ALKALINE WATER Co INC
ALKALINE WATER Co INC details
Ticker:ALKW
Employees:
Filing
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 September 30, 2022
[ ] 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.)
organization)
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.
145,825,459 shares of common stock issued and outstanding as of November 14, 2022.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
THE ALKALINE WATER COMPANY INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, 2022 March 31, 2022
ASSETS
Current assets
Cash $ 2,257,502 $ 1,531,062
Accounts receivable, net 7,464,009 7,927,065
Inventory 9,873,998 8,583,664
Prepaid expenses 2,403,972 2,928,085
Operating lease right-of-use asset - current portion 187,545 187,545
Total current assets 22,187,026 21,157,421
Fixed assets - net 2,027,667 1,200,797
Operating lease right-of-use asset 48,587 142,359
Total assets $ 24,263,280 $ 22,500,577
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 10,902,488 $ 10,441,879
Accrued expenses 2,326,094 2,036,739
Revolving financing 7,531,935 7,043,870
Convertible note payable, net of debt discount - 2,223,633
Operating lease liability - current portion 204,405 174,565
Total current liabilities 20,964,922 21,920,686
Operating lease liability 54,108 178,753
Total liabilities 21,019,030 22,099,439
Commitments and contingencies (Note 10)
Stockholders' equity
Preferred stock, $ 0.001 par value, 100,000,000 shares authorized, 2,227,030 Series S issued and outstanding on September 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 145,825,459 and 110,571,812 shares issued and outstanding at September 30, 2022 and March 31, 2022, respectively 145,827 110,572
Subscription Receivable - ( 62,388 )
Additional paid in capital 128,502,392 109,864,080
Accumulated deficit ( 125,406,196 ) ( 109,515,580 )
Total stockholders' equity 3,244,250 401,138
Total liabilities and stockholders' equity $ 24,263,280 $ 22,500,577
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
For the Three Months For the Six Months
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Net Revenue $ 19,574,953 $ 15,255,765 $ 36,469,356 $ 29,369,343
Cost of Goods Sold 14,948,461 10,091,415 28,348,235 19,402,426
Gross Profit 4,626,492 5,164,350 8,121,121 9,966,917
Operating expenses
Sales and marketing expenses 7,120,133 10,120,875 14,041,979 17,277,275
General and administrative 2,575,986 5,251,751 5,439,979 10,216,125
Total operating expenses 9,696,119 15,372,626 19,481,958 27,493,400
Total operating loss ( 5,069,627 ) ( 10,208,276 ) ( 11,360,837 ) ( 17,526,483 )
Other (income) expense
Interest expense ( 921,969 ) ( 170,197 ) ( 2,124,167 ) ( 277,616 )
Debt conversion expense ( 2,405,612 ) - ( 2,405,612 ) -
Total other (income) expense ( 3,327,581 ) ( 170,197 ) ( 4,529,779 ) ( 277,616 )
Net loss $ ( 8,397,208 ) $ ( 10,378,473 ) $ ( 15,890,616 ) $ ( 17,804,099 )
LOSS PER SHARE (Basic and Diluted) $ ( 0.06 ) $ ( 0.11 ) $ ( 0.12 ) $ ( 0.20 )
WEIGHTED AVERAGE SHARES OUTSTANDING (Basic and Diluted) 137,563,831 93,669,358 127,595,784 91,020,392
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
Preferred Stock Common Stock Additional Subscription Accumulated
Number Par Value Number Par Value Paid-in Capital Stock Payable 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) ( 7,425,656 ) ( 7,425,656 )
Balance, June 30, 2021 6,681,090 $ 6,681 89,761,122 $ 89,761 $ 84,468,451 $ - $ - $ ( 77,356,876 ) $ 7,208,017
