grow the
business. Financing may not be available in amounts or on terms acceptable to
us, if at all. Any failure by us to raise additional funds on terms favorable to
us, or at all, will limit our ability to expand our business operations and
could harm our overall business prospects.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to our
stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
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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.