UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-55096

THE ALKALINE WATER COMPANY INC.
(Exact name of registrant as specified in its charter)

Nevada 99-0367049
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
   
7730 E Greenway Road, Suite 203, Scottsdale, AZ 85260
(Address of principal executive offices) (Zip Code)

(480) 656-2423
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report )

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]          No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]          No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Ruble 12b-2 of the Exchange Act.

Large accelerated filer [  ] Accelerated filer [  ]
   
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes[  ]          No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

102,927,070 shares of common stock issued and outstanding as of August 12, 2014.

1


THE ALKALINE WATER COMPANY INC.
QUARTERLY PERIOD ENDED JUNE 30, 2014

Index to Report on Form 10-Q

   

Page No.

  PART I - FINANCIAL INFORMATION  
Item 1. Financial Statements

3

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

22

Item 4. Controls and Procedures

22

  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings

22

Item1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Mine Safety Disclosures 23
Item 5. Other Information 23
Item 6. Exhibits

24

  Signatures

26

2


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

THE ALKALINE WATER COMPANY, INC.
(FORMERLY GLOBAL LINES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(unaudited)

    June 30, 2014     March 31, 2014  

 

  (Unaudited)        

ASSETS

           

 

           

Current assets:

           

   Cash

$  620,031   $  2,665  

   Accounts receivable

  160,393     166,404  

   Inventory

  353,829     57,965  

   Prepaid expenses and other current assets

  4,694     -  

   Deferred financing cost

  -     54,288  

 

           

       Total current assets

  1,138,947     281,322  

 

           

Fixed assets, net

  457,690     286,986  

Equipment deposits - related party

  711,500     -  

 

           

       Total assets

$  2,308,137   $  568,308  

 

           

 

           

LIABILITIES AND STOCKHOLDERS' DEFICIT

           

 

           

Current liabilities:

           

   Accounts payable

$  490,991   $  320,154  

   Accounts payable - related party

  -     18,403  

   Accrued expenses

  71,537     56,601  

   Accrued interest

  -     19,829  

   Revolving financing

  129,486     83,348  

   Notes payable

  -     -  

   Current portion of capital leases

  64,578     -  

   Derivative liability

  257,862     337,988  

 

           

       Total current liabilities

  1,014,454     836,323  

 

           

Long-term liabilities:

           

   Capitalize leases- related party

  308,794     -  

 

           

       Total long-term liabilities

  308,794     -  

 

           

       Total liabilities

  1,323,248     836,323  

 

           

Redeemable convertible preferred stock

  -     83,820  

 

           

 

           

 

           

Stockholders' deficit:

           

   Preferred stock - $0.001 par value, 100,000,000 shares 
 authorized. Series A issued 20,000,000

20,000 20,000

   Common stock, Class A, $0.001 par value, 1,125,000,000 
 shares authorized, 101,182,070 and 81,602,175 shares issued and 
 outstanding as of June 30, 2014 and March 31, 2014, 
 respectively

101,182 81,602

 

           

Additional paid in capital

  7,813,817     4,059,464  

Deficit accumulated during development stage

  (6,950,110 )   (4,512,901 )

 

           

       Total stockholders' deficit

$  984,889   $  (351,835 )

 

           

       Total liabilities and stockholders' deficit

$  2,308,137   $  568,308  

See Accompanying Notes to Condensed Consolidated Financial Statements.

3


THE ALKALINE WATER COMPANY INC.
(A
DEVELOPMENT STAGE COMPANY)
FORMERLY
GLOBAL LINES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

    For the Three     For the Three     Inception  
    Months Ended     Months Ended     (June 19, 2012)
    June 30, 2014     June 30, 2013     to June 30, 2014  

 

                 

 

                 

Revenue

$  572,049   $  32,522   $  1,139,858  

 

                 

Cost of goods sold

  406,125     18,057     826,002  

 

                 

Gross profit

  165,924     14,465     313,856  

 

                 

Operating expenses:

                 

   Sales and marketing expenses

  226,780     84,193     779,090  

   General and administrative

  2,138,753     67,509     6,081,134  

   General and administrative - related party

  -     39,846     167,021  

   Depreciation expense

  16,534     1,849     60,755  

 

                 

      Total operating expenses

  2,382,067     193,397     7,088,000  

 

                 

Other income (expenses):

                 

   Interest expense

  (2,524 )   (3,555 )   (14,896 )

   Interest expense on redeemable preferred stock

  (40,382 )   -     (508,637 )

   Fees paid on credit line

  (7,057 )   -     (15,660 )

   Placement agent fee to acquired credit line

  -     -     (10,000 )

   Amortization of debt discount

  (414,370 )   -     (521,902 )

   Other expenses

  (11 )   -     (6,117 )

   Other income - related party

  -     -     40,029  

   Loss on sales leaseback

  (20,773 )   -     (20,773 )

   Change in derivative liability

  264,051     -     881,990  

 

                 

      Total other expense

  (221,066 )   (3,555 )   (175,966 )

 

                 

Net loss

$  (2,437,209 ) $  (182,487 ) $  (6,950,110 )

 

                 

 

                 

Weighted average number of common shares outstanding - basic

  94,019,973     78,156,409        

 

                 

Net loss per share - basic

$  (0.03 ) $  (0.00 )      

See Accompanying Notes to Condensed Consolidated Financial Statements.

4


THE ALKALINE WATER COMPANY INC.
(A DEVELOPMENT STAGE COMPANY)
FORMERLY GLOBAL LINES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

    For the Three     For the Three     Inception  
    Months Ended     Months Ended     (June 19, 2012)
    June 30, 2014     June 30, 2013     to June 30, 2014  
                   

CASH FLOWS FROM OPERATING ACTIVITIES

                 

   Net loss

$  (2,437,209 ) $  (182,487 ) $  (6,950,110 )

   Adjustments to reconcile net income to net cash used in operating activities:

       Bad debt expense

  -     -     10,000  

       Depreciation expense

  16,534     1,849     60,755  

       Interest expense converted to common stock

  -     -     3,555  

       Shares issued for services

  1,399,127     -     4,051,418  

       Amortization of debt discount

  414,370     -     521,902  

       Initial discount on Redeemable preferred stock

  -     -     455,926  

       Change in derivative liabilities

  (264,051 )   -     (881,990 )

   Changes in operating assets and liabilities:

                 

       Accounts receivable

  6,011     (9,435 )   (170,393 )

       Accounts receivable - related party

  -           -  

       Inventory

  (295,864 )   (21,591 )   (353,829 )

       Prepaid expenses and other current assets

  (4,694 )         (4,694 )

       Accounts payable

  170,837     19,221     491,482  

       Accounts payable - related party

  (18,403 )   -     (490 )

       Accrued expenses

  14,936     -     71,537  

       Accrued interest

  (19,829 )   3,555     1,315  

 

                 

Net cash used in operating activities

  (1,018,235 )   (188,888 )   (2,693,616 )

 

                 

CASH FLOWS FROM INVESTING ACTIVITIES

                 

   Purchase of fixed assets

  (17,435 )   (1,019 )   (333,642 )