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 and 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 $ - $ - $ ( 87,735,349 ) $ 14,722,239
Balance, March 31, 2022 4,453,970 $ 4,454 110,571,812 $ 110,572 $ 109,864,080 $ - $ ( 62,388 ) $ ( 109,515,580 ) $ 401,138
Preferred stock conversion to common stock and vesting of endorsement shares ( 2,226,940 ) ( 2,227 ) 2,227,030 2,227 2,227,030 2,227,030
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 ) -
Stock option and RSU-related compensation expense and common shares issued upon 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
Common shares issued in connection with conversion of note payable - 10,459,354 10,460 4,966,013 4,976,473
Common shares issued upon exercise of warrants 12,745,068 12,746 5,640,798 5,653,544
Stock option and RSU-related compensation expense and common shares issued upon conversion of RSUs 500,000 500 385,572 386,072
Net (loss) ( 8,397,208 ) ( 8,397,208 )
Balance, September 30, 2022 2,227,030 $ 2,227 145,825,459 $ 145,827 $ 128,502,392 $ - $ - $ ( 125,406,196 ) $ 3,244,250
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, 2022 September 30, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ ( 15,890,616 ) $ ( 17,804,099 )
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation expense 406,385 318,030
Shares issued and vested, options and RSU expensed for employee and non-employee services 1,721,605 3,851,955
Amortization of debt discount 1,598,855 -
Debt conversion expense 2,405,612 -
Non-cash interest expense 47,472 -
Non-cash lease expense ( 1,033 ) 8,366
Changes in operating assets and liabilities:
Accounts receivable 463,056 ( 2,525,055 )
Inventory ( 1,290,334 ) ( 1,870,124 )
Prepaid expenses and other current assets 338,527 ( 1,723,026 )
Accounts payable 460,609 929,303
Accrued expenses 289,355 84,224
NET CASH USED IN OPERATING ACTIVITIES ( 9,450,507 ) ( 18,730,426 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets ( 1,233,254 ) ( 315,408 )
CASH USED IN INVESTING ACTIVITIES ( 1,233,254 ) ( 315,408 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayment of) revolving financing, net 488,065 2,673,516
Proceeds from sale of common stock, net 5,268,592 4,995,250
Proceeds for the exercise of warrants, net 5,653,544 12,556,997
Proceeds for the exercise of stock options, net - 108,108
CASH PROVIDED BY FINANCING ACTIVITIES 11,410,201 20,333,871
NET CHANGE IN CASH 726,440 1,288,037
CASH AT BEGINNING OF PERIOD 1,531,062 9,130,956
CASH AT END OF PERIOD $ 2,257,502 $ 10,418,993
INTEREST PAID $ 468,118 $ 271,190
TAXES PAID $ - $ -
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company offers retail consumers bottled alkaline water in 500-milliliter, 700-milliliter, 1-liter, 1.5 -liter, 2,-liter, 3-liter and 1-gallon sizes, all of which is produced through an electrolysis process that uses specialized electronic cells coated with a variety of rare earth minerals to produce 8.8 pH drinking water without the use of any manmade chemicals. The Company recently introduced and began selling hemp-derived CBD bottled water under the brand name "Alkaline88CBD™" and Alkaline88® Sports Drinks. Our hemp-derived CBD bottled water is produced and sold in compliance with the Agriculture Improvement Act of 2018 (also known as the 2018 Farm Bill, Public Law 115-334).
Basis of presentation
The consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in U.S. dollars, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission.
