UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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For the quarterly period ended
Commission File Number:
(Exact name of registrant as specified in its charter)
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(I.R.S. Employer Identification No.) |
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Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
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Smaller reporting company [ |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE ALKALINE WATER COMPANY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| June 30, 2022 | March 31, 2022 | |||||
| ASSETS | ||||||
| Current assets | ||||||
| Cash | $ | $ | ||||
| Accounts receivable, net | ||||||
| Inventory | ||||||
| Prepaid expenses | ||||||
| Operating lease right-of-use asset - current portion | ||||||
| Total current assets | ||||||
| Fixed assets - net | ||||||
| Operating lease right-of-use asset | ||||||
| Total assets | $ | $ | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||
| Current liabilities | ||||||
| Accounts payable | $ | $ | ||||
| Accrued expenses | ||||||
| Revolving financing | ||||||
| Convertible note payable, net of debt discount | ||||||
| PPP loan payable - current portion | ||||||
| Operating lease liability - current portion | ||||||
| Total current liabilities | ||||||
| Operating lease liability | ||||||
| Total liabilities | ||||||
| Commitments and contingencies (Note 8) | ||||||
| Stockholders' equity (deficit) | ||||||
| Preferred stock, $ |
||||||
| Common stock, Class A - $ |
||||||
| Subscription Receivable | ( |
) | ||||
| Additional paid in capital | ||||||
| Accumulated deficit | ( |
) | ( |
) | ||
| Total stockholders' equity | ||||||
| Total liabilities and stockholders' equity | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
| For the Three Months | ||||||
| June 30, 2022 | June 30, 2021 | |||||
| Net Revenue | $ | $ | ||||
| Cost of Goods Sold | ||||||
| Gross Profit | ||||||
| Operating expenses | ||||||
| Sales and marketing expenses | ||||||
| General and administrative | ||||||
| Total operating expenses | ||||||
| Total operating loss | ( |
) | ( |
) | ||
| Other expense | ||||||
| Interest expense | ( |
) | ( |
) | ||
| Total other expense | ( |
) | ( |
) | ||
| Net loss | $ | ( |
) | $ | ( |
) |
| LOSS PER SHARE (Basic and Diluted) | $ | ( |
) | $ | ( |
) |
| WEIGHTED AVERAGE SHARES OUTSTANDING (Basic and Diluted) | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT)
(unaudited)
| Preferred Stock | Common Stock | Additional | Subscription | Accumulated | ||||||||||||||||||||
| Number | Par Value | Number | Par Value | Paid-in Capital | Receivable | Deficit | Total | |||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Preferred stock issuance | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants | ||||||||||||||||||||||||
| Common shares issued to non-employees and employees | ||||||||||||||||||||||||
| Stock option and RSU-related stock compensation expense | ||||||||||||||||||||||||
| Stock option exercise | ||||||||||||||||||||||||
| Net (loss) | ( |
) | ( |
) | ||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Common Shares issued in connection with offerings | ||||||||||||||||||||||||
| Stock option exercise | ( |
) | ||||||||||||||||||||||
| Preferred stock conversion to common stock | ( |
) | ( |
) | ||||||||||||||||||||
| Stock option and RSU-related compensation expense and common shares issued opun conversion of RSUs | ||||||||||||||||||||||||
| Net (loss) | ( |
) | ( |
) | ||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Three Months | ||||||
| June 30, 2022 | June 30, 2021 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net loss | $ | ( |
) | $ | ( |
) |
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||
| Depreciation expense | ||||||
| Shares issued and vested, options and RSU expensed for employee and non-employee services | ||||||
| Amortization of debt discount | ||||||
| Non-cash interest expense | ||||||
| Non-cash lease expense | ( |
) | ||||
| Changes in operating assets and liabilities: | ||||||
| Accounts receivable | ( |
) | ||||
| Inventory | ( |
) | ( |
) | ||
| Prepaid expenses and other current assets | ( |
) | ( |
) | ||
| Accounts payable | ||||||
| Accrued expenses | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( |
) | ( |
) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Purchase of fixed assets | ( |
) | ( |
) | ||
| CASH USED IN INVESTING ACTIVITIES | ( |
