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 SeptemberJune 30, 20212022
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38754
THE ALKALINE WATER COMPANY INC.
(Exact name of registrant as specified in its charter)
Nevada | 99-0367049 |
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
| |
8541 E. Anderson Drive, Suite 100, Scottsdale, AZ | 85255 |
(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)
Securities registered pursuant to Section 12(b) of the Act
Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock, par value $0.001 per share | WTER | The Nasdaq Stock Market LLC |
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 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).
Yes [X] No [ ]
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 [ ] |
| Non-accelerated filer [X] | Smaller reporting company [X] |
| 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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
104,333,373141,888,269 shares of common stock issued and outstanding as of November 9, 2021.August 12, 2022.
PART I-FINANCIALI - FINANCIAL INFORMATION
Item 1. Financial Statements.Statements
THE ALKALINE WATER COMPANY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, 2021 | March 31, 2021 | June 30, 2022 | March 31, 2022 | ||||||||||
| ASSETS | ASSETS | ||||||||||||
| Current assets | Current assets | ||||||||||||
| Cash | Cash | $ | 10,419,065 | $ | 9,130,956 | $ | 2,945,924 | $ | 1,531,062 | ||||
| Accounts receivable, net | Accounts receivable, net | 10,983,231 | 8,458,176 | 8,422,415 | 7,927,065 | ||||||||
| Inventory | Inventory | 6,277,844 | 4,407,720 | 10,678,339 | 8,583,664 | ||||||||
| Prepaid expenses | Prepaid expenses | 2,760,987 | 1,037,961 | 4,362,972 | 2,928,085 | ||||||||
| Operating lease right-of-use asset - current portion | Operating lease right-of-use asset - current portion | 185,517 | 236,446 | 187,545 | 187,545 | ||||||||
| Total current assets | Total current assets | 30,626,644 | 23,271,259 | 26,597,195 | 21,157,421 | ||||||||
| Fixed assets - net | Fixed assets - net | 1,007,561 | 1,010,183 | 1,868,362 | 1,200,797 | ||||||||
| Operating lease right-of-use asset | Operating lease right-of-use asset | 190,348 | 269,167 | 95,473 | 142,359 | ||||||||
| Total assets | Total assets | $ | 31,824,553 | $ | 24,550,609 | $ | 28,561,030 | $ | 22,500,577 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |||||||||||||
| Current liabilities | Current liabilities | ||||||||||||
| Accounts payable | Accounts payable | $ | 7,984,651 | $ | 7,055,348 | $ | 11,934,494 | $ | 10,441,879 | ||||
| Accrued expenses | Accrued expenses | 1,388,349 | 1,306,106 | 5,946,778 | 2,036,739 | ||||||||
| Revolving financing | Revolving financing | 6,997,928 | 4,324,412 | 6,539,787 | 7,043,870 | ||||||||
| Convertible note payable, net of debt discount | 3,208,445 | 2,223,633 | |||||||||||
| PPP loan payable - current portion | PPP loan payable - current portion | 330,551 | 328,570 | - | - | ||||||||
| Operating lease liability - current portion | Operating lease liability - current portion | 207,007 | 229,605 | 199,430 | 174,565 | ||||||||
| Total current liabilities | Total current liabilities | 16,908,486 | 13,244,041 | 27,828,934 | 21,920,686 | ||||||||
| Operating lease liability | Operating lease liability | 193,798 | 292,582 | 106,727 | 178,753 | ||||||||
| Total liabilities | Total liabilities | 17,102,284 | 13,536,623 | 27,935,661 | 22,099,439 | ||||||||
| Commitments and contingencies (Note 10) | 0 | 0 | |||||||||||
| Commitments and contingencies (Note 8) | |||||||||||||
| Stockholders' equity | |||||||||||||
| Preferred stock, $0.001 par value, 100,000,000 shares authorized, 6,681,090 Series S issued and outstanding on September 30, 2021 and nil issued and outstanding on March 31, 2021 | 6,681 | 0 | |||||||||||
| Common stock, Class A - $0.001 par value, 200,000,000 shares authorized 104,333,373 and 87,465,178 shares issued and outstanding at September 30, 2021 and March 31, 2021, respectively | 104,335 | 87,464 | |||||||||||
| Stockholders' equity (deficit) | |||||||||||||
| Preferred stock, $0.001 par value, 100,000,000 shares authorized, 2,227,030 Series S issued and outstanding on June 30, 2022 and 4,453,970 issued and outstanding on March 31, 2022 | 2,227 | 4,454 | |||||||||||
| Common stock, Class A - $0.001 par value, 200,000,000 shares authorized 122,121,037 and 110,571,812 shares issued and outstanding at June 30, 2022 and March 31, 2022, respectively | 122,121 | 110,572 | |||||||||||
| Subscription Receivable | - | (62,388 | ) | ||||||||||
| Additional paid in capital | Additional paid in capital | 102,346,572 | 80,857,742 | 117,510,009 | 109,864,080 | ||||||||
| Accumulated deficit | Accumulated deficit | (87,735,319 | ) | (69,931,220 | ) | (117,008,988 | ) | (109,515,580 | ) | ||||
| Total stockholders' equity | Total stockholders' equity | 14,722,269 | 11,013,986 | 625,369 | 401,138 | ||||||||
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 31,824,553 | $ | 24,550,609 | $ | 28,561,030 | $ | 22,500,577 | ||||
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 | $ | 16,894,403 | $ | 14,113,578 | ||
| Cost of Goods Sold | 13,399,774 | 9,311,011 | ||||
| Gross Profit | 3,494,629 | 4,802,567 | ||||
| Operating expenses | ||||||
| Sales and marketing expenses | 6,921,846 | 7,156,400 | ||||
| General and administrative | 2,863,993 | 4,964,374 | ||||
| Total operating expenses | 9,785,839 | 12,120,774 | ||||
| Total operating loss | (6,291,210 | ) | (7,318,207 | ) | ||
| Other expense | ||||||
| Interest expense | (1,202,198 | ) | (107,419 | ) | ||
| Total other expense | (1,202,198 | ) | (107,419 | ) | ||
| Net loss | $ | (7,493,408 | ) | $ | (7,425,626 | ) |
| LOSS PER SHARE (Basic and Diluted) | $ | (0.06 | ) | $ | (0.08 | ) |
| WEIGHTED AVERAGE SHARES OUTSTANDING (Basic and Diluted) | 117,518,198 | 88,342,316 | ||||
| For the Three Months | For the Six Months | |||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||
| Revenue | $ | 15,255,765 | $ | 10,160,552 | $ | 29,369,343 | $ | 23,592,862 | ||||
| Cost of Goods Sold | 10,091,415 | 6,509,264 | 19,402,426 | 15,104,105 | ||||||||
| Gross Profit | 5,164,350 | 3,651,288 | 9,966,917 | 8,488,757 | ||||||||
| Operating expenses | ||||||||||||
| Sales and marketing expenses | 10,120,875 | 4,389,335 | 17,277,275 | 8,107,566 | ||||||||
| General and administrative | 5,251,751 | 3,492,648 | 10,216,125 | 7,442,565 | ||||||||
| Total operating expenses | 15,372,626 | 7,881,983 | 27,493,400 | 15,550,131 | ||||||||
| Total operating loss | (10,208,276 | ) | (4,230,695 | ) | (17,526,483 | ) | (7,061,374 | ) | ||||
| Other expense | ||||||||||||
| Interest expense | (170,197 | ) | (130,933 | ) | (277,616 | ) | (321,257 | ) | ||||
| Total other expense | (170,197 | ) | (130,933 | ) | (277,616 | ) | (321,257 | ) | ||||
| Net loss | $ | (10,378,473 | ) | $ | (4,361,628 | ) | $ | (17,804,099 | ) | $ | (7,382,631 | ) |