Principles of consolidation
The consolidated financial statements include the accounts of The Alkaline Water Company Inc. (a Nevada Corporation) and its wholly owned subsidiary, Alkaline 88, LLC (an Arizona Limited Liability Company). All significant intercompany balances and transactions have been eliminated. The Alkaline Water Company Inc. and Alkaline 88, LLC will be collectively referred herein to as the "Company". Any reference herein to "The Alkaline Water Company Inc.", the "Company", "we", "our" or "us" is intended to mean The Alkaline Water Company Inc., including its Alkaline 88, LLC subsidiary indicated above, unless otherwise indicated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less to be considered cash equivalents. The carrying value of these investments approximates fair value. As of the balance sheet date and periodically throughout the period, the Company has maintained balances in various operating accounts in excess of federally insured limits. In addition, the Company has maintained balances in its attorney's client trust account in both C$ and US$. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible. The Company had $ 2,257,502 and $ 1,531,062 in cash at September 30, 2022 and March 31, 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 September 30, 2022 and March 31, 2022:
September 30, 2022 March 31, 2022
Trade receivables, net $ 7,934,009 $ 8,397,065
Less: Allowance for doubtful accounts ( 470,000 ) ( 470,000 )
Net accounts receivable $ 7,464,009 $ 7,927,065
Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions. The accounts receivable balance is pledged as collateral for the Company's revolving financing as disclosed in Note 3.
Inventory
Inventory represents raw materials and finished goods valued at the lower of cost or market with cost determined using the weight average method which approximates first-in first-out method, and with market defined as the lower of replacement cost or realizable value. The inventory balance is pledged as collateral for the Company's revolving financing as disclosed in Note 3.
As of September 30, 2022 and March 31, 2022, inventory consisted of the following:
September 30, 2022 March 31, 2022
Raw materials $ 6,239,929 $ 3,848,750
Finished goods 3,634,069 4,734,914
Total inventory $ 9,873,998 $ 8,583,664
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, which the Company has determined to be 3 years .
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification ("ASC") 718. Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options and warrants and the closing price of the Company's common stock for common share issuances.
Revenue Recognition
We recognize revenue when our performance obligations are satisfied. Our primary performance obligation (the distribution and sale of beverage products) is satisfied upon the delivery of products to our customers, which is also when control is transferred. The Company does not accept returns due to the nature of the product. However, the Company will provide credit to our customers for damaged goods. The Company provides credit to its customers which typically requires payment within 30 days. As an incentive to pay early the Company also typically provides a 2% discount if the customer pays within 10 days. The Company estimates the amount of the discount that the customer is likely to take and records it as reduction in revenue. The amounts are not considered material. The Company's bottled water product represents substantially all revenue for all periods presented.
Revenue consists of the gross sales price, less variable consideration, including estimated allowances for which provisions are made at the time of sale, and less certain other discounts and allowances. Shipping and handling charges that are billed to customers are included as a component of revenue. Costs incurred by the Company for shipping and handling charges are included in selling expenses and amounted to $ 3,720,857 and $ 4,812,052 for the three months ended September 30, 2022 and 2021, respectively and $ 7,534,234 and $ 7,718,952 for the six months ended September 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 three months ended September 30, 2022 and September 30, 2021 are as follows:
September 30, 2022 September 30, 2021
Retailers $ 12,857,303 $ 10,940,057
Distributors 6,286,113 4,104,243
Ecommerce/Other 431,537 211,465
Total Net Revenue $ 19,574,953 $ 15,255,765
The following table reflects disaggregated net revenue by sales channel for the six months ended September 30, 2022 and September 30, 2021 are as follows:
September 30, 2022 September 30, 2021
Retailers $ 23,812,653 $ 20,344,719
Distributors 11,920,555 8,640,245
Ecommerce/Other 736,149 384,379
Total Net Revenue $ 36,469,356 $ 29,369,343
Concentration Risks
We have 2 major customers that together account for 22 % ( 12 % and 10 %, respectively) of accounts receivable at September 30, 2022, 3 customers that accounts for 39 % ( 17 %, 12 % and 10 %, respectively) of total revenues for the three months ended September 30, 2022 and 2 customers that accounts for 29 % ( 17 % and 12 %, respectively) of the total revenues earned for the six months ended September 30, 2022. The Company has 1 vendors that accounts for 31 % of purchases for the three months ended September 30, 2022 and 2 vendors that accounted for 43 % ( 31 %, and 12 % respectively) of purchases for the six months ended September 30, 2022.