) | ( |
) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Proceeds from (repayment of) revolving financing | ( |
) | ||||
| Proceeds from sale of common stock, net | ||||||
| Proceeds for the exercise of warrants, net | ||||||
| Proceeds for the exercise of stock options, net | ||||||
| CASH PROVIDED BY FINANCING ACTIVITIES | ||||||
| NET CHANGE IN CASH | ( |
) | ||||
| CASH AT BEGINNING OF PERIOD | ||||||
| CASH AT END OF PERIOD | $ | $ | ||||
| INTEREST PAID | $ | $ | ||||
| TAXES PAID | $ | $ | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company offers retail consumers bottled alkaline water in 500-milliliter, 700-milliliter, 1-liter, 1.5 -liter, 2,-liter, 3-liter and 1-gallon sizes, all of which is produced through an electrolysis process that uses specialized electronic cells coated with a variety of rare earth minerals to produce 8.8 pH drinking water without the use of any manmade chemicals. The Company recently introduced and began selling hemp-derived CBD bottled water under the brand name "Alkaline88CBD™" and Alkaline88® Sports Drinks. Our hemp-derived CBD bottled water is produced and sold in compliance with the Agriculture Improvement Act of 2018 (also known as the 2018 Farm Bill, Public Law 115-334).
Basis of presentation
The 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, pursuant to the rules and regulations of the Securities and Exchange Commission.
Principles of consolidation
The consolidated financial statements include the accounts of The Alkaline Water Company Inc. (a Nevada Corporation) and its wholly owned subsidiary, Alkaline 88, LLC (an Arizona Limited Liability Company). All significant intercompany balances and transactions have been eliminated. The Alkaline Water Company Inc. and Alkaline 88, LLC 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 its Alkaline 88, LLC subsidiary indicated above, unless otherwise indicated.
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. As of the balance sheet date and periodically throughout the period, the Company has maintained balances in various operating accounts in excess of federally insured limits. In addition, the Company has maintained balances in its attorney's client trust account in both C$ and US$. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible. The Company had $
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, 2022 and March 31, 2022:
| June 30, 2022 | March 31, 2022 | |||||
| Trade receivables, net | $ | $ | ||||
| Less: Allowance for doubtful accounts | ( |
) | ( |
) | ||
| Net accounts receivable | $ | $ |
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. The accounts receivable balance is pledged as collateral for the Company's revolving financing as disclosed in Note 3.
Inventory
Inventory represents raw materials and finished goods 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. The inventory balance is pledged as collateral for the Company's revolving financing as disclosed in Note 3.
As of June 30, 2022 and March 31, 2022, inventory consisted of the following:
| June 30, 2022 | March 31, 2022 | |||||
| Raw materials | $ | $ | ||||
| Finished goods | ||||||
| Total inventory | $ | $ |
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 (half-life convention) method over the estimated useful life of the assets or the lease term, whichever is shorter. The Company evaluated its property and equipment for impairment and concluded for the quarter ended June 30, 2022, there was no impairment.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification ("ASC") 718. Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite 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 our performance obligations are satisfied. Our primary performance obligation (the distribution and sale of beverage products) is satisfied upon the delivery of products to our customers, which is also when control is transferred. The Company does not accept returns due to the nature of the product. However, the Company will provide credit to our customers for damaged goods. The Company provides credit to its customers which typically requires payment within 30 days. As an incentive to pay early the Company also typically provides a 2% discount if the customer pays within 10 days. The Company estimates the amount of the discount that the customer is likely to take and records it as reduction in revenue. The amounts are not considered material. The Company's bottled water product represents substantially all revenue for all periods presented.