| LOSS PER SHARE (Basic and Diluted) | $ | (0.11 | ) | $ | (0.06 | ) | $ | (0.20 | ) | $ | (0.12 | ) |
| WEIGHTED AVERAGE SHARES OUTSTANDING (Basic and Diluted) | 93,669,358 | 67,888,935 | 91,020,392 | 62,646,038 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(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 | - | $ | - | 87,465,178 | $ | 87,464 | $ | 80,857,742 | $ | - | $ | (69,931,220 | ) | $ | 11,013,986 | |||||||||
| Preferred stock issuance | 6,681,090 | 6,681 | 2,220,350 | 2,227,031 | ||||||||||||||||||||
| Common shares issued upon exercise of warrants | 1,277,777 | 1,278 | 651,499 | 652,777 | ||||||||||||||||||||
| Common shares issued to non-employees and employees | 855,499 | 856 | 39,144 | 40,000 | ||||||||||||||||||||
| Stock option and RSU-related stock compensation expense | 651,648 | 651,648 | ||||||||||||||||||||||
| Stock option exercise | 162,668 | 163 | 48,068 | 48,231 | ||||||||||||||||||||
| Net (loss) | (7,425,626 | ) | (7,425,626 | ) | ||||||||||||||||||||
| Balance, June 30, 2021 | 6,681,090 | $ | 6,681 | 89,761,122 | $ | 89,761 | $ | 84,468,451 | $ | - | $ | (77,356,846 | ) | $ | 7,208,047 | |||||||||
| Balance, March 31, 2022 | 4,453,970 | $ | 4,454 | 110,571,812 | $ | 110,572 | $ | 109,864,080 | $ | (62,388 | ) | $ | (109,515,580 | ) | $ | 401,138 | ||||||||
| Common Shares issued in connection with offerings | 9,083,574 | 9,083 | 5,197,121 | 62,388 | 5,268,592 | |||||||||||||||||||
| Stock option exercise | 16,956 | 17 | (17 | ) | - | |||||||||||||||||||
| Preferred stock conversion to common stock | (2,226,940 | ) | (2,227 | ) | 2,227,030 | 2,227 | 2,227,030 | 2,227,030 | ||||||||||||||||
| Stock option and RSU-related compensation expense and common shares issued opun conversion of RSUs | 221,665 | 222 | 221,795 | 222,017 | ||||||||||||||||||||
| Net (loss) | (7,493,408 | ) | (7,493,408 | ) | ||||||||||||||||||||
| Balance, June 30, 2022 | 2,227,030 | $ | 2,227 | 122,121,037 | $ | 122,121 | $ | 117,510,009 | $ | - | $ | (117,008,988 | ) | $ | 625,369 | |||||||||
| Preferred Stock | Common Stock | Additional | Accumulated | |||||||||||||||||||||
| Number | Par Value | Number | Par Value | Paid-in Capital | Stock Payable | Deficit | Total | |||||||||||||||||
| Balance, March 31, 2020 | 3,400,000 | $ | 3,400 | 45,585,592 | $ | 45,585 | $ | 54,094,848 | $ | 1,000,000 | $ | (53,521,700 | ) | $ | 1,622,133 | |||||||||
| Preferred stock conversion | (3,400,000 | ) | (3,400 | ) | 3,400,000 | 3,400 | - | |||||||||||||||||
| Common shares issued in connection with offerings | 9,750,000 | 9,750 | 3,890,250 | (1,000,000 | ) | 2,900,000 | ||||||||||||||||||
| Common shares issued upon exercise of warrants | 287,666 | 288 | 258,612 | 258,900 | ||||||||||||||||||||
| Common shares issued to non-employees and employees | 472,000 | 472 | 486,828 | 487,300 | ||||||||||||||||||||
| Stock Option expense | 661,959 | 661,959 | ||||||||||||||||||||||
| Stock Option exercise | 116,000 | 116 | 61,364 | 61,480 | ||||||||||||||||||||
| Stock Payable | 1,999,998 | 1,999,998 | ||||||||||||||||||||||
| Net (loss) | (3,021,003 | ) | (3,021,003 | ) | ||||||||||||||||||||
| Balance, June 30, 2020 | - | $ | - | 59,611,258 | $ | 59,611 | $ | 59,453,861 | $ | 1,999,998 | $ | (56,542,703 | ) | $ | 4,970,767 | |||||||||
| Common shares issued in connection with offerings | 4,444,440 | 4,444 | 1,995,554 | (1,999,998 | ) | - | ||||||||||||||||||
| Common shares issued upon exercise of warrants | 8,839,399 | 8,839 | 4,555,484 | 4,564,323 | ||||||||||||||||||||
| Common shares issued to non-employees | 191,136 | 191 | 326,408 | 326,599 | ||||||||||||||||||||
| Stock Option expense | 204,594 | 204,594 | ||||||||||||||||||||||
| Stock Option exercise | 236,239 | 236 | (236 | ) | - | |||||||||||||||||||
| Net (loss) | (4,361,628 | ) | (4,361,628 | ) | ||||||||||||||||||||
| Balance, September 30, 2020 | - | $ | - | 73,322,472 | $ | 73,321 | $ | 66,535,665 | $ | - | $ | (60,904,331 | ) | $ | 5,704,655 | |||||||||
| Balance, March 31, 2021 | - | $ | - | 87,465,178 | $ | 87,464 | $ | 80,857,742 | $ | - | $ | (69,931,220 | ) | $ | 11,013,986 | |||||||||
| Preferred stock issuance | 6,681,090 | 6,681 | 2,220,350 | 2,227,031 | ||||||||||||||||||||
| Common shares issued upon exercise of warrants | 1,277,777 | 1,278 | 651,499 | 652,777 | ||||||||||||||||||||
| Common shares issued to non-employees and employees | 855,499 | 856 | 39,144 | 40,000 | ||||||||||||||||||||
| Stock option and RSU-related stock compensation expense | 651,648 | 651,648 | ||||||||||||||||||||||
| Stock Option exercise | 162,668 | 163 | 48,068 | 48,231 | ||||||||||||||||||||
| Net (loss) | (7,425,626 | ) | (7,425,626 | ) | ||||||||||||||||||||
| Balance, June 30, 2021 | 6,681,090 | $ | 6,681 | 89,761,122 | $ | 89,761 | $ | 84,468,451 | $ | - | $ | (77,356,846 | ) | $ | 7,208,047 | |||||||||
| Common shares issued in connection with offerings | 4,757,381 | 4,757 | 4,990,493 | 4,995,250 | ||||||||||||||||||||
| Common shares issued upon exercise of warrants | 9,523,376 | 9,526 | 11,894,694 | 11,904,220 | ||||||||||||||||||||
| Common shares issued to non-employees | 172,802 | 173 | 307,546 | 307,719 | ||||||||||||||||||||
| Stock option and RSU-related stock compensation expense | 625,556 | 625,556 | ||||||||||||||||||||||
| Stock Option exercise | 118,692 | 118 | 59,832 | 59,950 | ||||||||||||||||||||
| Net (loss) | (10,378,473 | ) | (10,378,473 | ) | ||||||||||||||||||||
| Balance, September 30, 2021 | 6,681,090 | $ | 6,681 | 104,333,373 | $ | 104,335 | $ | 102,346,572 | $ | - | $ | (87,735,319 | ) | $ | 14,722,269 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)
| For the Six Months | ||||||
| September 30, 2021 | September 30, 2020 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net loss | $ | (17,804,099 | ) | $ | (7,382,631 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||
| Depreciation expense | 318,030 | 412,317 | ||||
| Shares issued and vested, options and RSU amortized for employee and non-employee services | 3,851,955 | 1,680,453 | ||||
| Non-cash lease expense | 8,366 | (9,907 | ) | |||
| Changes in operating assets and liabilities: | ||||||
| Accounts receivable | (2,525,055 | ) | (859,937 | ) | ||
| Inventory | (1,870,124 | ) | (1,329,721 | ) | ||
| Prepaid expenses and other current assets | (1,723,026 | ) | (807,161 | ) | ||
| Accounts payable | 929,303 | (142,116 | ) | |||
| Accrued expenses | 84,224 | 327,187 | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (18,730,426 | ) | (8,111,516 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Purchase of fixed assets | (315,408 | ) | (90,109 | ) | ||
| CASH USED IN INVESTING ACTIVITIES | (315,408 | ) | (90,109 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Proceeds from (repayment of) revolving financing | 2,673,516 | (2,493,680 | ) | |||
| Proceeds from promissory note payable | 0 | 325,800 | ||||
| Proceeds from sale of common stock, net | 4,995,250 | 4,899,998 | ||||