The Company had 2 major customers that together account for 30 % ( 18 % and 12 %, respectively) of accounts receivable at September 30, 2021, and 3 customers that accounted for 43 % ( 21 %, 11 % and 11 %, respectively) of total revenues for the three months ended September 30, 2021 and 3 customers that accounted for 44 % ( 21 %, 13 % and 10 %, respectively) of the total revenues earned for the six months ended September 30, 2021. The Company had 3 vendors that accounted for 53 % ( 32 %, 11 % and 10 % respectively) of purchases for the three months ended September 30, 2021 and 3 vendors that accounted for 53 % ( 30 %, 13 % and 10 % respectively) of purchases for the six months ended September 30, 2021.
Income Taxes
The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income (loss), permanent tax differences and statutory tax rates. Deferred income taxes are recognized for differences between the basis of assets and liabilities 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 reduce deferred tax assets to the amount 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.
The Company had 8,796,234 and 4,371,379 shares relating to options, 1,805,000 and 2,087,104 shares relating to warrants and 2,227,030 and 6,681,090 convertible preferred shares at September 30, 2022 and 2021, 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 and 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, 2022 and 2021, the Company did not have any financial instruments that are measured on a recurring basis as Level 1, 2 or 3.
Recent Accounting Pronouncements
Standards Required to be 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 believe that the impact of adopting this standard will have a material effect on its financial statements.
The Company has evaluated other recent accounting pronouncements through September 30, 2022 and believes that none of them will have a material effect on our consolidated financial statements.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in developing its business plan and building its initial customer and distribution base for its products. As a result, the Company incurred accumulated net losses from Inception (June 19, 2012) through the period ended September 30, 2022 of ($ 125,406,196 ). 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
NOTE 3 - PROPERTY AND EQUIPMENT
Fixed assets consisted of the following at:
Property and Equipment consisted of the following at: September 30, 2022 March 31, 2022
Machinery and Equipment $ 5,999,558 $ 4,766,303
Office Equipment 55,439 55,439
Less: Accumulated Depreciation ( 4,027,330 ) ( 3,620,945 )
Property and Equipment, net $ 2,027,667 $ 1,200,797
Depreciation expense for the three months ended September 30, 2022 and 2021 was $ 218,953 and $ 159,015 , respectively.
Depreciation expense for the six months ended September 30, 2022 and 2021 was $ 406,385 and $ 318,030 , respectively.
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) $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 September 30, 2022 was $ 7,531,935
The Credit Agreement expires on July 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, 2022 and March 31, 2022 was 9.5% and 8.0%, respectively .
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 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 5 - STOCKHOLDERS 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. As of September 30, 2022, the Company has paid $ 1,750,000 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 agreed 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. The term of the Endorsement Agreement ends on May 1, 2024. The Series S Preferred was valued at $ 6,681,090 based on the Company's closing stock price of $ 1.00 on May 12, 2021. The Company valued each annual vested Series S Preferred Stock in the amount of $ 2,227,030 , is being expensed over twelve months, for the three and six months ended September 30, 2022, the expense relating to the Series S Preferred Stock was $ 556,758 and $ 1,113,515 , respectively.
In the three and six months ended September 30, 2022, the Company recognized an expense of $ 806,758 and $ 1,613,515 in connection with the agreement and anticipates recognizing an expense of $ 806,758 in each of the quarters ended December 31, 2022, and March 31, 2023 for a total expense of $ 3,227,030 for the year ended March 31, 2023. In the years ended March 31, 2024 and March 31, 2025, the Company anticipates recognizing an expense in the amount of $ 3,227,030 and $ 185,586 respectively.