Revenue consists of the gross sales price, less variable consideration, including estimated allowances for which provisions are made at the time of sale, and less certain other discounts and allowances. Shipping and handling charges that are billed to customers are included as a component of revenue. Costs incurred by the Company for shipping and handling charges are included in selling expenses and amounted to $
Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company's retail customers or distributors including, but not limited to the following: (a) discounts granted off list prices to support price promotions to end-consumers by retailers; (b) reimbursements given to the Company's distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; and (c) the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers, club stores and/or wholesalers; The Company's promotional allowance programs with its retailers or distributors are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, typically ranging from one week to one year. The Company's promotional and other allowances are calculated based on various programs with retailers and distributors, and accruals are established at the time of initial product sale for the Company's anticipated liabilities. The Company believes that adequate provision has been made for cash discounts, returns and spoilage based on the Company's historical experience.
Disaggregated Net Revenues
The following table reflects disaggregated net revenue by sales channel for the years ended June 30, 2022 and June 30, 2021 are as follows:
| June 30, 2022 | June 30, 2021 | |||||
| Retailers | $ | $ | ||||
| Distributors | ||||||
| Ecommerce/Other | ||||||
| Total Net Revenue | $ | $ |
Concentration Risks
The Company has
The Company had
Income Taxes
In accordance with ASC 740 "Accounting for Income Taxes", the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
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 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.
For the three months ended June 30, 2022 and 2021, respectively, the Company had
Business Segments
The Company operates on one segment in one geographic location - the United States of America and; therefore, segment information is not presented.
Recent Accounting Pronouncements
Standards Recently Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. The Company believes that the impact of adopting this standard will not have a material effect on its financial statements.
The Company has evaluated other recent accounting pronouncements through June 30, 2022 and believes that none of them will have a material effect on our consolidated 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 realization of assets and satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in 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, 2022 of ($
The Company's cash position may not be sufficient to support the Company's daily operations. Management plans to raise additional funds by way of a private or ongoing public offering. While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise additional funds, there can be no assurances to that effect. Should the Company fail to raise additional capital, it may be compelled to reduce the scope of its planned future business activities.
The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 - PROPERTY AND EQUIPMENT
Fixed assets consisted of the following at:
| Fixed assets consisted of the following at: | June 30, 2022 | March 31, 2022 | ||||
| Machinery and Equipment | $ | $ | ||||
| Office Equipment | ||||||
| Less: Accumulated Depreciation | ( |
) | ( |
) | ||
| Fixed Assets, net | $ | $ |
Depreciation expense for the quarter ended June 30, 2022 and 2021 was $
NOTE 4 - REVOLVING FINANCING
On February 1, 2017, we entered into a credit and security agreement (the "Credit Agreement") with SCM Specialty Finance Opportunities Fund, L.P. ("SCM" or "Lender"), which subsequently changed its name to CNH Finance Fund I, L.P.
The Credit Agreement provides our company with a revolving credit facility (the "Revolving Facility"), the proceeds of which are to be used to repay existing indebtedness of our company, transaction fees incurred in connection with the Credit Agreement and for the working capital needs of our company.
The Credit Agreement expires on July 3, 2023, unless earlier terminated by the parties in accordance with the terms of the Credit Agreement.
To secure the payment and performance of the obligations under the Credit Agreement, we granted to SCM a continuing security interest in all of our assets and agreed to a lockbox account arrangement in respect of certain eligible receivables.
The Company agreed to pay to SCM monthly an unused line fee in amount equal to
The interest rate will be increased by
The Credit Agreement contains customary representations and warranties and various affirmative and negative covenants including the right of first refusal to provide financing for our company and the financial and loan covenants, such as the loan turnover rate, minimum EBITDA, fixed charge coverage ratio and minimum liquidity requirements.
NOTE 5 - STOCKHOLDERS' EQUITY
Preferred Shares
On October 7, 2013, the Company amended its articles of incorporation to create
Series S Convertible Preferred Stock
On May 12, 2021, The Alkaline Water Company Inc. (the "Company") entered into an Endorsement Agreement (the "Endorsement Agreement"), with ABG-Shaq, LLC ("ABG-Shaq"), an entity affiliated with Shaquille O'Neal, for the personal services of Mr. O'Neal. Pursuant to the Endorsement Agreement, the Company received the right and license to use Mr. O'Neal's name, nickname, initials, autograph, voice, video or film portrayals, photograph, likeness and certain other intellectual property rights, in each case, solely as approved by ABG-Shaq, in connection with the advertising, promotion and sale of the Company's branded products. Mr. O'Neal will also provide brand ambassador services related to appearances, social media and public relations matters. The Endorsement Agreement also includes customary exclusivity, termination, and indemnification clauses.