   Proceeds from sale lease back

  208,773     -     208,773  

   Equipment deposits - related party

  (711,500 )   (90,000 )   (726,500 )

 

                 

   Net cash used in investing activities

  (520,162 )   (91,019 )   (851,369 )

 

                 

CASH FLOWS FROM FINANCING ACTIVITIES

                 

   Proceeds from notes payable

  -     75,000     150,000  

   Proceeds from revolving financing

  46,138     -     129,486  

   Proceeds from sale of common stock, net

  2,361,999     525,000     3,461,999  

   Repayment of capital lease

  (5,204 )   -     (5,204 )

   Repayment of redeemable preferred shares

  (247,170 )   -     (247,170 )

   Proceeds from sale of mandatory redeemable preferred stock, net

  -     -     422,000  

   Shareholder contribution

  -     -     264,575  

   Shareholder distribution

  -     -     (10,670 )

 

                 

   Net cash provided by financing activities

  2,155,763     600,000     4,165,016  

 

                 

NET CHANGE IN CASH

  617,366     320,093     620,031  

 

                 

CASH AT BEGINNING OF PERIOD

  2,665     64,607     -  

 

                 

CASH AT END OF PERIOD

$  620,031   $  384,700   $  620,031  

 

                 

 

                 

SUPPLEMENTAL INFORMATION:

                 

   Interest paid

$  -   $  -        

   Income taxes paid

$  -   $  -        

 

                 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

                 

   Debt converted to common stock

$  -   $  229,870        

   Derivative liability on redeemable preferred stock

  -              

       Preferred stock conversion to common stock

  252,830              

       Deferred discount on conversion of preferred stock

  56,098              

       Fair value of derivate liability at isuance of Warrants

  240,023              

See Accompanying Notes to Condensed Consolidated Financial Statements.

5


THE ALKALINE WATER COMPANY INC.
(FORMERLY GLOBAL LINES INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in U.S. dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these condensed interim consolidated financial statements be read in conjunction with the financial statements of the Company for the period of inception (June 19, 2012) to June 30, 2014 and notes thereto included in the Company’s Annual Report on Form 10-K dated March 31, 2014. The Company follows the same accounting policies in the preparation of interim reports. Results of operations for the interim period are not indicative of annual results.

Development Stage Company

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles related to development stage companies. A development-stage company is one in which planned principal operations have not commenced or if its operations have commenced, there has been no significant revenues there from.

Principles of consolidation

For the period from June 19, 2012 to June 30, 2014, the consolidated financial statements include the accounts of Alkaline Water Corp. (an Arizona Corporation) and Alkaline 88 LLC (formerly Alkaline 84, LLC) (an Arizona Limited Liability Company). For the period from April 1, 2013 to June 30, 2013 and April 1, 2014 to June 30, 2014, the consolidated financial statements include the accounts of The Alkaline Water Company Inc. (a Nevada Corporation), Alkaline Water Corp. (an Arizona Corporation) and Alkaline 84, LLC (an Arizona Limited Liability Company).

All significant intercompany balances and transactions have been eliminated. The Alkaline Water Company Inc. (a Nevada Corporation), Alkaline Water Corp. (an Arizona Corporation) and Alkaline 88, LLC (an Arizona Limited Liability Company) will be collectively referred herein to as the “Company”. Any reference herein to “The Alkaline Water Company Inc.”, the “Company”, “we”, “our” or “us” is intended to mean The Alkaline Water Company Inc., including the subsidiaries indicated above, unless otherwise indicated.

6


Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original maturity of three months or less to be considered cash equivalents. The carrying value of these investments approximates fair value. We had $620,031 and $384,700 in cash and cash equivalents at June 30, 2014 and 2013, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

The Company generally does not require collateral, and the majority of its trade receivables are unsecured. The carrying amount for accounts receivable approximates fair value. Accounts receivable consisted of the following as of June 30, 2014 and March 31, 2014:

    June 30     March 31  

 

  2014     2014  

Trade receivables

$  169,361   $  176,404  

Less: Allowance for doubtful accounts

  (8,968 )   (10,000 )

Net accounts receivable

$  160,393   $  166,404  

Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions.

Inventory

Inventory represents packaging items, empty bottles, finished goods and other items valued at the lower of cost or market with cost determined using the weight average method which approximates first-in first-out method, and with market defined as the lower of replacement cost or realizable value. As of June 30, 2014 and March 31 2014, inventory consisted of the following:

    June 30     March 31  
    2014     2014  
Raw materials $  246,557   $  24,022  
Finished goods   107,272     33,943  
Total inventory $  353,829   $  57,965  

Property and equipment

The Company records all property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful life of the assets or the lease term, whichever is shorter. Depreciation periods are as follows for the relevant fixed assets:

Equipment   5 years

7


Stock-based Compensation

The Company accounts for stock-based compensation to employees in accordance with Accounting Standard Codification (ASC) 718. Stock-based compensation to employees is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite employee service period. The Company accounts for stock-based compensation to other than employees in accordance with ASC 505-50. Equity instruments issued to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments and is recognized as expense over the service period. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options and warrants and the closing price of the Company’s common stock for common share issuances.

Revenue recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the amount to be paid by the customer is fixed or determinable; and (4) the collection of such amount is probable.

The Company records revenue when it is realizable and earned upon shipment of the finished products. We do not accept returns due to the nature of the product. However, we will provide credit to our customers for damaged goods.

Fair Value Measurements

The valuation of our embedded derivatives and warrant derivatives are determined primarily by the multinomial distribution (Lattice) model. An embedded derivative is a derivative instrument that is embedded within another contract, which under the convertible note (the host contract) includes the right to convert the note by the holder, certain default redemption right premiums and a change of control premium (payable in cash if a fundamental change occurs). In accordance with Accounting Standards Codification ("ASC") 815 “Accounting for Derivative Instruments and Hedging Activities”, as amended, these embedded derivatives are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. A warrant derivative liability is also determined in accordance with ASC 815. Based on ASC 815, warrants which are determined to be classified as derivative liabilities are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. The practical effect of this has been that when our stock price increases so does our derivative liability resulting in a non-cash loss charge that reduces our earnings and earnings per share. When our stock price declines, we record a non-cash gain, increasing our earnings and earnings per share. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
     

Level 2 Inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
     

Level 3      Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. To determine the fair value of our embedded derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair value recorded for the derivative liability varies from period to period. This variability may result in the actual derivative liability for a period either above or below the estimates recorded on our consolidated financial statements, resulting in significant fluctuations in other income (expense) because of the corresponding non-cash gain or loss recorded.

8


Concentration

The Company has 2 major customers that together account for 54% (33% and 21%, respectively) of accounts receivable at June 30, 2014, and 4 customers that together account for 54% (16%, 13%, 13% and 12%, respectively) of the total revenues earned for the period ended June 30, 2014.

The Company has 3 vendors that accounted for 62% (23%, 20%, and 19%, respectively) of purchases for the period ended June 30, 2014.

Basic and Diluted Loss Per Share

Basic and diluted earnings or loss per share (“EPS”) amounts in the consolidated financial statements are computed in accordance Accounting Standard Codification (ASC) 260 – 10 “Earnings per Share”, which establishes the requirements for presenting EPS. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS is based on the weighted average number of common shares outstanding and dilutive common stock equivalents. Basic EPS is computed by dividing net income or loss available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Potentially dilutive securities were excluded from the calculation of diluted loss per share, because their effect would be anti-dilutive.