Common Stock
On March 4, 2022, the Company entered into private placement subscription agreements, whereby it issued unsecured convertible notes (the "Notes") in the aggregate principal amount of $ 3.8 million. The Notes were to mature on September 4, 2022 and will accrue interest at 8 % per annum, which interest will be payable on the date of the maturity. Pursuant to the terms of the Notes, the holders of the Notes may convert all or any part of the principal amount outstanding under the Notes into units (the "Conversion Units") at a conversion price of $ 0.80 per Conversion Unit. Each Conversion Unit will consist of one share of the Company's common stock and one share purchase warrant. Each share purchase warrant would entitle the holder thereof to acquire one share of the Company's common stock at a price of $ 1.10 per share until March 4, 2025.
Pursuant to the aforementioned subscription agreements, in consideration for the subscribers' execution and delivery of the subscription agreements, the Company issued an aggregate of 475,000 shares which the Company recognized a debt discount in the amount of $ 345,455 which will be amortized over the term of the Notes. For the three and six months ended September 30, 2022, the Company recognized interest expense in connection with the amortization of the debt discount of $ 121,619 and $ 294,346 , respectively.
In addition, the Company recognized a beneficial conversion feature in connection with the warrants in the amount of $ 1,524,750 which will be amortized over the term of the Notes. For the three and six months ended September 30, 2022, the Company recognized interest expense in connection with the amortization of the beneficial conversion feature of $ 542,133 and $ 1,304,508 , respectively.
On July 25, 2022, the Company entered into debt settlement agreements the holders of the Notes in which the Company issued 10,459,354 common shares in settlement of the Company's Notes in an aggregate amount of $ 3,869,962 (principal of $ 3,800,000 and accrued and unpaid interest of $ 69,962 ) at settlement price per share of $ 0.37 . The original conversion price per share of the Notes was $ 0.80 per share and the stock price at the date of the debt settlement was $ 0.429 per share. The settlement of the debt at $ 0.37 per share resulted in a non-cash debt settlement expense of $ 2,405,612 .
Upon conversion of the Notes, the holders of the Notes received warrants to purchase 10,459,354 common shares in the Company at $ 1.10 per share. The Company lowered the warrant exercise price from $ 1.10 to $ 0.44 for thirty days. The holders of the Notes exercised all of the warrants, resulting in the Company receiving net proceeds of $ 4,602,116 and the issuance of 10,459,354 shares of its common stock. In connection with this exercise of the warrants, the Company expensed the unamortized amount of the above referenced beneficial conversion feature recognized in connection with the issuance of the warrants.
Share Issuances
Effective as of August 29, 2022, we issued an aggregate of 2,285,714 shares of our common stock upon exercise of our common stock purchase warrants with an exercise price of $ 0.46 per share for aggregate gross proceeds of $ 1,051,428 .
Restricted Awards
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 with a value of $ 214,000 based on a common share price of $ 0.428 .
NOTE 6 - OPTIONS
Options
On July 29, 2022, we granted Frank Lazaran, our president, chief executive officer and director, stock options to purchase 1,000,000 shares of our common stock pursuant to his employment agreement dated July 29, 2022 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.
On August 23, 2022, we granted an aggregate of 2,230,000 stock options to certain employees for the purchase of up to 2,230,000 shares of our common stock pursuant to our 2020 Equity Incentive Plan. Each stock option is exercisable at a price of US$ 0.51 per share until August 23, 2032. These stock options vest as to 50% ( 1,115,000 ) on each of the first and second anniversary of the grant date
NOTE 7 - LEASES
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, respectively.
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, 2022 was $ 56,362 and $ 121,531 , respectively.
Operating Lease expense for the three and six months ended September 30, 2021 was $ 91,611 and $ 192,526 , respectively.