| Proceeds from stock payable | 0 | 0 | ||||
| Proceeds for the exercise of warrants, net | 12,556,997 | 4,823,222 | ||||
| Proceeds for the exercise of stock options, net | 108,180 | 61,480 | ||||
| CASH PROVIDED BY FINANCING ACTIVITIES | 20,333,943 | 7,616,820 | ||||
| NET CHANGE IN CASH | 1,288,109 | (584,805 | ) | |||
| CASH AT BEGINNING OF PERIOD | 9,130,956 | 4,561,682 | ||||
| CASH AT END OF PERIOD | $ | 10,419,065 | $ | 3,976,877 | ||
| INTEREST PAID | $ | 271,190 | $ | 276,813 | ||
| TAXES PAID | $ | 0 | $ | 0 | ||
| SUPPLEMENTAL DISCLOSURE of NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||
| ISSUANCE OF COMMON SHARES TO SETTLE STOCK PAYABLE | $ | 0 | $ | 1,000,000 | ||
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 | $ | (7,493,408 | ) | $ | (7,425,626 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||
| Depreciation expense | 187,432 | 159,015 | ||||
| Shares issued and vested, options and RSU expensed for employee and non-employee services | 2,449,047 | 2,918,680 | ||||
| Amortization of debt discount | 935,102 | - | ||||
| Non-cash interest expense | 49,710 | - | ||||
| Non-cash lease expense | (275 | ) | 5,084 | |||
| Changes in operating assets and liabilities: | ||||||
| Accounts receivable | (495,350 | ) | 236,803 | |||
| Inventory | (2,094,675 | ) | (629,855 | ) | ||
| Prepaid expenses and other current assets | (1,434,887 | ) | (2,028,928 | ) | ||
| Accounts payable | 1,492,615 | 653,199 | ||||
| Accrued expenses | 3,910,039 | 56,315 | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (2,494,650 | ) | (6,055,313 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Purchase of fixed assets | (854,997 | ) | (61,444 | ) | ||
| CASH USED IN INVESTING ACTIVITIES | (854,997 | ) | (61,444 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Proceeds from (repayment of) revolving financing | (504,083 | ) | 782,699 | |||
| Proceeds from sale of common stock, net | 5,268,592 | - | ||||
| Proceeds for the exercise of warrants, net | - | 652,777 | ||||
| Proceeds for the exercise of stock options, net | - | 48,230 | ||||
| CASH PROVIDED BY FINANCING ACTIVITIES | 4,764,509 | 1,483,706 | ||||
| NET CHANGE IN CASH | 1,414,862 | (4,633,051 | ) | |||
| CASH AT BEGINNING OF PERIOD | 1,531,062 | 9,130,956 | ||||
| CASH AT END OF PERIOD | $ | 2,945,924 | $ | 4,497,905 | ||
| INTEREST PAID | $ | 215,164 | $ | 105,197 | ||
| 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)
(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,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. In addition to its bottled alkaline water, the Company also offers retail consumers flavor infused bottled water in the 500-milliliter size in six flavors: Raspberry, Watermelon, Lemon, Lemon Lime, Peach Mango and Blood Orange. The Company recently introduced and began selling hemp-derived CBD topical and ingestible productsbottled water under the brand name "A88CBD™"Alkaline88CBD™". and Alkaline88® Sports Drinks. Our hemp-derived CBD products arebottled 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
These unaudited financial statements represent the condensedThe consolidated financial statements of The Alkaline Water Company and its wholly owned subsidiaries (collectively, the "Company"). These unaudited condensed consolidated financial statements should be readincluded herein, presented in conjunctionaccordance with the Company's consolidated financial statements and the notes thereto as set forth in the Company's Form 10-K, filed with the SEC on July 2, 2021, which included all disclosures required byUnited States generally accepted accounting principles ("GAAP") Inand stated in U.S. dollars, have been prepared by the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessaryCompany, pursuant to present fairly the Company's financial position on a consolidated basisrules and the consolidated results of operations, equity and cash flows for the interim periods presented. The results of operations for the three and six months ended September 30, 2021 and 2020 are not necessarily indicative of expected operating results for the full year. The information presented throughout the document as of and for the three and six months ended September 30, 2021 and 2020 is unaudited. The consolidated balance sheet at March 31, 2021 has been derived from the audited financial statements at that date but does not include allregulations of the informationSecurities and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements.Exchange Commission.
Principles of consolidation
The consolidated financial statements include the accounts of The Alkaline Water Company Inc. (a Nevada Corporation) and its six wholly owned subsidiaries: A88 Infused Beverage Division Inc. (a Nevada Corporation), A88 International, Inc. (a Nevada Corporation), A88 Infused Products Inc. (a Nevada Corporation), AWC Acquisition Company Inc. (a Nevada corporation), The Clean Beverage Company Inc (a Nevada corporation) andsubsidiary, Alkaline 88, LLC (an Arizona Limited Liability Company). All significant intercompany balances and transactions have been eliminated. The Alkaline Water Company Inc., A88 Infused Beverage Division, Inc., A88 Infused Products Inc., A88 International, Inc., AWC Acquisition Company Inc., The Clean Beverage 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 the subsidiariesits 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 $10,419,065$2,945,924 and $9,130,956$1,531,062 in cash at SeptemberJune 30, 20212022 and March 31, 2021,2022, 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 SeptemberJune 30, 20212022 and March 31, 2021:2022:
| June 30, 2022 | March 31, 2022 | |||||
| Trade receivables, net | $ | 8,912,415 | $ | 8,397,065 | ||
| Less: Allowance for doubtful accounts | (490,000 | ) | (470,000 | ) | ||
| Net accounts receivable | $ | 8,422,415 | $ | 7,927,065 |
| September 30, 2021 | March 31, 2021 | |||||
| (unaudited) | ||||||
| Trade receivables, net | $ | 11,323,231 | $ | 8,798,176 | ||
| Less: Allowance for doubtful accounts | (340,000 | ) | (340,000 | ) | ||
| Net accounts receivable | $ | 10,983,231 | $ | 8,458,176 |
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 SeptemberJune 30, 20212022 and March 31, 2021,2022, inventory consisted of the following:
| June 30, 2022 | March 31, 2022 | |||||
| Raw materials | $ | 6,755,208 | $ | 3,848,750 | ||
| Finished goods | 3,923,131 | 4,734,914 | ||||
| Total inventory | $ | 10,678,339 | $ | 8,583,664 |
| September 30, 2021 | March 31, 2021 | |||||
| (unaudited) | ||||||
| Raw materials | $ | 4,146,330 | $ | 3,055,091 | ||
| Finished goods | 2,131,514 | 1,352,629 | ||||
| Total inventory | $ | 6,277,844 | $ | 4,407,720 |
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 whichor the lease term, whichever is shorter. The Company has determined to be 3 years.evaluated its property and equipment for impairment and concluded for the quarter ended June 30, 2022, there was no impairment.