Reclassification

Certain accounts in the prior period were reclassified to conform to the current period financial statements presentation.

Recent pronouncements

The Company has evaluated all the recent accounting pronouncements through June 2014 and believes that none of them will have a material effect on our financial statements.

NOTE 2 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability and/or acquisition and sale of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in financing activities, developing its business plan and building its initial customer and distribution base for its products. As a result, the Company incurred accumulated net losses from Inception (June 19, 2012) through the period ended June 30, 2014 of $(6,950,110). In addition, the Company’s development activities since inception have been financially sustained through debt and equity financing.

The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.

NOTE 3 – PROPERTY AND EQUIPMENT

Fixed assets consisted of the following at:

    June     March  
    30, 2014     31, 2014  

Machinery and Equipment

$  72,137 $     273,597  

Machinery under Capital Lease

  378,576        

Office Equipment

  54,612     53,631  

Leasehold Improvements

  13,120     3,979  

Less: Accumulated Depreciation

  (60755 )   (44,221 )

Fixed Assets, net

$  457,690   $  286,986  

9



Depreciation expense for the periods ended June 30, 2014 and 2013 was $16,534 and $1,849, respectively.

NOTE 4 – EQUIPMENT DEPOSITS – RELATED PARTY

On February 27, 2013, we paid a $15,000 deposit on equipment that we purchased for approximately $208,773. The equipment was manufactured by and purchased under an exclusive manufacturing contract from Water Engineering Solutions, LLC, an entity that is controlled and majority owned by Steven P. Nickolas and Richard A. Wright, for the production of our alkaline water.

On May 1, 2014 the Company paid a $690,000 deposit on equipment and on June 27, 2014 the Company paid a $21,500 deposit on equipment. As of June 30, 2014, the total amount of deposits for equipment is $711,500. The equipment will be manufactured by and under an exclusive manufacturing contract from Water Engineering Solutions, LLC, an entity that is controlled and majority owned by Steven P. Nickolas and Richard A. Wright, for the production of our alkaline water.

NOTE 5 – REVOLVING FINANCING

On February 20, 2014, The Alkaline Water Company Inc., and subsidiaries, Alkaline 88, LLC and Alkaline Water Corp., entered into a revolving accounts receivable funding agreement with Gibraltar Business Capital, LLC (“Gibraltar”). Under the agreement, from time to time, the Company agreed to tender to Gibraltar all of our accounts (which is defined as our rights to payment whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned or otherwise disposed of, or (ii) for services rendered or to be rendered, or (iii) as otherwise defined in the Uniform Commercial Code of the State of Illinois). Gibraltar will have the right, but will not be obligated, to purchase such accounts tendered in its sole discretion. If Gibraltar purchases such accounts, Gibraltar will make cash advances to us as the purchase price for the purchased accounts.

The Company assumed full risk of non-payment and unconditionally guaranteed the full and prompt payment of the full face amount of all purchased accounts. The Company also agreed to direct all parties obligated to pay the accounts to send all payments for all accounts directly to Gibraltar. All collections from accounts will be applied to our indebtedness, which is defined as the amount owed by us to Gibraltar from time to time, i.e., all cash advances, plus all charges, plus all other amounts owning from us to Gibraltar pursuant to the agreement, less all collections retained by Gibraltar from either purchased accounts or from us which are applied to indebtedness, unless Gibraltar elects to hold any such collections to establish reserves to secure payment of any purchased accounts.

In consideration of Gibraltar’s purchase of the accounts, the Company agreed to pay Gibraltar interest on the indebtedness outstanding at the rate of 8% per annum plus the prime rate in effect at the end of each month with the prime rate for these purposes never being less than 3.25% per annum, calculated on a 360-day year and payable monthly. In addition, the Company agreed to pay to Gibraltar a monthly collateral/management fee in the amount of 0.5% calculated on the average daily borrowing amount for the given month and an unused line fee of 0.25% monthly based on the difference between the actual line of credit and the average daily borrowing amount for the given month. The Company also agreed to pay to Gibraltar upon execution of the agreement and as of the commencement of each renewal term, a closing cost of 1% of the initial indebtedness in addition to the amount of any other credit accommodations granted from Gibraltar, which amount will be deducted from the first cash advances.

10


The initial indebtedness is $500,000. The Company may request an increase to the initial indebtedness in $500,000 increments up to $5,000,000, subject the Company’s financial performance and/or projections are satisfactory to Gibraltar, and absent an event of default. The Company also granted to Gibraltar a security interest in all of our presently-owned and hereafter-acquired personal and fixture property, wherever located. The agreement will continue until the first to occur of (i) demand by Gibraltar; or (ii) 24 months from the first day of the month following the date that the first purchased account is purchased and will be automatically renewed for successive periods of 12 months thereafter unless, at least 30 days prior to the end of the term, we give Gibraltar notice of our intention to terminate the agreement. In addition, we will be able to exit the agreement at any time for a fee of 2% of the line of credit in place at the time of prepayment. On June 30, 2014 the amount borrowed on this facility was $129,486.

NOTE 6 – DERIVATIVE LIABILITY

On November 7, 2013, we sold to certain institutional investors 10% Series B Convertible Preferred Shares (“Series B Preferred Stock”) which are subject to mandatory redemption and include down-round provisions that reduce the exercise price of a warrant and convertible instrument. As required by ASC 815 “Derivatives and Hedging”, if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price, the investors will be entitled to down-round protection. The Company evaluated whether its warrants and convertible debt instruments contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants and conversion instruments contained such provisions thereby concluding they were not indexed to the Company’s own stock and therefore a derivative instrument.

Between April 16 and April 24, 2014, the Company redeemed 247 shares of the 10% Series B Preferred Stock for $247,171 plus accrued interest of $46,456 and $10,212 penalty related to the delayed registration. The effect of this redemption resulted in a reduction of $56,098 derivative liability.

On May 1, 2014, the Company completed the offering and sale of an aggregate of 17,333,329 shares of our common stock and warrants to purchase an aggregate of 8,666,665 shares of our common stock, for aggregate gross proceeds of $2,599,999. Each share of common stock we sold in the offering was accompanied by a warrant to purchase one-half of a share of common stock at an exercise price of $0.15 per share for a period of five years from the date of issuance. Each share of common stock, together with each warrant was sold at a price of $0.15. The warrants include down-round provisions that reduce the exercise price of a warrant and convertible instrument. As required by ASC 815 “Derivatives and Hedging”, if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price, the investors will be entitled to down-round protection. The Company evaluated whether its warrants and convertible debt instruments contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants and conversion instruments contained such provisions thereby concluding they were not indexed to the Company’s own stock and therefore a derivative instrument.