As consideration for the rights and services granted under the Endorsement Agreement, the Company agreed to pay to ABG-Shaq aggregate cash payments of $
In addition, the Company agreed to grant
In the quarter ended June 30, 2022, the Company recognized an expense of $
Common Stock
Share Issuances
During April, 2022, we sold a total of
Effective as of May 2, 2022, the Company issued
On May 4, 2022, the Company entered into an underwriting agreement (the "Underwriting Agreement") with Aegis Capital Corp. (the "Underwriter"). Pursuant to the Underwriting Agreement, the Company agreed to sell in an underwritten offering (the "Offering") an aggregate of
Effective as of June 15, 2022, the Company issued an aggregate of
Restricted Awards
On June 10, 2022, we granted an award of
NOTE 6 - OPTIONS AND WARRANTS
The Company issued
NOTE 7 - LEASES
As of October 1, 2020, the company entered into a lease for
As of November 1, 2020, the company entered into a lease for
As of April 1, 2022, the Company entered into a lease for
At inception the ROU and Lease Liability was calculated based on the net present value of the future lease payments over the term of the lease. When available, the Company uses the rate implicit in the lease discount payments as the incremental borrowing rate to calculate the net present value; however, the rate implicit in the lease is not readily determinable for our corporate office lease. In this case, the Company estimated its incremental borrowing rate as the interest rate it could borrow an amount equal to the lease payments over a similar term, with similar collateral as the lease, and in a similar economic environment. The Company estimated its rate using available evidence such as rates imposed by third-party lenders to the Company in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to the Company's estimated creditworthiness.
For operating leases that include rent holidays and rent escalation clauses, the Company recognizes lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. The Company records the straight-line lease expense and any contingent rent, if applicable, in general and administrative expenses on the condensed consolidated statements of operations. The corporate office, lease also requires the Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in the general and administrative expenses on the condensed consolidated statements of operations.
Operating Lease expense for the three months ended June 30, 2022 was $
| Operating Leases: | June 30, 2022 | ||
| Operating lease right-of-use asset - current portion | $ | ||
| Operating lease right-of-use asset - non-current portion | |||
| Total Operating lease right-of-use asset | $ | ||
| Operating lease liability - current portion | $ | ||
| Operating lease liability - non-current portion | |||
| Total Operating lease liability | $ | ||
| Weighted average remaining lease term (in years): | |||
| Operating leases |
|
||
| Weighted average discount rate: | |||
| Operating leases |
Maturities of undiscounted lease liabilities as of June 30, 2022 are as follows:
| Operating Leases | |||
| Year ending March 31, 2023 | |||
| Year ending March 31, 2024 | |||
| Year ending March 31, 2025 | |||
| Total lease payments | |||
| Less: Imputed interest | ( |
) | |
| Total lease obligations |
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not believe that the disposition of matters that are pending or asserted will have a material effect on its consolidated financial statements.
NOTE 9 - SUBSEQUENT EVENTS
Private Placement
On July 25, 2022, the Company entered into debt settlement and subscription agreements with
Effective as of July 25, 2022, the Company issued an aggregate of
Effective as of July 25, 2022, we issued
Employment Agreement with Frank Lazaran
On July 29, 2022, The Company entered into an employment agreement with Frank Lazaran, our president, chief executive officer and director. Pursuant to the terms of the employment agreement, we have agreed to pay Mr. Lazaran US$
In addition, subject to compliance with all applicable laws and the rules of any stock exchange on which our common stock is listed, we have agreed to grant to Mr. Lazaran an aggregate of
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 applicable 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 and Canada, 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:
• lack of working capital;
• inability to raise additional financing;
• the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
• deterioration in general or regional economic conditions;
• adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
• inability to efficiently manage our operations;
• inability to achieve future sales levels or other operating results; and
• the unavailability of funds for capital expenditures.