Going Concern
The Company has not generated sufficient revenues from product sales to provide for cash flows to enable the Company to finance its operations internally thus there is substantial doubt about the Company’s ability to continue as a going concern within one year from the date of filing. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital.
The Company currently anticipates with cash on hand and funds from the exercise of outstanding warrants will adequately fund the Company's planned operations and capital needs for the next 12 months. 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 continue as a going concern.
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
The Company recognizes revenue per ASC 606. The Company recognizesWe recognize revenue when the Company'sour performance obligations are satisfied. The Company'sOur primary performance obligation (the distribution and sale of beverage products) is satisfied upon the delivery of products to the Company'sour 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 requirerequires 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 recognizesrecords it as variable consideration.reduction in revenue. The amounts are not considered material. After evaluating theThe Company's bottled water product represents substantially all revenue disclosure requirements, the Company does not believe that any revenues are required to be disaggregated.for all periods presented.
Revenue consists of the gross sales price, less variable consideration, consisting ofincluding estimated allowances for which provisions are made at the time of sale, and less certain other discounts allowances, and rebates that are accounted for as a reduction from gross revenue.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 $4,812,052$3,813,376 and $1,670,523$2,906,900 (which are not included in revenue) for the three monthsquarter ended SeptemberJune 30, 2022 and 2021, respectively.
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 and 2020, respectively and $7,718,952 and $3,477,554 for the six months ended September 30, 2021 and 2020, respectively.are as follows:
| June 30, 2022 | June 30, 2021 | |||||
| Retailers | $ | 10,955,349 | $ | 9,404,681 | ||
| Distributors | 5,634,443 | 4,536,003 | ||||
| Ecommerce/Other | 304,611 | 172,914 | ||||
| Total Net Revenue | $ | 16,894,403 | $ | 14,113,578 |
We haveThe Company has 2 major customers that account for 25% (13% and 12% respectively) of accounts receivable at June 30, 2022, and 2 customers that together account for 30%31% (18% and 12%, respectively) of accounts receivable at September 30, 2021, 3 customers that accounts for 43% (21%, 11% and 11%, respectively) of total revenues for the three months ended September 30, 2021 and 3 customers that accounts for 44% (21%, 13% and 10%, respectively) of the total revenues earned for the six monthsquarter ended SeptemberJune 30, 2021.2022. The Company has 32 vendors that accountsaccounted for 53% (32%48% (31%, 11% and 10%17% respectively) of purchases for the three monthsquarter ended SeptemberJune 30, 2021 and 3 vendors2022.
The Company had 1 major customer that accounted for 53% (30%, 13% and 10% respectively) of purchases for the six months ended September 30, 2021.
We have 2 major customers that together account for 27% (15% and 12%, respectively) of accounts receivable at SeptemberJune 30, 2020, 1 customer that accounts for 25% of total revenues for the three months ended September 30, 20202021, and 2 customers that accountstogether accounted for 40% (22%36% (20% and 18%16%, respectively) of the total revenues earned for the six monthsquarter ended SeptemberJune 30, 2020.2021. The Company has 3had 2 vendors that accountsaccounted for 58% (25%43% (27%, 21% and 12%16% respectively) of purchases for the three monthsquarter ended SeptemberJune 30, 2020 and 3 vendors that accounted for 55% (24%, 19% and 12% respectively) of purchases for the six months ended September 30, 2020.2021.
Income Taxes
The Company uses an estimated annual effectiveIn 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 rate method in computing its interim tax provision. This effective tax rate isassets and liabilities are determined based on forecasted annual pre-tax income (loss), permanent tax differences and statutory tax rates. Deferred income taxes are recognized forthe differences between the basisfinancial 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 financial statement and income tax purposes. The differences relate principally to net operating loss carryforwards. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduceamount of deferred tax assets to the amountthat, 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.
TheFor the three months ended June 30, 2022 and 2021, respectively, the Company had 4,371,3794,518,132 and 1,951,4903,897,897 shares relating to options, 2,087,104NaN and 1,734,4434,761,690 shares relating to warrants and 2,227,030NaN and -0- million2,227,030 convertible preferred shares at September 30, 2021 and 2020, respectively that were not included in the diluted earnings per share calculation because they were antidilutive.
Business Segments
The Company operates on one segment in one geographic location - the United States of America andand; therefore, segment information is not presented.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including accounts payable, accrued expenses, and notes payable approximate fair value due to the relative short period for maturity of these instruments.
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market, or foreign-currency risks.
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the company's assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
As of September 30, 2021 and 2020, the Company did not have any financial instruments that are measured on a recurring basis as Level 1, 2 or 3.
The accompanying consolidated statement of operations for the three and six months ended September 30, 2020 has been corrected for the following: a reclassification of depreciation expense of $182,306 and $412,317, respectively, to cost of goods sold related to assets utilized in the production of inventory and an adjustment to reclassify sales and marketing expenses of $595,384 and 1,382,508, respectively, as a reduction in revenue as such amounts were related to consideration payable to a customer which the Company determined was not for distinct goods or services received. The Company assessed the materiality of the misstatement quantitively and qualitatively and has concluded that the correction of the classification error is immaterial to the consolidated financials taken as a whole. As a result of the correction for the three and six months ended September 30, 2020, cost of goods sold increased from $6,326,958 to $6,509,264 and from $14,696,484 to $15,104,105, respectively, and revenue decreased from $10,755,946 to $10,160,552 and $24,975,370 to $23,592,862, respectively which combined resulted in a decrease of gross profit from $4,428,988 to $3,651,288 and from $10,278,886 to $8,488,757, respectively. The correction had no impact on total operating loss and net loss. The misstatement was identified by the Company and corrected initially in the year end results for the twelve months ending March 31, 2021.
Standards Required to beRecently Adopted in Future Years.
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. In November 2018, ASU 2016-13 was amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. ASU 2018-19 changes the effective date of the credit loss standards (ASU 2016-13) to fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Further, the ASU clarifies that operating lease receivables are not within the scope of ASC 326-20 and should instead be accounted for under the new leasing standard, ASC 842. The Company does not believebelieves 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 SeptemberJune 30, 20212022 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 ($117,008,988). In addition, the Company's development activities since inception have been financially sustained through debt and equity financing. These factors raise substantial doubt about the Company's ability to continue as a going concern within one year from the of the date that the financial statements are issued.