Pursuant to the engagement agreement dated March 12, 2014 with H.C. Wainwright & Co., LLC (“Wainwright”), Wainwright agreed to act as our exclusive placement agent in connection with the offering. Pursuant to the engagement agreement, the Company, we issued warrants to purchase an aggregate of 5.5% of the aggregate number of shares of our common stock sold in the offering, or 953,333, to Wainwright and its designees. These warrants have an exercise price of $0.1875 per share and expire on April 16, 2019. The warrants include down-round provisions that reduce the exercise price of a warrant and convertible instrument. As required by ASC 815 “Derivatives and Hedging”, if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price, the investors will be entitled to down-round protection. The Company evaluated whether its warrants and convertible debt instruments contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants and conversion instruments contained such provisions thereby concluding they were not indexed to the Company’s own stock and therefore a derivative instrument.

11


The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at April 24, 2014 is as follows:

    Conversion feature  
Stock price $ 0 .3275  
Term (Years)   Less than 1  
Volatility   331%  
Exercise prices $  0.43  
Dividend yield   0%  

The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at May 1, 2014 is as follows:

    Issuance Warrants     Placement agent Warrants  
Stock price $  0.15   $  0.15  
Term (Years)   5     5  
Volatility   306%     306%  
Exercise prices $  0.15   $  0.1875  
Dividend yield   0%     0%  

The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at June 30, 2014 is as follows:

    Warrants (including placement agent)  
Stock price $  0.1282  
Term (Years)   4 to 5  
Volatility   282%  
Exercise prices $  0.55 to 0.15  
Dividend yield   0%  

The following table sets forth the fair value hierarchy within our financial assets and liabilities by level that were accounted for at fair value on a recurring basis as of May 1, 2013.

          Fair Value Measurement at May 1, 2014  
    Carrying                    

 

  Value at                    

 

  May 1, 2014     Level 1     Level 2     Level 3  

Liabilities:

                       

 

                       

Derivative warrant liability

$  216,236   $  -   $  -   $  216,236  

Derivative placement agent warrant liability

$  23,787   $  -   $  -   $  23,787  

Total derivative liability

$  240,023   $  -   $  -   $  240,023  

The following table sets forth the fair value hierarchy within our financial assets and liabilities by level that were accounted for at fair value on a recurring basis as of June 30, 2014.

12



          Fair Value Measurement at June 30, 2014  
    Carrying                    
    Value at                    

 

  June 30, 2014     Level 1     Level 2     Level 3  

Liabilities:

                       

 

                       

Derivative convertible debt liability

$  -   $  -   $ -   $ -  

Derivative warrant liability convertible preferred stock

$ 80,974 $ - $ - $ 80,974

Derivative warrants liability on common stock issuance including placement agent warrants

$ 176,888 $ - $ - $ 176,888

Total derivative liability

$  257,862   $  -   $   -   $   257,862  

The Company analyzed the warrants and conversion feature under ASC 815 to determine the derivative liability. The Company estimated the fair value of these derivatives using a multinomial distribution (Lattice) valuation model. The fair value of these warrant liabilities at June 30, 2014 was $257,862 and the conversion feature liability was $0. At March 31, 2014 the fair value of these warrant liabilities was $209,320 and the conversion feature liability was $128,668. Changes in the derivative liability for the period ended June 30, 2014 consist of:

    Three Months  
    Ended  

 

  June 30, 2014  

Derivative liability at March 31, 2014

$  337,998  

Redemption of convertible preferred stock

  (56,098 )

Warrants issued May 1, 2014

  216,236  

Placement agent warrants May 1, 2014

  23,787  

Change in derivative liability – mark to market

  (264,051 )

Derivative liability at June 30, 2014

$  257,862  

NOTE 7 – PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION

Redeemable Convertible Preferred Shares

On November 7, 2013, the Company sold to certain institutional investors an aggregate of 500 shares of our 10% Series B Convertible Preferred Stock (“Series B Preferred Stock”) at a stated value of $1,000 per share of Series B Preferred Stock for gross proceeds of $500,000. Additionally the investors also received Series A, Series B and Series C common stock purchase warrants. The Series A warrants will be exercisable into 1,162,791 shares of our common stock at an exercise price of $0.55 per share, the Series B warrants will be exercisable into 1,162,791 shares of our common stock at an exercise price of $0.43 per share and the Series C warrants will be exercisable into 1,162,791 shares our common stock at an exercise price of $0.55 per share. Holders of the Series B Preferred Stock will be entitled to receive cumulative dividends at the rate per share (as a percentage of the stated value per share) of 10% per annum, payable semi-annually. Each share of the Series B Preferred Stock will be convertible at the option of the holder thereof into that number of shares of common stock determined by dividing the stated value of such share of the Series B Preferred Stock by the conversion price of $0.43, subject to later adjustment. On November 4, 2013, we also entered into a registration rights agreement with the investors pursuant to which we are obligated to file a registration statement to register the resale of the shares of common stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the Warrants.

Between April 16, 2014 and April 22, 2014, the holders of our Series B Preferred Stock exercised their right to have the Company redeem their shares whereby we redeemed 247.17 shares of Series B Preferred Stock for $303,839, which included accrued interest of $46,456 and a penalty for late registration of $10,212. The remaining portion of the Series B Preferred Stock, or 252.83 shares, was converted into 796,566 of our common shares at a conversion price of $0.3174 per share.

Effective November 7, 2013, the Company issued common stock purchase warrants to the placement agent and its designees as compensation for the services provided by the placement agent in connection with our private placement of 500.00028 shares Series B Preferred Stock, which was completed on November 7, 2013. The warrants issued to the placement agent and its designees are exercisable into an aggregate of 116,279 shares of our common stock with an exercise price of $0.55 per share and have a term of exercise of five years. The Company issued the warrants to six accredited investors and paid certain transactional costs of $78,000. For the period ended June 30, 2014 the Company recorded $123,123 of amortization of the debt discount and deferred financing cost.

13


The Series B Preferred Stock included down-round provisions that reduce the exercise price of a warrant and convertible instrument as required by ASC 815 “Derivatives and Hedging”. The aggregate of the derivative liability at issuance was $955,927, which was recorded as amortization of debt discount at issuance. The Company recorded a debt discount cost of $500,000 and will amortize this cost over the mandatory redemption period.

NOTE 8 – STOCKHOLDERS’ EQUITY

Preferred Stock

On October 7, 2013, the Company amended its articles of incorporation to create 100,000,000 shares of preferred stock by filing a Certificate of Amendment to Articles of Incorporation with the Secretary of State of Nevada. The preferred stock may be divided into and issued in series, with such designations, rights, qualifications, preferences, limitations and terms as fixed and determined by our board of directors.

Grant of Series A Preferred Stock

On October 8, 2013, the Company issued a total of 20,000,000 shares of non-convertible Series A Preferred Stock to Steven A. Nickolas and Richard A. Wright (10,000,000 shares to each), our directors and executive officers, in consideration for the past services, at a deemed value of $0.001 per share. The company valued these shares based on the cost considering the time and average billing rate of these individuals and recorded a $20,000 stock compensation cost for the period ended June 30, 2014.

Common Stock

We are authorized to issue 1,125,000,000 shares of $0.001 par value common stock. On May 31, 2013, we effected a 15-for-1 forward stock split of our $0.001 par value common stock. All shares and per share amounts have been retroactively restated to reflect such split. Prior to the acquisition of Alkaline Water Corp., we had 109,500,000 shares of common stock issued and outstanding.