Our financial statements are stated in United States Dollars ($ or US$) unless otherwise stated and are prepared in accordance with United States Generally Accepted Accounting Principles.
In this quarterly report, unless otherwise specified, all references to "common shares" refer to the common shares in our capital stock.
As used in this quarterly report on Form 10-Q, the terms "we", "us" "our", the "Company" and "Alkaline" refer to The Alkaline Water Company Inc., a Nevada corporation, and its wholly owned subsidiary Alkaline 88, LLC (an Arizona Limited Liability Company), unless otherwise specified.
COVID-19
Our business could be materially and adversely affected by the risks, or the public perception of the risks, related to the outbreak of COVID-19. To date, we have managed to operate successfully throughout the pandemic without any material disruptions to our supply chain. Although retailers which carry our products may be considered essential businesses and therefore be allowed to remain operational, they may experience significantly reduced demand. The risk of a pandemic, or public perception of the risk, could cause customers to avoid public places, including retail properties, and could cause temporary or long-term disruptions in our supply chains and/or delays in the delivery of our inventory to our customers. Further, such risks could also adversely affect retail customers' financial condition, resulting in reduced spending on our products, which are marketed as premium products. "Shelter-in-place" or other such orders by governmental entities could also disrupt our operations, if our employees or the employees of our sourcing partners who cannot perform their responsibilities from home, are not able to report to work. Risks related to an epidemic, pandemic or other health crisis, such as COVID-19, could also lead to the complete or partial closure of one or more of our co-packing facilities or operations of our sourcing partners.
Inflationary Pressure
We have seen significant margin contraction as a result of inflationary pressures over the last 12 months. We've taken a number of steps that will allow us to increase our margins in the year ended March 31, 2023. These steps include (1) an approximate 9% across the board price increase (effective across all banners for the entire fiscal 2023); (2) a potential leveling off or small reduction in freight costs due to the geographic distribution of our new co-packers and suppliers; and (3) our buying power allowing us to lock in price breaks on raw materials over the next 12 months.
Results of Operations
Our results of operations for the three months ended June 30, 2022 and June 30, 2021 are as follows:
| For the three months ended June 30, 2022 |
For the three months ended June 30, 2021 |
|||||
| Revenue | $ | 16,894,403 | $ | 14,113,578 | ||
| Cost of goods sold | 13,399,774 | 9,311,011 | ||||
| Gross profit | $ | 3,494,629 | $ | 4,802,567 | ||
| Net Loss | $ | (7,493,408 | ) | $ | (7,425,626 | ) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the three months ended June 30, 2022 of $16,894,403 as compared to $14,113,578 for the three months ended June 30, 2021, an increase of 20%. 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, Sam's Club, Family Dollar, Albertson/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB and Brookshire's.
Cost of goods sold is comprised of production costs, shipping and handling costs. For the three months ended June 30, 2022, we had cost of goods sold of $13,399,774, or 79% of revenue, as compared to cost of goods sold of $9,311,011 or 66% of revenue, for the three months ended June 30, 2021. The increase in cost of goods sold is due to increased raw material costs and increased freight costs to our co-packers.
Expenses
Our operating expenses for the three months ended June 30, 2022 and June 30, 2021 are as follows:
| For the three months ended June 30, 2022 |
For the three months ended June 30, 2021 |
|||||
| Sales and marketing expenses | $ | 6,921,846 | $ | 7,156,400 | ||
| General and administrative expenses | 2,863,993 | 4,964,373 | ||||
| Total operating expenses | $ | 9,785,839 | $ | 12,120,774 |
For the three months ended June 30, 2022, our total operating expenses were $9,785,839 as compared to $12,120,774 for the three months ended June 30, 2021.
For the three months ended June 30, 2022, the total included $6,951,846 of sales and marketing expenses. For the three months ended June 30, 2021 the total included $7,156,400 of sales and marketing expenses. Compared to the three months ended June 30, 2021, sales and marketing expenses for the three months ended June 30, 2022 decreased due to lower advertising and promotion of approximately $0.2 million and lower professional fees of approximately $0.6 million offset by an increase of freight to our customers in the amount of $0.9 million.