September 30, 2022
Operating lease right-of-use asset - current portion $ 187,545
Operating lease right-of-use asset - non-current portion 48,587
Total Operating lease right-of-use asset $ 236,132
Operating lease liability - current portion $ 204,405
Operating lease liability - non-current portion 54,108
Total Operating lease liability $ 258,513
Weighted average remaining lease term (in years):
Operating leases 1.9
Weighted average discount rate:
Operating leases 7 %
Supplemental cash flow information related to leases is as follows:
Maturities of undiscounted lease liabilities as of September 30, 2022 are as follows:
Operating Leases
Year ending March 31, 2023 $ 107,678
Year ending March 31, 2024 141,552
Year ending March 31, 2025 23,075
Total lease payments 272,305
Less: Imputed interest ( 13,792 )
Total lease obligations $ 258,513
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
In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to September 30, 2022 to the date these financial statements were issued and has determined that it does not have any material subsequent events to disclose in these financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains "forward-looking statements." All statements other than statements of historical fact are "forward-looking statements" for purposes of applicable securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "could," "estimate," "intend," "continue," "believe," "expect" or "anticipate" or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward- looking statements, which speak only as of the dates on which they are made. Except as required by applicable law, including the securities laws of the United States and Canada, we do not intend, and undertake no obligation, to update any forward-looking statement.
Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:
• lack of working capital;
• inability to raise additional financing;
• the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
• deterioration in general or regional economic conditions;
• adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
• inability to efficiently manage our operations;
• inability to achieve future sales levels or other operating results; and
• the unavailability of funds for capital expenditures.
Our financial statements are stated in United States Dollars ($ or US$) unless otherwise stated and are prepared in accordance with United States Generally Accepted Accounting Principles.
In this quarterly report, unless otherwise specified, all references to "common shares" refer to the common shares in our capital stock.
As used in this quarterly report on Form 10-Q, the terms "we", "us" "our", the "Company" and "Alkaline" refer to The Alkaline Water Company Inc., a Nevada corporation, and its wholly owned subsidiary Alkaline 88, LLC (an Arizona Limited Liability Company), unless otherwise specified.
COVID-19
Our business could be materially and adversely affected by the risks, or the public perception of the risks, related to the outbreak of COVID-19. To date, we have managed to operate successfully throughout the pandemic without any material disruptions to our supply chain. Although retailers which carry our products may be considered essential businesses and therefore be allowed to remain operational, they may experience significantly reduced demand. The risk of a pandemic, or public perception of the risk, could cause customers to avoid public places, including retail properties, and could cause temporary or long-term disruptions in our supply chains and/or delays in the delivery of our inventory to our customers. Further, such risks could also adversely affect retail customers' financial condition, resulting in reduced spending on our products, which are marketed as premium products. "Shelter-in-place" or other such orders by governmental entities could also disrupt our operations, if our employees or the employees of our sourcing partners who cannot perform their responsibilities from home, are not able to report to work. Risks related to an epidemic, pandemic or other health crisis, such as COVID-19, could also lead to the complete or partial closure of one or more of our co-packing facilities or operations of our sourcing partners.
Inflationary Pressure
We have seen significant margin contraction as a result of inflationary pressures over the last 12 months. We've taken a number of steps that will allow us to increase our margins in the year ended March 31, 2023. These steps include (1) an approximate 9% across the board price increase (effective across all banners for the entire fiscal 2023); (2) a potential leveling off or small reduction in freight costs due to the geographic distribution of our new co-packers and suppliers; and (3) our buying power allowing us to lock in price breaks on raw materials over the next 12 months.
Results of Operations
Three Months Ended September 30, 2022 and September 30, 2021
Our results of operations for the three months ended September 30, 2022 and September 30, 2021 are as follows:
For the three For the three
months ended months ended
September 30, September 30,
2022 2021
Revenue $ 19,574,953 $ 15,225,765
Cost of goods sold 14,948,461 10,091,415
Gross profit $ 4,626,492 $ 5,164,350
Net Loss $ (8,397,208 ) $ (10,378,473 )
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the three months ended September 30, 2022 of $19,874,953, as compared to $15,255,765 for the three months ended September 30, 2021, an increase of 28%. The increase in sales is due to the expanded distribution of our products to additional retailers throughout the country. We distribute our product through several channels. We sell through large national distributors (UNFI, KeHE, C&S, and Core-Mark), which together represent over 150,000 retail outlets. We also sell our product directly to retail clients, including drug store chains, warehouse clubs, convenience stores, natural food products stores, large ethnic markets and national retailers. Some examples of retail clients are: Walmart, CVS, Rite Aid, Sam's Club, Family Dollar, Albertson/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB and Brookshire's.