On May 31, 2013, we issued 43,000,000 shares in exchange for a 100% interest in Alkaline Water Corp. For accounting purposes, the acquisition of Alkaline Water Corp. by The Alkaline Water Company Inc. has been recorded as a reverse acquisition of a company and recapitalization of Alkaline Water Corp. based on the factors demonstrating that Alkaline Water Corp. represents the accounting acquirer. Consequently, after the closing of this agreement we adopted the business of Alkaline Water Corp.’s wholly-owned subsidiary, Alkaline 88, LLC. As part of the acquisition, the former management of the Company agreed to cancel 75,000,000 shares of common stock.

Sales of Registered Shares of Common Stock

On May 1, 2014, the Company completed the offering and sale of an aggregate of 17,333,329 shares of our common stock and warrants to purchase an aggregate of 8,666,665 shares of our common stock, for aggregate gross proceeds of $2,599,999. Each share of common stock the Company sold in the offering was accompanied by a warrant to purchase one-half of a share of common stock at an exercise price of $0.15 per share for a period of five years from the date of issuance. Each share of common stock, together with each warrant was sold at a price of $0.15. These securities were sold pursuant to the securities purchase agreement dated April 28, 2014 and have been registered under the Securities Act of 1933 pursuant to our registration statement on Form S-1, as amended (No. 333-192599), which was declared effective by the Securities and Exchange Commission on April 16, 2014.

Pursuant to the engagement agreement dated March 12, 2014 with H.C. Wainwright & Co., LLC (“Wainwright”), Wainwright agreed to act as our exclusive placement agent in connection with the offering. Pursuant to the engagement agreement, the Company paid Wainwright a cash placement fee equal to 8% of the aggregate gross proceeds from the offering, or $208,000, and a non-accountable expense allowance equal to 1% of the aggregate gross proceeds from the offering, or $26,000. In addition, we issued warrants to purchase an aggregate of 5.5% of the aggregate number of shares of our common stock sold in the offering, or 953,333, to Wainwright and its designees. These warrants have an exercise price of $0.1875 per share and expire on April 16, 2019.

14


Sale of Restricted Shares of Common Stock

On October 8, 2013, the Company issued an aggregate of 1,250,000 shares of our common stock to three investors in a non-brokered private placement, at a purchase price of $0.40 per share for gross proceeds of $500,000. In addition, the Company issued 1,250,000 warrants with an exercise price of $0.50 per share and 650,000 warrants with an exercise prices of $0.60 per share to a finder in connection with this private placement. Each unit consisted of one share purchase warrant entitling the holder to purchase, for a period of two years from issuance, one share of our common stock at an exercise price of $0.50 per share and one-half of one share purchase warrant, with each whole share purchase warrant entitling the holder to purchase, for a period of two years from issuance, one share of our common stock at an exercise price of $0.60 per share.

On May 31, 2013, the Company sold 1,312,500 units at $0.40 per share for total cash of $525,000. Each unit consisted of one share of common stock, one warrant which entitles the holder to purchase one share of common stock for a period of 2 years with an exercise price of $0.50 per share, and 1/2 warrant which entitles the holder to purchase 1/2 share of common stock for a period of 2 years with an exercise price of $0.60 per share.

On May 31, 2013, the Company converted principal amount of $225,000 and accrued interest of $4,870 into 574,675 units at $0.40 per share for total debt converted of $229,870. Each unit consisted of one share of common stock, one warrant which entitles the holder to purchase one share of common stock for a period of 2 years with an exercise price of $0.50 per share, and 1/2 warrant which entitles the holder to purchase 1/2 share of common stock for a period of 2 years with an exercise price of $0.60 per share.

Common Stock Issued for Services

On May 15, 2014, the Company issued 100,000 restricted common shares to consultant for services rendered and were valued at the market value on that date of $0.150 per share.

On June 2, 2014, the Company issued 100,000 restricted common shares to consultant for services rendered and were valued at the market value on that date of $0.130 per share.

On June 6, 2014, the Company issued 1,000,000 restricted common shares to consultant for services rendered and were valued at the market value on that date of $0.134 per share.

On June 11, 2014, the Company issued 250,000 restricted common shares to consultant for services rendered and were valued at the market value on that date of $0.121 per share.

NOTE 9 – OPTIONS AND WARRANTS

Stock Option Awards

On May 12, 2014, the Company granted a total of 820,000 stock options to employees and consultants. The stock options are exercisable at the exercise price of $0.15 per share for a period of ten years from the date of grant. 502,500 stock options vested upon the date of grant, 116,250 stock options vest on June 30, 2014, 116,250 stock options vest on September 30, 2014 and 85,000 stock options vest on December 31, 2014.

On May 16, 2014, the Company granted a total of 250,000 stock options to a consultant. The stock options are exercisable at the exercise price of $0.143 per share for a period of ten years from the date of grant. 62,500 stock options vested upon the date of grant, 62,500 stock options vest on June 30, 2014, 62,500 stock options vest on September 30, 2014 and 62,500 stock options vest on December 31, 2014.

On May 21, 2014, the Company granted a total of 6,000,000 stock options Steven A. Nickolas and Richard A. Wright (3,000,000 stock options to each). The stock options are exercisable at the exercise price of $0.1455 per share for a period of ten years from the date of grant. 3,000,000 stock options vested upon the date of grant and the 3,000,000 stock options will vest on November 21, 2014.

15


On May 12, 2014, the Company granted a total of 1,200,000 stock options Steven A. Nickolas and Richard A. Wright (600,000 stock options to each). The stock options are exercisable at the exercise price of $0.165 per share for a period of ten years from the date of grant. 1,200,000 stock options vested upon the date of grant.

On October 9, 2013, the Company granted a total of 6,000,000 stock options to Steven A. Nickolas and Richard A. Wright (3,000,000 stock options to each). The stock options are exercisable at the exercise price of $0.605 per share for a period of ten years from the date of grant. The stock options vest as follows: (i) 1,000,000 upon the date of grant; and (ii) 500,000 per quarter until fully vested.

For the period ended June 30, 2014 and June 30, 2013 the Company has recognized compensation expense of $1,206,877 and $0, respectively, on the stock options granted that vested. The fair value of the unvested shares is $992,348 as of June 30, 2014 with the total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of approximately 1 year. The aggregate intrinsic value of these options was $0 at June 30, 2014.