For the three months ended June 30, 2022, general and administrative expenses of $2,863,993 consisted primarily of approximately $0.4 million of professional fees, media fees and legal fees, stock compensation expense of approximately $0.2 million and approximately $2.0 million of wages and wage related expenses. For the three months ended June 30, 2021, general and administrative expenses of $4,964,374, consisted primarily of approximately $2.6 million of professional fees, media fees and legal fees, stock compensation expense of approximately $1.1 million and approximately $1.0 million of wages and wage related expenses.
Liquidity and Capital Resources
Working Capital
| June 30, 2022 | March 31, 2022 | |||||
| Current assets | $ | 26,597,195 | $ | 21,157,421 | ||
| Current liabilities | 27,828,934 | 21,920,686 | ||||
| Working capital | $ | (1,231,739 | ) | $ | (763,265 | ) |
Current Assets
Current assets as of June 30, 2022 and March 31, 2022 primarily include $2,945,924 and $1,531,062 in cash, $8,422,415 and $7,927,065 in accounts receivable and $10,678,339 and $8,583,664 in inventory, respectively.
Current Liabilities
Current liabilities as of June 30, 2022 and March 31, 2022 primarily include $11,934,494 and $10,441,879 in accounts payable, revolving financing of $6,539,787 and $7,043,870, and accrued expenses of $5,946,778 and $2,036,736, respectively. The increase in accrued expenses during the three-month period ending June 30, 2022 is primarily due to approximately $3 million of proceeds received early by the Company as of June 30, 2022 for warrants exercised by third parties as part of the debt settlement transaction that did not close until July 25, 2022 as detailed below.
Cash Flow
Our cash flows for the three months ended June 30, 2022 and June 30, 2021 are as follows:
| For the three months ended June 30, 2022 |
For the three months ended June 30, 2021 |
|||||
| Net Cash used in operating activities | $ | (2,494,650 | ) | $ | (6,055,313 | ) |
| Net Cash used in investing activities | (854,997 | ) | (61,444 | ) | ||
| Net Cash provided by financing activities | 4,764,509 | 1,483,706 | ||||
| Net increase (decrease) in cash | $ | 1,414,862 | $ | (4,633,051 | ) |
Operating Activities
Net cash used in operating activities was $2,494,650 for the three months ended June 30, 2022, as compared to $6,055,313 used in operating activities for the three months ended June 30, 2021. The decrease in net cash used in operating activities was primarily due to the receipt of approximately $3 million for the exercise of warrants that were not exercised until July 25, 2022 (see below Financing Activities Subsequent to June 30, 2022).
Investing Activities
Net cash used in investing activities was $854,997 for the three months ended June 30, 2022, as compared to $61,444 used in investing activities for the three months ended June 30, 2021. The increase in net cash used in investing activities was primarily due to the purchase of equipment for 2 new co-packing plants and the purchase of a new model for our 1-gallon bottle.
Financing Activities
Net cash provided by financing activities for the three months ended June 30, 2022 was $4,764,509, as compared to $1,483,706 for the three months ended June 30, 2020. The increase in net cash provided by financing activities was primarily to due proceeds from the sale of common stock in the amount of $5.2 million in the three months ended June 30, 2022.
Financing Activities Subsequent to June 30, 2022
We entered into debt settlement and subscription agreements with four creditors, and we issued units to three creditors and special warrants to one creditor in settlement of debt in an aggregate of $3,869,962 (principal of $3,800,000 and accrued and unpaid interest of $69,962) owing the creditors in connection with certain convertible notes.
Effective as of July 25, 2022, we issued an aggregate of 9,633,616 units of our company at a deemed price of $0.37 per unit to three creditors. Each unit was comprised of one share of common stock and one warrant. Each warrant entitled the holder to purchase an additional share of our common stock at a price of $0.44 per share for a period of three years. As a condition of the debt settlement, each of the creditors who has received the units has agreed to immediately exercise the creditor's respective warrants. Accordingly, the creditors exercised warrants for an aggregate of $4,238,791 (of which approximately $3 million was received as of June 30, 2022 and recorded as an accrued liability of the Company pending the closing of this debt settlement transaction) resulting in an aggregate of an additional 9,633,616 shares of our common stock being issued to such creditors.