Cost of goods sold is comprised of production costs, shipping and handling costs. For the three months ended September 30, 2022, we had cost of goods sold of $14,948,461 or 76% of revenue, as compared to cost of goods sold of $10,091,415 or 66% of revenue, for the three months ended September 30, 2021. The increase in cost of goods sold is due to increased raw material cost from our suppliers.
Expenses
Our operating expenses for the three months ended September 30, 2022 and September 30, 2021 are as follows:
For the three For the three
months ended months ended
September 30, September 30,
2022 2021
Sales and marketing expenses $ 7,120,133 $ 10,120,875
General and administrative expenses 2,575,986 5,251,751
Total operating expenses $ 9,696,119 $ 15,372,626
For the three months ended September 30, 2022, our total operating expenses were $9,696,119 as compared to $15,372,626 for the three months ended September 30, 2021.
For the three months ended September 30, 2022, the total included $7,120,133 of sales and marketing expenses. For the three months ended September 30, 2021, the total included $10,120,875 of sales and marketing expenses. Sales and marketing expenses decreased as a result of decreased out-bound freight expenses (from approximately $4.8 million to $3.7 million) and decreased marketing expense of approximately $1.9 million, primarily relating to higher expense in the three months ended September 30, 2021 relating to our brand ambassador. For the three months ended September 30, 2022, general and administrative expenses of $2,575,986, consisted primarily of approximately $0.2 million of professional fees, media fees and legal fees, non-cash stock award and option expense in the amount of approximately $0.4 million and approximately $1.7 million of wages and wage related expenses. For the three months ended September 30, 2021, general and administrative expenses of $5,251,751, consisted primarily of approximately $2.8 million of professional fees, media fees and legal fees, non-cash stock award and option expense in the amount of approximately $0.7 million and approximately $1.1 million of wages and wage related expenses. General and administrative expenses decreased as a result of lower professional fees, media fees and legal fees.
Six Months Ended September 30, 2022 and September 30, 2021
Our results of operations for the six months ended September 30, 2022 and September 30, 2021 are as follows:
For the six months For the six months
ended ended
September 30, September 30,
2022 2021
Revenue $ 36,469,356 $ 29,369,343
Cost of goods sold 28,348,235 19,402,426
Gross profit 8,121,121 9,966,917
Net Loss $ (15,890,616 ) $ (17,804,099 )
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the six months ended September 30, 2022 of $36,469,356 as compared to $29,369,343 for the six months ended September 30, 2021, an increase of 24%. The increase in sales is due to the expanded distribution of our products to additional retailers throughout the country. We distribute our product through several channels. We sell through large national distributors (UNFI, KeHE, C&S, and Core-Mark), which together represent over 150,000 retail outlets. We also sell our product directly to retail clients, including drug store chains, warehouse clubs, convenience stores, natural food products stores, large ethnic markets and national retailers. Some examples of retail clients are: Walmart, CVS, Rite Aid, Sam's Club, Family Dollar, Albertson/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB and Brookshire's.
Cost of goods sold is comprised of production costs, shipping and handling costs. For the six months ended September 30, 2022, we had cost of goods sold of $28,348,235, or 78% of revenue, as compared to cost of goods sold of $19,402,426 or 66% of revenue, for the six months ended September 30, 2021. The increase in cost of goods sold is due to increased raw material cost from our suppliers.