Stock option activity summary covering options is presented in the table below:

                Weighted-  
          Weighted-     Average  
          Average     Remaining  
    Number of     Exercise     Contractual  
    Shares     Price     Term (years)  
Outstanding at March 31, 2014   6,000,000   $  0.61     9.3  
Granted   8,270,000   $  0.15     9.9  
Exercised   -   $  -.     -  
Expired/Forfeited   -   $  -     -  
Outstanding at June 30, 2014   14,270,000   $  0.34     9.8  
Exercisable at June 30, 2014   9,193,750   $  0.34     9.8  

Warrants

The following is a summary of the status of all of our warrants as of June 30, 2014 and changes during the twelve months ended on that date:

          Weighted-  
    Number     Average  
    of Warrants     Exercise Price  
Outstanding at March 31, 2014   8,310,415   $  0.53  
   Granted   9,619,998     0.15  
   Exercised   -     0.00  
   Cancelled   -     0.00  
Outstanding at June 30, 2014   17,930,413     0.52  
Warrants exercisable at June 30, 2014   17,378,072   $  0.52  

The following table summarizes information about stock warrants outstanding and exercisable at June 30, 2014:

16



    STOCK WARRANTS OUTSTANDING AND EXERCISABLE  
        Weighted-  
        Average  
    Number of   Remaining  
    Warrants   Contractual  
Exercise Price   Outstanding   Life in Years  
$ 0.1500   8,666,665   4.8  
$ 0.1875   953,333   4.8  
$ 0.4300   1,162,791   1.1  
$ 0.5000   3,137,175   1.1  
$ 0.5500   2,441,861   3.27  
$ 0.6000   1,568,588   0.40  

NOTE 10 – RELATED PARTY TRANSACTIONS

On May 21, 2014, the Company granted a total of 6,000,000 stock options Steven A. Nickolas and Richard A. Wright (3,000,000 stock options to each). The stock options are exercisable at the exercise price of $0.1455 per share for a period of ten years from the date of grant. 3,000,000 stock options vested upon the date of grant and the 3,000,000 stock options will vest on November 21, 2014.

On October 8, 2013, the Company issued a total of 20,000,000 shares of non-convertible Series A Preferred Stock to Steven A. Nickolas and Richard A. Wright (10,000,000 shares to each), our directors and executive officers, in consideration for the past services, at a deemed value of $0.001 per share. We valued these shares based on the cost considering the time and average billing rate of these individuals and recorded a $20,000 stock compensation cost for the period ended June 30, 2014.

On October 9, 2013, the Company granted a total of 6,000,000 stock options to Steven A. Nickolas and Richard A. Wright (3,000,000 stock options to each). The stock options are exercisable at the exercise price of $0.605 per share for a period of ten years from the date of grant. The stock options vest as follows: (i) 1,000,000 upon the date of grant; and (ii) 500,000 per quarter until fully vested.

On August 1, 2013 the Company entered into a 3-year sub-lease agreement requiring a monthly payment of $2,085 for office space in Scottsdale, Arizona, with a basic monthly lease increase of 8% and 7% on each anniversary date. The Company or the landlord can cancel the lease with 30 days’ notice. The sub-lessor is an entity owned by the Company’s Chief Executive Officer and President.

As of March 31, 2014 the Company had $0 in equipment deposits with an entity that is controlled and owned by an officer, director and shareholder of the Company. During the period ended March 31, 2014, the Company provided $201,900 of deposits on equipment used to produce our alkaline water to an entity that is controlled and owned by an officer, director and shareholder of the Company. During the month of March 2014, these funds were returned to the Company.

During the period ended June 30, 2013, the Company had a total of $39,846, in general and administrative expenses with related parties. Of that total for period ended June 30, 201, $20,000 was consulting fees to an officer, director and shareholder of the Company, $8,346 was rent and repairs to an entity that is controlled and owned by an officer, director and shareholder of the Company and $11,500 was professional fees to an entity that is controlled and owned by an officer, director and shareholder.

On January 17, 2014, amended on February 12, 2014 the Company entered into an equipment lease with Water Engineering Solutions LLC, an entity that is controlled and owned by an officer, director and shareholder, for specialized equipment used to make our alkaline water totaling $190,756 and agreed to a 60 month term at $3,864 per month.

On April 2, 2014 the Company entered into a sale-leaseback transaction with Water Engineering Solutions LLC, an entity that is controlled and owned by an officer, director and shareholder, for specialized equipment with an original cost of $208,773 acquired in August 2013. The Company received proceeds of $188,000 in April 2014.

17


The lease terms are 60 monthly payments of $3,812, payable 30 days after installation of the equipment and a purchase option of $1.00. The Company recorded a loss on sales leaseback of $20,773.

Under the terms of the exclusive manufacturing agreement entered into on April 15, 2013 between the Company and Water Engineering Solutions LLC, a related party, we paid $690,000 on May 1 2014 and $21,500 on June 27, 2014 for specialized equipment used in the production of our alkaline water. Water Engineering Solutions LLC is an entity that is controlled and owned by an officer, director and shareholder.

NOTE 11 - SALES LEASEBACK

On April 2, 2014 the Company entered into a sale-leaseback transaction with Water Engineering Solutions LLC, an entity that is controlled and owned by an officer, director and shareholder, for specialized equipment with an original cost of $208,773 acquired in August 2013. Under the terms of the sale leaseback agreement, the Company received proceeds of $188,000 in April 2014 and recorded a loss on sales leaseback of $20,773.

NOTE 12 – CAPITAL LEASE

On January 17, 2014 the Company entered into an equipment lease with Water Engineering Solutions LLC, an entity that is controlled and owned by an officer, director and shareholder, for specialized equipment used to make our alkaline water with a stated value of $190,756 and agreed to a 60 month term at $3,864 per month and a purchase option of $1 which commenced on May 1, 2014.

On April 2, 2014, we entered into a capital lease agreement with Water Engineering Solutions LLC, an entity that is controlled and owned by an officer, director and shareholder, for specialized equipment used to make our alkaline water with a stated value of $188,000, terms of 60 monthly payments of $3,812, payable 30 days after installation of the equipment and a purchase option of $1.00 which commenced on July 1, 2014.

NOTE 13 – SUBSEQUENT EVENTS

On July 3, 2014, the Company entered into an agreement with a third-party to provide consulting services. The compensation in the agreement was $25,000 in cash upon execution of the agreement and the issuance of 350,000 of the Company’s common shares as follows: 175,000 common shares upon execution of the agreement, 70,000 common shares on or before July 15, 2014, 70,000 common shares on or before August 15, 2014 and 35,000 common shares on or before September 15, 2014.

On August 1, 2014, the Company issued 1,000,000 common shares to consultant for services rendered that were valued at the market value on that date of $0.175 per share.

On August 7, 2014, the Company entered into an agreement with a third-party to provide consulting services. The compensation in the agreement was for 2,000,000 of the Company’s common shares to be issued as follows: 500,000 common shares on the date of the execution of the agreement, 500,000 common shares on the date that is 45 days from the execution date, 500,000 common shares on the date that is 90 days from the execution date, and 500,000 common shares on the date that is 135 days from the execution date.

18


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains “forward-looking statements”. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.

Forward-looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. Except as required by applicable law, including the securities laws of the United States, we do not intend, and undertake no obligation, to update any forward-looking statement.

Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:

Throughout this Quarterly Report references to “we”, “our”, “us”, “Alkaline”, “the Company”, and similar terms refer to The Alkaline Water Company Inc.

19


Results of Operations

    For the     For the  
    Three     Three  
    Months     Months  
    Ended     Ended  
    June 30,     June 30,  
    2014     2013  
Revenue $  572,049   $  32,522  
Cost of goods sold   406,125     18,057  
Gross profit   165,924     14,465  
Net loss (after operating            
expenses and other expenses) $ (2,437,209 ) $  (182,487 )

Revenue and Cost of Goods Sold

We had revenue from sales of our product for the three months ended June 30, 2014 of $572,049, as compared to $32,522 for the three month period ended June 30, 2013. The increase in sales is due to the expanded distribution of our products to additional retailers throughout the country. Cost of goods sold is comprised of production costs, shipping and handling costs.