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 23 - 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 | $ | 5,621,300 | $ | 4,766,303 | ||
| Office Equipment | 55,439 | 55,439 | ||||
| Less: Accumulated Depreciation | (3,808,377 | ) | (3,620,945 | ) | ||
| Fixed Assets, net | $ | 1,868,362 | $ | 1,200,797 |
| Property and Equipment consisted of the following at: | September 30, 2021 (unaudited) | March 31, 2021 | ||||
| Machinery and Equipment | $ | 5,127,752 | $ | 4,812,344 | ||
| Office Equipment | 55,439 | 55,439 | ||||
| Less: Accumulated Depreciation | (4,175,630 | ) | (3,857,600 | ) | ||
| Property and Equipment, net | $ | 1,007,561 | $ | 1,010,183 |
Depreciation expense for the three monthsquarter ended SeptemberJune 30, 2022 and 2021 was $187,432 and 2020 was $159,015, and $184,406, respectively.
Depreciation expense for the six months ended September 30, 2021 and 2020 was $318,030 and $412,317, respectively.
NOTE 3 - REVOLVING FINANCING
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.
Under the terms of the Credit Agreement, SCM has agreed to make cash advances to our company in an aggregate principal at any one time outstanding not to exceed the lesser of (i) $7$10 million (the "Revolving Loan Commitment Amount") and (ii) the Borrowing Base (defined to mean, as of any date of determination, 85% of net eligible billed receivables plus 65% of eligible unbilled receivables, minus certain reserves). The advanced under the credit agreement as of June 30, 2022 was $6,539,787.
The Credit Agreement expires on July 1, 2022,3, 2023, unless earlier terminated by the parties in accordance with the terms of the Credit Agreement.
The principal amount of the Revolving Facility outstanding bears interest at a rate per annum equal to (i) a fluctuating interest rate per annum equal at all times to the rate of interest announced, from time to time, within Wells Fargo Bank at its principal office in San Francisco as its "prime rate," plus (ii) 3.25%, payable monthly in arrears. The interest rate as of September 30, 2021 and March 31, 20212022 was 7.0%8.0%
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 0.083% per month of the difference derived by subtracting (i) the average daily outstanding balance under the Revolving Facility during the preceding month, from (ii) the Revolving Loan Commitment Amount. The unused line fee will be payable monthly in arrears. We also agreed to pay SCM as additional interest a monthly collateral management fee equal to 0.35% per month calculated on the basis of the average daily balance under the Revolving Facility outstanding during the preceding month. The collateral management fee will be payable monthly in arrears. Upon a termination of the Revolving Facility, we agreed to pay SCM a termination fee in an amount equal to 1% of the Revolving Loan Commitment Amount if the termination occurs before July 1, 2022.3, 2023. We must also pay certain fees in the event that receivables are not properly deposited in the appropriate lockbox account.
The interest rate will be increased by 5% in the event of a default under the Credit Agreement. Events of default under the Credit Agreement, some of which are subject to certain cure periods, include a failure to pay obligations when due, the making of a material misrepresentation to SCM, the rendering of certain judgments or decrees against our company and the commencement of a proceeding for the appointment of a receiver, trustee, liquidator or conservator or filing of a petition seeking reorganization or liquidation or similar relief.
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 4 - PAYCHECK PROTECTION PROGRAM LOAN
On April 29, 2020, Alkaline 88, LLC (the "Borrower"), a wholly owned subsidiary of the Company, signed a promissory note with MidFirst Bank (the "Lender") in the amount of $325,800, pursuant to the Paycheck Protection Program (the "PPP") under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The loan was forgiven on October 14, 2021 as authorized by Section 1106 of the CARES Act.
NOTE 5 - STOCKHOLDERSSTOCKHOLDERS' EQUITY
Preferred Shares
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.
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 $3 million over the three years of the Endorsement Agreement. The Company will also pay expenses related to the marketing and personal services provided by Mr. O'Neal. The Company paid $500,000 and $1,000,000 in the three and six months ended SeptemberAs of June 30, 2021, respectively and2022, the Company will behas paid $1,500,000 under this agreement and anticipates paying an additional $250,000 in each quarter in the fiscal years ended March 31, 2023 and March 31, 2024
In addition, the Company issuedagreed to grant 6,681,090 shares of Series S Preferred Stock to ABG, each vested share of which is convertible into one share of the Company's common stock. The shares of Series S Preferred Stock will vest as to 1/3 on May 12, 2021, May 1, 2022, and May 1, 2023, respectively.2023. The term of the Endorsement Agreement is three years, commencingends on May 1, 2021 and terminating on May 1, 2024 (the " Term").2024. The Series S Preferred Stock was valuevalued at $6,681,090 based on the Company's closing stock price of $1.00 per share on May 12, 2021. The Company valued theeach annual vested Series S Preferred Stock atin the amount of $2,227,030, which amount was recognized by the Company as a prepaid expense on each vesting date that is being expensed over the initial twelve months of the Endorsement Agreement's Term.months. The prepaid expense at SeptemberJune 30, 20212022 was $1,299,100.$1,855,858.
In the three and six monthsquarter ended SeptemberJune 30, 2021,2022, the Company recognized an expense of 1,056,758 and $1,927,929, respectively,$806,758 in connection with the agreement and anticipates recognizing an expense of 556,758806,758 in each of the quarterquarters ended September 30, 2022, December 31, 20212022, and March 31, 20222023 for a total expense of $3,041,444$3,227,030 for the year ended March 31, 2022.2023. In the years ended March 31, 20232024 and March 31, 2024,2025, the Company anticipates recognizing an expense in the amount of $3,227,030 and $3,227,030$185,586 respectively.
Common Stock
Share Issuances
Private Placement
On July 6, 2021,During April, 2022, we completedsold a private placementtotal of 4,757,381 subscription receipts750,240 common shares at aan average price of $1.05 per subscription receipt$0.84 through our Agent under the Sales Agreement for total grossour previously established ATM facility for net proceeds of $4,995,250. The subscription receipts were held in escrow until September 29, 2021 when each subscription receipt was converted into one unit consisting of one share of our common stock and one transferable share purchase warrant, for no additional consideration. Each warrant will entitle the holder thereof to acquire one share of our common stock for a period of three years from the date of issuance thereof at a price of $1.25 per share.$631,203.
Share Issuance
Effective as of April 15, 2021,May 2, 2022, the Company issued 38,8342,227,030 shares of our common stock to non-employees in consideration for services to be renderedupon conversion of 2,227,030 shares of Series S Preferred Stock without the payment of any additional consideration.
On May 4, 2022, the Company entered into an underwriting agreement (the "Underwriting Agreement") with Aegis Capital Corp. (the "Underwriter"). Pursuant to the Company. The total fair valueUnderwriting Agreement, the Company agreed to sell in an underwritten offering (the "Offering") an aggregate of 8,333,334 shares of the Issuer's common stock at a public offering price of $0.60 per share, for net proceeds of approximately $4,575,000. On May 9, 2022 all 8,333,334 shares is $40,000 basedwere issued to the applicable shareholders.
Effective as of June 15, 2022, the Company issued an aggregate of 121,665 shares of common stock upon the per share closing pricevesting of "restricted awards" granted April 30, 2020 as part of the Company's common stock on the NASDAQ stock exchange on April 15, 2021. In addition, effective as2020 Equity Incentive Plan. These shares were issued to 6 individuals.
Restricted Awards
On June 10, 2022, we granted an award of August 27, 2021 and September 29, 2021, the Company issued 73,684 and 16,118, respectively100,000 shares of our common stock to non-employees in consideration for services rendered to the Company. The total fair value of the shares is $140,000 and $25,789, respectively, based upon the per share closing price of the Company's common stock on the NASDAQ stock exchange on August 20, 2021 and September 29, 2021. All of these shares were issued pursuant toas a consulting agreement dated June 15, 2020, whereby the Company engaged an entity to perform consulting services for the Company for a period of one year. The Company agreed to pay a retainer in the amount of $40,000 per month. The agreement has been terminated and no further amounts are owed by the Company under this agreement.