Effective as of July 25, 2022, we issued 825,738 special warrants at a deemed price of $0.37 per special warrant to one creditor. Each special warrant is automatically exercisable (without payment of any further consideration and subject to customary anti-dilution adjustments) into units on the date that is the earlier of: (i) the date that is three business days following the date on which our company obtains a receipt from the British Columbia Securities Commission for a (final) short form prospectus qualifying the distribution of the units issuable upon exercise of the special warrants, and (ii) the date that is four months and one day after the issuance of the special warrants. Each unit will be comprised of one share of common stock and one warrant. Each warrant will entitle the holder to purchase an additional share of our common stock at a price of $0.44 per share. As consideration for the debt settlement and the issuance of the special warrants, the creditor agreed to exercise the warrants immediately upon automatic exercise of the special warrants by payment of $363,325, which amount is held in trust by the creditor's solicitors until the automatic exercise date, for an additional 825,735 shares of our common stock.
Cash Requirements
Our ability to operating as a going concern is dependent on obtaining adequate capital to fund operating losses until we become profitable. We announced on July 9, 2022 that we have begun implementing a combination of cost-reduction measures and margin enhancements. The cost reduction measures include a) organizational restructuring; b) reductions in professional services; and c) reductions in marketing and promotional expenses and the margin enhancements will include a) packaging changes; b) improved manufacturing efficiencies; c) pricing and promotional optimization; and d) decreases in freight costs due to an enhanced distribution network.
Our cash on hand, plus the implementation of our cost-reduction and margin enhancement strategy, anticipated warrant exercises, our line of credit and the sales agreement with Roth Capital Partners, LLC is planned to fund our current planned operations and capital needs. However, if our current plans change or are accelerated or we choose to increase our production capacity, we may seek to sell additional equity or debt securities or obtain additional credit facilities, including seeking investments from strategic investors. 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 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
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 financial 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 not effective. The ineffectiveness of our disclosure controls and procedures was due to the material weaknesses in our internal control over financial reporting disclosed in our annual report on Form 10-K for the fiscal year ended March 31, 2022.
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, 2022 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 know of no material pending legal proceedings to which our company or any of our subsidiaries is a party or of which any of our properties, or the properties of any of our subsidiaries, is the subject. In addition, we do not know of any such proceedings contemplated by any governmental authorities.
We know of no material proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder is a party adverse to our company or any of our subsidiaries or has a material interest adverse to our company or any of our subsidiaries.
Item 1A. Risk Factors
Information regarding risk factors appears in our Annual Report on Form 10-K filed on July 14, 2022. There have been no material changes since July 14, 2022 from the risk factors disclosed in that Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Since the beginning of our fiscal quarter ended June 30, 2022, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in a current report on Form 8-K.
On July 29, 2022, we granted Frank Lazaran, our president, chief executive officer and director, an award of 500,000 shares of our common stock as a "restricted award" under the employment agreement dated July 29, 2022 with Mr. Lazaran and our 2020 equity incentive plan. These shares vested as of July 29, 2022. On July 29, 2022, we granted Mr. Lazaran stock options to purchase 1,000,000 shares of our common stock pursuant the employment agreement and our 2020 equity incentive plan. Each stock option is exercisable at a price of $0.428 per share until July 29, 2032. The stock options will vest as to 50% on each anniversary of the grant date. We granted the awards of these shares and stock options to one U.S. Person (as that term is defined in Regulation S of the Securities Act of 1933) and in granting these awards we relied on the registration exemption provided for in Section 4(a)(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
*Filed herewith.
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 15, 2022 | By: | /s/ Frank Lazaran |
| Frank Lazaran | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 15, 2022 | By: | /s/ David A. Guarino |
| David A. Guarino | ||
| Chief Financial Officer and Treasurer | ||
| (Principal Financial Officer and Principal | ||
| Accounting Officer) | ||