Expenses

Our operating expenses for the three months ended June 30, 2014 and 2013 are as follows:

    For the     For the  
    Three     Three  
    Months     Months  
    Ended     Ended  
    June 30,     June 30,  
    2014     2013  
Sales and marketing expenses $  226,780   $  84,193  
General and administrative expenses   2,138,753     67,509  
General and administrative expenses – related party   -     39,846  
Depreciation expenses   16,534     1,849  
Total operating expenses $  2,382,067   $  193,397  

During the three months ended June 30, 2014 and June 30, 2013, we had a total of $2,138,753 and $67,509, respectively, in general and administrative expenses. The primary factor in the increase which is included in general and administrative expense was the fair value of shares and options of $1,399,127 and $0 for the three months ended June 30, 2014 and 2013, respectively. Administrative expense with related parties was $0 and $39,846 for the three month periods ended June 30, 2014 and 2013, respectively. For these respective periods, administrative expenses with related parties consisted of $0 and $20,000 for consulting fees to an officer, director and shareholder of the Company, $0 and $8,346 for rent, including repairs, to an entity that is controlled and owned by an officer, director and shareholder of the Company and $0 and $11,500 for professional fees to an entity that is controlled and owned by an officer, director and shareholder.

20


Liquidity and Capital Resources

Working Capital

Our working capital as of June 30, 2013 and March 31, 2013 was as follows:

    June     March,  
    30, 2014     31, 2014  
Current assets $  1,138,947   $  281,322  
Current liabilities   1,014,454     836,323  
Working capital $  124,493   $  (555,001 )

Current Assets

Current assets as of June 30, 2014 and March 31, 2014 primarily relate to $620,031 and $2,665 in cash, $160,393 and $166,404 in accounts receivable and $353,829 and $57,965 in inventory, respectively.

Current Liabilities

Current liabilities as at June 30, 2014 primarily relate $490,991 in accounts payable and $257,862 in derivative liability. Current liabilities at March 31, 2014 primarily relate to $320,154 in accounts payable and $337,988 in derivative liability.

Cash Flow

Our cash flows for the three months ended June 30, 2014 and 2013 are as follows:

    For the     For the  
    Three     Three  
    Months     Months  
    Ended     Ended  
    June 30,     June 30,  
    2014     2013  
Net cash used in operating activities $  (1,018,235 ) $  (188,888 )
Net cash used in investing activities   (520,162 )   (91,019 )
Net cash provided by financing activities   2,155,763     600,000  
Net increase in cash and cash equivalents $  617,366   $  320,093  

Operating activities

Net cash used in operating activities was $1,018,235 for the three months ended June 30, 2014, as compared to $188,888 used in operating activities for the three months ended June 30, 2013. The increase in net cash used in operating activities was primarily due to net loss from operations and increase in inventory.

Investing activities

Net cash used in investing activities was $520,162 for the three months ended June 30, 2014, as compared to $91,019 used in investing activities for the three months ended June 30, 2013. The increase in net cash used by investing activities was primarily from the equipment deposits to related parties.

Financing activities

Net cash provided by financing activities for the three months ended June 30, 2014 was $2,155,763, as compared to $600,000 for the three months ended June 30, 2013. The increase of net cash provided by financing activities was mainly attributable to capital provided through sales of our common stock.

21


Cash Requirements

We believe that our cash flows from operations will not meet our present and near-term cash needs and thus we will require additional cash resources, including the sale of equity or debt securities, to meet our planned capital expenditures and working capital requirements for the next 12 months. We estimate that our capital needs over the next 12 month will be $2,000,000 to $5,000,000, depending on how we can continue to expand the distribution of our products across the country. We will require additional cash resources to purchase equipment, increase the production of our products, implement our strategy to expand our sales and marketing initiatives and increase brand awareness. If our own financial resources and then current cash-flows from operations are insufficient to satisfy our capital requirements, 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 did not have any 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 investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable as we are currently considered a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain "disclosure controls and procedures", as that term is defined in Rule 13a-15(e), promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal accounting officer to allow timely decisions regarding required disclosure.

As required by paragraph (b) of Rules 13a-15 under the Securities Exchange Act of 1934, our management, with the participation of our principal executive officer and our principal financial officer, evaluated our company's disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our management concluded that as of the end of the period covered by this quarterly report on Form 10-Q, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not a party to any material legal proceedings.

22


Item 1A. Risk Factors.

Information regarding risk factors appears in our Annual Report on Form 10-K filed on June 30, 2014. There have been no material changes since June 30, 2014 from the risk factors disclosed in that Form 8-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

For partial consideration for the services to be provided under a consulting agreement dated effective as of June 4, 2014, we issued 245,000 shares of our common stock to a third-party consultant on July 31, 2014. In addition, we agreed to issue to the consultant 70,000 shares of our common stock on or before August 15, 2014 and 35,000 shares of our common stock on or before September 15, 2014. We issued and intend to issue these shares to an accredited investor. The issuance of these shares was and will be exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder.

In consideration for the consulting services to be rendered to our company under a consulting agreement dated effective as of August 7, 2014, we agreed to issue a third-party consultant an aggregate of 2,000,000 shares of our common stock to be issued as follows: 500,000 shares on the date of the execution of the agreement, 500,000 shares on the date that is 45 days from the execution date, 500,000 shares on the date that is 90 days from the execution date, and 500,000 shares on the date that is 135 days from the execution date. We issued and intend to issue these shares to an accredited investor. The issuance of these shares was and will be exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On February 12, 2014, we entered into an amendment #1 to the equipment lease agreement dated January 17, 2014 with Water Engineering Solutions, LLC, an entity that is controlled and owned by our President, Chief Executive Officer and director, Steven P. Nickolas, and our Vice-President, Secretary, Treasurer and director, Richard A. Wright. The amendment provides that the term of the lease will commence upon the actual installation and commercial operation of the equipment and continue for 60 months. The amendment also provides that the equipment will be leased for $190,576.00 at a rate of 8% per annum with the residual amount of $1.00. And for the term of the agreement, we agreed to deliver to Water Engineering Solutions, LLC lease payments in the amount of $3,864.19 per month, commencing 30 days after the equipment is commercially operating but no later than July 1, 2014. In addition, the amendment provides that the title will pass to us upon completion of the term and payment of $1.00 residual amount.

On April 2, 2014, we entered into an equipment sale/lease back agreement with Water Engineering Solutions, LLC for alkaline generating electrolysis machinery and equipment with an original cost of $208,773.23 acquired in August 2013. Under the terms of the agreement, Water Engineering Solutions, LLC bought back the equipment for $188,000 in April 2014 and the equipment was leased back to us for $188,000 at a rate of 8% per annum for a term of 60 months with the residual amount of $1.00. For the term of the agreement, we agreed to deliver to Water Engineering Solutions, LLC lease payments in the amount of $3,811.96 per month, commencing on May 2, 2014. In addition, the agreement provides that the title will pass to us upon completion of the term and payment of $1.00 residual amount.