Effective as of August 20, 2021, the Company issued 83,000 shares of our common stock to non-employees in consideration for services to be rendered to the Company. The total fair value of the shares is $141,930 based upon the per share closing price of the Company's common stock on the NASDAQ stock exchange on August 20, 2021.
Restricted Awards
On May 3, 2021, the Company issued 816,665 shares of our common stock to employees upon the exercise of vested restricted awards"restricted award" under our 2020 Equity Incentive Plan.Plan to Richard A. Wright, a former director and executive officer of our company, pursuant to a Separation Agreement and Release of All Claims dated June 2, 2022 with Mr. Wright. These shares vested as of June 10, 2022.
NOTE 6 - OPTIONS AND WARRANTS
Options
The Company issued 162,66816,956 shares of common stock during the three months ending June 30, 20212022 in connection with the exercise of 40,000 stock options of which 91,00023,044 options were with a payment to the Company for the exercise price of $48,230$0.53 and the remaining amount of stock options were exercised as a cashless exercise under the plan.
The Company issued 118,692 shares of common stock during the three months ending September 30, 2021 in connection with the exercise of stock options of which 55,000 options were with a payment to the Company for the exercise price of $59,950 and the remaining amount of stock options were exercised as a cashless exercise under the plan.
On July 27, 2021, the Company granted an aggregate of 454,000 stock options to certain employees for the purchase of up to 454,000 shares of common stock pursuant to the 2020 Equity Incentive Plan. Each stock option is exercisable at a price of $1.75 per share until July 27, 2031.
Warrants
The Company issued 1,277,777 shares of common stock during the three months ending June 30, 2021 in connection with the exercise of warrants with a payment to the Company for the exercise price of $652,777.
The Company issued 9,523,376 shares of common stock during the three months ending September 30, 2021 in connection with the exercise of warrants with a payment to the Company for the exercise price of $11,904,220.
On September 29, 2021, the Company issued 4,757,381 share purchase warrant and at exercise price of $1.25 per share. These warrants were issued in connection with the private placement of common stock on September 29, 2021.
NOTE 7 - LEASES
As of July 1, 2020, the Company entered into a lease for 14,530 square feet of warehouse space from a third party through December 2021 at a rate of $7,992 per month for the first twelve months, then at a rate of $8,231 per month for the last six months of the lease. The Company determined this lease was an operating lease under ASC 842 and using an interest rate of 7%, the Company determined that the ROU for this lease was $130,989 and the lease liability for this lease was $138,266, at inception of this lease, respectively.
As of October 1, 2020, the company entered into a lease for 9,166 square feet of corporate office and warehouse space from a third party through September 2023 at a rate of $10,083 per month for the first twelve months, then at a rate of $10,385 for the next 12 months, and $10,697 for the final 12 months of the lease. The Company determined this lease was an operating lease under ASC 842 and using an interest rate of 7%, the Company determined that the ROU for this lease was $337,932 and the lease liability for this lease was $337,932, at inception of this lease, respectively. Previously, the Company leased its corporate office space with a size of 3,352 square feet leased from a third party which leased through November 2020 at the current rate of $7,891 per month.
As of November 1, 2020, the company entered into a lease for 2,390 square feet of corporate office space from a third party through January 2024 at a rate of $5,280 per month for the first twelve months starting January 2021, then at a rate of $5,377 for the next 12 months, and $5,497 for the final 13 months of the lease. The Company determined this lease was an operating lease under ASC 842 and using an interest rate of 7%, the Company determined that the ROU for this lease was $177,629 and the lease liability for this lease was $177,629, at inception of this lease, respectivelyrespectively.
As of April 1, 2022, the Company entered into a lease for 1,520 square feet of warehouse space from a third party through March 2025 at a rate of $1,812 per month for the first twelve months, then at a rate of $1,867 per month for the last next twelve months and then at a rate of $1,923 for the last twelve months. The Company determined this lease was an operating lease under ASC 842 and using an interest rate of 7%, the Company determined that the ROU for this lease was $60,737 and the lease liability for this lease was $60,737, at inception of this lease, respectively.
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 and six months ended September 30, 2021 was $91,611 and $192,526, respectively.
Operating Lease expense for the three and six months ended SeptemberJune 30, 20202022 was $59,461$65,169 and $94,215, respectively.for the three months ended June 30, 2021 was $100,915.
| September 30, 2021 | |||
| Operating lease right-of-use asset - current portion | $ | 185,517 | |
| Operating lease right-of-use asset - non-current portion | 190,348 | ||
| Total Operating lease right-of-use asset | $ | 375,865 | |
| Operating lease liability - current portion | $ | 207,007 | |
| Operating lease liability - non-current portion | 193,798 | ||
| Total Operating lease liability | $ | 400,805 | |
| Weighted average remaining lease term (in years): | |||
| Operating leases | 1.0 | ||
| Weighted average discount rate: | |||
| Operating leases | 7.0% |
| Operating Leases: | June 30, 2022 | ||
| Operating lease right-of-use asset - current portion | $ | 187,545 | |
| Operating lease right-of-use asset - non-current portion | 95,473 | ||
| Total Operating lease right-of-use asset | $ | 283,018 | |
| Operating lease liability - current portion | $ | 199,430 | |
| Operating lease liability - non-current portion | 106,727 | ||
| Total Operating lease liability | $ | 306,157 | |
| Weighted average remaining lease term (in years): | |||
| Operating leases | 1.6 | ||
| Weighted average discount rate: | |||
| Operating leases | 7% |
Supplemental cash flow information related to leases is as follows:
Maturities of undiscounted lease liabilities as of SeptemberJune 30, 20212022 are as follows:
| Operating Leases | |||
| Year ending March 31, 2022 | $ | 118,977 | |
| Year ending March 31, 2023 | 191,379 | ||
| Year ending March 31, 2024 | 119,150 | ||
| Total lease payments | 429,505 | ||
| Less: Imputed interest | (28,700 | ) | |
| Total lease obligations | $ | 400,805 |
| Operating Leases | |||
| Year ending March 31, 2023 | 160,404 | ||
| Year ending March 31, 2024 | 141,552 | ||
| Year ending March 31, 2025 | 23,074 | ||
| Total lease payments | 325,030 | ||
| Less: Imputed interest | (18,873 | ) | |
| Total lease obligations | 306,157 |
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 4 creditors, and the Company 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, the Company 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 October 14, 2021, the Company's loandebt 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 lawyers until the automatic exercise date, for an additional 825,735 shares of our common stock.
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$275,000 annually or such other amount as may be determined by our board of directors from time to time, commencing on the Effective Date.
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 1,000,000 shares (the "Restricted Award Shares") of our common stock as "restricted awards" under our 2020 equity incentive plan and any successor equity incentive plan (collectively, the "Plan") and non-qualified stock options under the Paycheck Protection Program ("PPP") was forgiven as authorized by Section 1106Plan to purchase an aggregate of 1,000,000 shares of our common stock on the following terms: (i) 500,000 of the CARES Act. The outstanding principal balanceRestricted Award Shares were granted on July 29, 2022 (the "First Grant Date") and these Restricted Award Shares vested immediately; (ii) the other 500,000 Restricted Award Shares will be granted as soon as reasonably practicable following the our stockholder approval of $325,800 alongthe amendment to the Plan or otherwise to allow the grant of such Restricted Award (the "Second Grant Date") and these Restricted Award Shares will vest on the six month anniversary of the First Grant Date, provided, however, if we do not obtain the stockholder approval by June 3, 2023, such Restricted Award Shares will not be granted and we will have no further obligation with accrued interestrespect to such Restricted Award Shares; (iii) the stock options were granted on July 29, 2022 (the "Option Grant Date"); (iv) the exercise price for the stock options is $0.428 per share; (v) the stock options will vest in two equal annual installments, with the first 500,000 stock options vesting on the one year anniversary of $4,751 totalling $330,551 was forgiven.the Option Grant Date and the second 500,000 stock options vesting on the second anniversary of the Option Grant Date; and (vi) vested stock options may be exercised for up to ten years from the Option Grant Date.
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'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.
Unless otherwise indicated, all reference to "dollars", "$", "USD" or "US$" are to United States dollars and all reference to "CDN$" are to Canadian dollars.
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 subsidiaries A88 Infused Beverage Division, Inc. (a Nevada Corporation hereinafter referred to as "A88 Infused"), A88 Infused Products, Inc. (a Nevada Corporation), A88 International, Inc. (a Nevada Corporation), andwholly owned subsidiary Alkaline 88, LLC (an Arizona Limited Liability Company), unless otherwise specified.
COVID-19
In December 2019, a novel strain of COVID-19 was reported in China. Since then, the COVID-19 has spread globally including across North America and the United States. The spread of COVID-19 from China to other countries has resulted in the World Health Organization (WHO) declaring the outbreak of COVID-19 as a "pandemic," or a worldwide spread of a new disease, on March 11, 2020.
Specifically, we caution that ourOur 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
Three Months Ended September 30, 2021 and September 30, 2020
Our results of operations for the three months ended SeptemberJune 30, 2022 and June 30, 2021 and September 30, 2020 are as follows:
| For the three | For the three | |||||||||||
| months ended | months ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2021 | 2020 | For the three months ended June 30, 2022 | For the three months ended June 30, 2021 | |||||||||
| Revenue | $ | 15,255,765 | $ | 10,160,552 | $ | 16,894,403 | $ | 14,113,578 | ||||
| Cost of goods sold | 10,091,415 | 6,509,264 | 13,399,774 | 9,311,011 | ||||||||
| Gross profit | $ | 5,164,350 | $ | 3,651,288 | $ | 3,494,629 | $ | 4,802,567 | ||||
| Net Loss | $ | (10,378,473 | ) | $ | (4,361,628 | ) | $ | (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 SeptemberJune 30, 20212022 of $15,255,765,$16,894,403 as compared to $10,160,552$14,113,578 for the three months ended SeptemberJune 30, 2020,2021, an increase of 50% generated by sales of our alkaline water and flavor infused water.20%. The increase in sales is due to the expanded distribution of our products to additional retailers throughout the country and increased demand due to Covid-19.country. We distribute our product through several channels. We sell through large national distributors (UNFI, KeHE,KeHe, C&S, and Core-Mark), which together represent over 150,000 retail outlets. We also sell our productsproduct directly to retail clients, including convenience stores, natural food products stores, large ethnic markets and national retailers and through Direct Store Distributors in selected markets, including Mahaska, Nevada Beverage, and Hensley, covering Nevada, Arizona, and Midwest region. Combined, they service over 16,000 customers in five states. Each one carries our full line of non-CBD waters.retailers. Some examples of retail clients are: Walmart, CVS, Rite-AidSam's Club, Family Dollar, Food Lion, Albertson's/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. The majority of our sales to retail clients are through brokers and distributors, however, sales to our larger retail clients are often direct to the client's own warehouse distribution network. Our CBD products are presently available for purchase on our E-commerce websites, www.a88cbd.com and www.a88hemp.com, in addition to a growing number of brick and mortar retail locations.
Cost of goods sold is comprised of production costs, shipping and handling costs. For the three months ended SeptemberJune 30, 2021,2022, we had cost of goods sold of $10,091,415$13,399,774, or 66%79% of revenue, as compared to cost of goods sold of $6,509,264$9,311,011 or 64%66% of revenue, for the three months ended SeptemberJune 30, 2020.2021. The increase in cost of goods sold is due to increased raw material costs and increased freight costs to our co-packers.
Expenses
Expenses
Our operating expenses for the three months ended SeptemberJune 30, 2022 and June 30, 2021 and September 30, 2020 are as follows:
| For the three | For the three | |||||||||||
| months ended | months ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2021 | 2020 | For the three months ended June 30, 2022 | For the three months ended June 30, 2021 | |||||||||
| Sales and marketing expenses | $ | 10,120,875 | $ | 4,389,335 | $ | 6,921,846 | $ | 7,156,400 | ||||
| General and administrative expenses | 5,251,751 | 3,492,648 | 2,863,993 | 4,964,373 | ||||||||
| Total operating expenses | $ | 15,372,626 | $ | 7,881,983 | $ | 9,785,839 | $ | 12,120,774 | ||||
For the three months ended SeptemberJune 30, 2021,2022, our total operating expenses were $ 15,372,626$9,785,839 as compared to $7,881,983$12,120,774 for the three months ended SeptemberJune 30, 2020.2021.
For the three months ended SeptemberJune 30, 2022, the total included $6,951,846 of sales and marketing expenses. For the three months ended June 30, 2021 the total included $10,120,875$7,156,400 of sales and marketing expenses. SalesCompared to the three months ended June 30, 2021, sales and marketing expenses increased as a result of increased out-bound freight expenses (from approximately $1.7 million to $4.8 million) and sales promotional expenses (from approximately $0.3 million to approximately $2.5 million), increase which is primarilyfor the three months ended June 30, 2022 decreased due to signing Alkaine88 brand ambassador. Generallower advertising and administrative expenses of $5,251,751, consisted primarilypromotion of approximately $2.8$0.2 million ofand lower professional fees media fees and legal fees, non-cash stock award and option expenseof approximately $0.6 million offset by an increase of freight to our customers in the amount of approximately $0.7 million and approximately $1.1 million of wages and wage related expenses.$0.9 million.
For the three months ended SeptemberJune 30, 2020, the total included $4,389,335 of sales and marketing expenses. Sales and marketing expenses increased as a result of increased freight and sales promotional expenses due to our increase in sales. General2022, general and administrative expenses of $3,492,648,$2,863,993 consisted primarily of approximately $1.6$0.4 million of professional fees, media fees and legal fees, stock optioncompensation expense in the amount of approximately $0.8$0.2 million and approximately $0.7$2.0 million of wages and wage related expenses.
Six Months Ended September For the three months ended June 30, 2021, and September 30, 2020
Our results of operations for the six months ended September 30, 2021 and September 30, 2020 are as follows:
| For the six months | For the six months | |||||
| ended | ended | |||||
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Revenue | $ | 29,369,343 | $ | 23,592,862 | ||
| Cost of goods sold | 19,402,426 | 15,104,105 | ||||
| Gross profit | 9,966,917 | 8,488,757 | ||||
| Net Loss | $ | (17,804,099 | ) | $ | (7,382,631 | ) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the six months ended September 30, 2021 of $29,369,343 as compared to $23,592,862 for the six months ended September 30, 2020, an increase of 24% generated by sales of our alkaline water and flavor infused water. 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 products directly to retail clients, including convenience stores, natural food products stores, large ethnic markets and national retailers and through Direct Store Distributors in selected markets, including Mahaska, Nevada Beverage, and Hensley, covering Nevada, Arizona, and Midwest region. Combined, they service over 16,000 customers in five states. Each one carries our full line of non-CBD waters. Some examples of retail clients are: Walmart, CVS, Rite-Aid Family Dollar, Food Lion, Albertson's/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 six months ended September 30, 2021, we had cost of goods sold of $19,402,426, or 66% of revenue, as compared to cost of goods sold of $15,104,105 or 64% of revenue, for the six months ended September 30, 2020. The decrease in gross profit rate is a result of increased raw material cost from our suppliers.