23


Item 6. Exhibits.

Exhibit  
Number Description
   
(1)

Underwriting Agreement

1.1

Engagement Agreement dated October 7, 2013 with H.C. Wainwright & Co., LLC (incorporated by reference from our Registration Statement on Form S-1, filed on November 27, 2013)

1.2

Amendment Agreement to Engagement Agreement dated November 1, 2013 with H.C. Wainwright & Co., LLC (incorporated by reference from our Registration Statement on Form S-1/A, filed on January 9, 2014)

1.3

Amendment Agreement to Engagement Agreement dated November 25, 2013 with H.C. Wainwright & Co., LLC (incorporated by reference from our Registration Statement on Form S-1, filed on November 27, 2013)

1.4

Termination Agreement for Engagement Agreement dated March 12, 2014 with H.C. Wainwright & Co., LLC (incorporated by reference from our Registration Statement on Form S-1, filed on March 12, 2014)

1.5

Engagement Agreement dated March 12, 2014 with H.C. Wainwright & Co., LLC (incorporated by reference from our Registration Statement on Form S-1, filed on March 12, 2014)

(2)

Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession

2.1

Share Exchange Agreement dated May 31, 2013 with Alkaline Water Corp. and its shareholders  (incorporated by reference from our Current Report on Form 8-K, filed on June 5, 2013)

(3)

Articles of Incorporation and Bylaws

3.1

Articles of Incorporation (incorporated by reference from our Form S-1 Registration Statement, filed on October 28, 2011)

3.2

Certificate of Change (incorporated by reference from our Quarterly Report on Form 10-Q, filed on August 13, 2013)

3.3

Articles of Merger (incorporated by reference from our Quarterly Report on Form 10-Q, filed on August 13, 2013)

3.4

Certificate of Amendment (incorporated by reference from our Current Report on Form 8-K, filed on October 11, 2013)

3.5

Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on October 11, 2013)

3.6

Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on November 12, 2013)

3.7

Amended and Restated Bylaws (incorporated by reference from our Current Report on Form 8-K, filed on March 15, 2013)

(10)

Material Contracts

10.1

Contract Packer Agreement dated November 14, 2012 between Alkaline 84, LLC and AZ Bottled Water, LLC (incorporated by reference from our Current Report on Form 8-K, filed on June 5, 2013)

10.2

Private Placement Subscription Agreement dated February 21, 2013 with Alkaline 84, LLC and Bank Gutenberg AG (incorporated by reference from our Quarterly Report on Form 10-Q, filed on May 17, 2013)

10.3

Private Placement Subscription Agreement dated April 17, 2013 with Alkaline 84, LLC and Bank Gutenberg AG (incorporated by reference from our Quarterly Report on Form 10-Q, filed on May 17, 2013)

10.4

Private Placement Subscription Agreement dated May 17, 2013 with Alkaline 84, LLC and Bank Gutenberg AG (incorporated by reference from our Current Report on Form 8-K, filed on June 5, 2013)

10.5

Private Placement Subscription Agreement dated May 29, 2013 with Bank Gutenberg AG  (incorporated by reference from our Current Report on Form 8-K, filed on June 5, 2013)

10.6

2013 Equity Incentive Plan (incorporated by reference from our Current Report on Form 8-K, filed on October 11, 2013)

10.7

Form of Securities Purchase Agreement dated as of November 4, 2013, by and among The Alkaline Water Company Inc. and the purchasers named therein (incorporated by reference from our Current Report on Form 8-K, filed on November 5, 2013)

24



10.8

Form of Registration Rights Agreement dated as of November 4, 2013, by and among The Alkaline Water Company Inc. and the purchasers named therein (incorporated by reference from our Current Report on Form 8-K, filed on November 5, 2013)

10.9

Form of Common Stock Purchase Warrant (incorporated by reference from our Current Report on Form 8-K, filed on November 5, 2013)

10.11

Stock Option Agreement dated October 9, 2013 with Steven P. Nickolas (incorporated by reference from our Quarterly Report on Form 10-Q, filed on November 13, 2013)

10.12

Stock Option Agreement dated October 9, 2013 with Richard A. Wright (incorporated by reference from our Quarterly Report on Form 10-Q, filed on November 13, 2013)

10.13

Contract Packer Agreement dated October 7, 2013 with White Water, LLC (incorporated by reference from our Quarterly Report on Form 10-Q, filed on November 13, 2013)

10.14

Manufacturing Agreement dated August 15, 2013 with Water Engineering Solutions, LLC (incorporated by reference from our Registration Statement on Form S-1, filed on November 27, 2013)

10.15

Equipment Lease Agreement dated January 17, 2014 (incorporated by reference from our Current Report on Form 8-K, filed on January 27, 2014)

10.16

Revolving Accounts Receivable Funding Agreement dated February 20, 2014 (incorporated by reference from our Current Report on Form 8-K, filed on February 25, 2014)

10.17

Form of Securities Purchase Agreement dated as of April 28, 2014, between The Alkaline Water Company Inc. and the purchasers named therein (incorporated by reference from our Current Report on Form 8-K, filed on May 6, 2014)

10.18

Form of Common Stock Purchase Warrant (incorporated by reference from our Current Report on Form 8-K, filed on May 6, 2014)

10.19

Form of Placement Agent Common Stock Purchase Warrant (incorporated by reference from our Current Report on Form 8-K, filed on May 6, 2014)

10.20

Stock Option Agreement dated May 12, 2014 with Steven P. Nickolas (incorporated by reference from our Current Report on Form 8-K, filed on May 14, 2014)

10.21

Stock Option Agreement dated May 12, 2014 with Richard A. Wright (incorporated by reference from our Current Report on Form 8-K, filed on May 14, 2014)

10.22

Stock Option Agreement dated May 21, 2014 with Steven P. Nickolas (incorporated by reference from our Current Report on Form 8-K, filed on May 23, 2014)

10.23

Stock Option Agreement dated May 21, 2014 with Richard A. Wright (incorporated by reference from our Current Report on Form 8-K, filed on May 23, 2014)

10.24*

Amendment #1 dated February 12, 2014 to Equipment Lease Agreement

10.25*

Equipment Sale/Lease Back Agreement dated April 2, 2014

(31)

Rule 13a-14 Certifications

31.1*

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(32)

Section 1350 Certifications

32.1*

Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(101)

Interactive Data File

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase

101.DEF*

XBRL Taxonomy Extension Definition Linkbase

101.LAB*

XBRL Taxonomy Extension Label Linkbase

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase

   
*Filed herewith.

25


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  THE ALKALINE WATER COMPANY INC.
   
   
Date: August 13, 2014 By:         /s/ Steven P. Nickolas               
                 Steven P. Nickolas
                 President, Chief Executive Officer and Director
                 (Principal Executive Officer)
   
   
   
   
Date: August 13, 2014 By:         /s/ Richard A. Wright               
                 Richard A. Wright
                 Vice-President, Secretary, Treasurer and Director
                 (Principal Financial Officer and Principal Accounting
                 Officer)

26