Expenses
Our operating expenses for the six months ended September 30, 2021 and September 30, 2020 are as follows:
| For the six | For the six | |||||
| months ended | months ended | |||||
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Sales and marketing expenses | $ | 17,277,275 | $ | 8,107,566 | ||
| General and administrative expenses | 10,216,125 | 7,442,565 | ||||
| Total operating expenses | $ | 27,493,400 | $ | 15,550,131 |
For the six months ended September 30, 2021, our total operating expenses were $27,493,400, as compared to $15,550,131 for the six months ended September 30, 2020.
For the six months ended September 30, 2021, the total included $17,277,275 of sales and marketing expenses. Sales and marketing expenses increased as a result of increased out-bound freight expense (from approximately $3.5 million to $7.7 million) and sales promotional expenses (from approximately $0.4 million to approximately $4.0 million), increase which is primarily due to signing Alkaine88 brand ambassador. Generalgeneral and administrative expenses of $10,216,125,$4,964,374, consisted primarily of approximately $5.5$2.6 million of professional fees, media fees and legal fees, stock award and optioncompensation expense in the amount of approximately $1.4$1.1 million and approximately $2.1$1.0 million of wagewages and wage related expenses.
For the six months ended September 30, 2020, the total included $8,107,566 of sales and marketing expenses and $7,442,565 of general and administrative expenses, consisting primarily of approximately $3.3 million of professional fees, stock option expense in the amount of approximately $1.9 million and approximately $1.4 million of wage and wage related expenses.
Liquidity and Capital Resources
Working Capital
| At September 30, 2021 | At March 31, 2021 | June 30, 2022 | March 31, 2022 | |||||||||
| Current assets | $ | 30,626,644 | $ | 23,271,259 | $ | 26,597,195 | $ | 21,157,421 | ||||
| Current liabilities | 16,908,486 | 13,244,041 | 27,828,934 | 21,920,686 | ||||||||
| Working capital | $ | 13,718,158 | $ | 10,027,218 | $ | (1,231,739 | ) | $ | (763,265 | ) | ||
Current Assets
Current assets as of SeptemberJune 30, 20212022 and March 31, 20212022 primarily relate to $10,419,065include $2,945,924 and $ 9,130,956$1,531,062 in cash, $10,983,231$8,422,415 and $ 8,458,176$7,927,065 in accounts receivable and $6,277,844$10,678,339 and $ 4,407,720$8,583,664 in inventory. inventory, respectively.
Current Liabilities
Current liabilities as of SeptemberJune 30, 20212022 and March 31, 20212022 primarily relate to $7,984,651include $11,934,494 and $ 7,055,348$10,441,879 in accounts payable, revolving financing of $6,997,928$6,539,787 and $ 4,324,412,$7,043,870, and accrued expenses of $1,388,349$5,946,778 and $1,306,106$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
Cash Flows
Our cash flows for the sixthree months ended SeptemberJune 30, 2022 and June 30, 2021 and September 30, 2020 are as follows:
| For the six | For the six | |||||||||||
| months ended | months ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2021 | 2020 | For the three months ended June 30, 2022 | For the three months ended June 30, 2021 | |||||||||
| Net Cash used in operating activities | $ | (18,730,426 | ) | $ | (8,111,51)6 | $ | (2,494,650 | ) | $ | (6,055,313 | ) | |
| Net Cash used in investing activities | (315,408 | ) | (90,109 | ) | (854,997 | ) | (61,444 | ) | ||||
| Net Cash provided by financing activities | 20,333,943 | 7,616,820 | 4,764,509 | 1,483,706 | ||||||||
| Net (decrease) in cash and cash equivalents | $ | 1,288,109 | $ | (584,805 | ) | |||||||
| Net increase (decrease) in cash | $ | 1,414,862 | $ | (4,633,051 | ) | |||||||
Operating Activities
Net cash used in operating activities was $18,730,426$2,494,650 for the sixthree months ended SeptemberJune 30, 2021,2022, as compared to $8,111,516$6,055,313 used in operating activities for the sixthree months ended SeptemberJune 30, 2020.2021. The increasedecrease in net cash used in operating activities was primarily due to the increased net loss after adjusting for non-cash activityreceipt of approximately $8.3$3 million and increases in accounts receivable and inventory.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 $315,408$854,997 for the sixthree months ended SeptemberJune 30, 2021,2022, as compared to $90,109$61,444 used in investing activities for the sixthree months ended SeptemberJune 30, 2020.2021. The increase in net cash used in investing activities was from an increase in purchasesprimarily due to the purchase of fixed assets.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 sixthree months ended SeptemberJune 30, 20212022 was $20,333,943,$4,764,509, as compared to $7,616,820$1,483,706 for the sixthree months ended SeptemberJune 30, 2020. The increase in net cash provided by financialfinancing activities iswas primarily due to an increase in thedue proceeds from the exercisesale of warrants of approximately $7.7 million and an increasecommon stock in proceedsthe amount of $5.2 million in the Company's revolver financing.three months ended June 30, 2022.
Cash RequirementsFinancing Activities Subsequent to June 30, 2022
On February 22, 2021, weWe 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 (the "Sales Agreement") with Roth Capital Partners, LLC as sales agent (the "Agent"), pursuantis planned to which we may offer and sell, from time to time, through or to the Agent, as sales agent and/or principal (the "Offering") up to $20,000,000 in shares offund our common stock. Subject to the terms and conditions of the Sales Agreement, the Agent agreed to use its commercially reasonable efforts to sell the shares from time to time, based upon our instructions. Under the Sales Agreement, the Agent may sell the shares by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. We have no obligation to sell any of the shares and may at any time suspend offers under the Sales Agreement. The Offering will terminate upon (a) the election of the Agent upon the occurrence of certain adverse events, (b) five days' advance notice from one party to the other, or (c) the sale of all of the shares specified in the Sales Agreement. Under the terms of the Sales Agreement, the Agent will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of the shares under the Sales Agreement. We will also reimburse the Agent for certain expenses incurred in connection with the Sales Agreement.
We believe cash on hand, plus the anticipated exercise of outstanding warrants will adequately fund the Company'scurrent planned operations and capital needs for the next 12 months.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 continue as a going concern.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 33. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 44. 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, 2021. We are working on mitigating the material weaknesses.2022.
Changes in Internal Control Overover Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended SeptemberJune 30, 20212022 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 6, 2021.14, 2022. There have been no material changes since July 6, 202114, 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 yearquarter ended March 31, 2021,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 quarterly report on Form 10-Q or 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 6. Exhibits
Number |
*Filed herewith.
SIGNATURESSignatures
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: November 9, 2021By:/s/ Richard A. WrightRichard A. WrightPresident and Chief Executive Officer(Principal Executive Officer) Date: August 15, 2022 By: /s/ Frank Lazaran Frank Lazaran President and Chief Executive Officer (Principal Executive Officer) Date: November 9, 2021August 15, 2022By: /s/ David A. Guarino David A. Guarino Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)