Expenses
Our operating expenses for the six months ended September 30, 2022 and September 30, 2021 are as follows:
For the six For the six
months ended months ended
September 30, September 30,
2022 2021
Sales and marketing expenses $ 14,041,979 $ 17,277,275
General and administrative expenses 5,439,979 10,216,125
Total operating expenses $ 19,481,958 $ 27,493,400
For the six months ended September 30, 2022, our total operating expenses were $19,481,958, as compared to $27,493,400 for the six months ended September 30, 2021.
For the six months ended September 30, 2022, the total included $14,041,979 of sales and marketing expenses. For the six months ended September 30, 2021, the total included $17,277,275 of sales and marketing expenses. Sales and marketing expenses decreased as a result of decreased out-bound freight expense (from approximately $7.7 million to $7.5 million) and decreased marketing expenses of approximately $3.1, primarily relating to higher expense in the six months ended September 30, 2021 relating to our brand ambassador. For the six months ended September 30, 2022, general and administrative expenses of $5,439,979, consisted primarily of approximately $0.6 million of professional fees, stock award and option expense in the amount of approximately $0.6 million and approximately $3.7 million of wage and wage related expenses. For the six months ended September 30, 2021, general and administrative expenses of $10,216,125, consisted primarily of approximately $5.5 million of professional fees, stock award and option expense in the amount of approximately $1.4 million and approximately $2.1 million of wage and wage related expenses. General and administrative expenses decreased as a result of lower professional fees, media fees and legal fees.
Liquidity and Capital Resources
Working Capital
At September 30, 2022 At March 31, 2022
Current assets $ 22,187,026 $ 21,157,421
Current liabilities 20,964,922 21,920,686
Working capital $ 1,222,104 $ (763,265 )
Current Assets
Current assets as of September 30, 2022 and March 31, 2022 primarily relate to $2,257,502 and $1,531,062 in cash, $7,464,009 and $7,927,065 in accounts receivable and $9,873,998 and $8,853,664 in inventory, respectively.
Current Liabilities
Current liabilities as of September 30, 2022 and March 31, 2022 primarily relate to $10,902,488 and $10,441,879 in accounts payable, revolving financing of $7,531,935 and $7,043,870, and accrued expenses of $2,326,094 and $2,036,739, respectively.
Cash Flows
Our cash flows for the six months ended September 30, 2022 and September 30, 2021 are as follows:
For the six For the six
months ended months ended
September 30, September 30,
2022 2021
Net Cash used in operating activities $ (9,450,507 ) $ (18,730,426 )
Net Cash used in investing activities (1,233,254 ) (315,408 )
Net Cash provided by financing activities 11,410,201 20,333,943
Net (decrease) in cash and cash equivalents $ 726,440 $ 1,288,109
Operating Activities
Net cash used in operating activities was $9,450,507 for the six months ended September 30, 2022, as compared to $18,730,426 used in operating activities for the six months ended September 30, 2021. The decrease in net cash used in operating activities was primarily due to the decreased net loss after adjusting for non-cash activity of approximately $5.0 million.
Investing Activities
Net cash used in investing activities was $1,233,254 for the six months ended September 30, 2022, as compared to $315,408 used in investing activities for the six months ended September 30, 2021. The increase in net cash used in investing activities was from an increase in purchases of fixed assets.
Financing Activities
Net cash provided by financing activities for the six months ended September 30, 2022 was $11,410,201, as compared to $20,333,943 for the six months ended September 30, 2021. The decrease in net cash provided by financing activities is primarily due to a decrease in the proceeds from the exercise of warrants of approximately $6.9 million.
Cash Requirements
Our ability to continue 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 ATM sales agreement with Roth Capital Partners, LLC is planned to fund our current planned operations and capital needs. However, if our current plans change or are accelerated or we choose to increase our production capacity, we may seek to sell additional equity or debt securities or obtain additional credit facilities, including seeking investments from strategic investors. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4 Controls and Procedures
Disclosure Controls and Procedures
We maintain "disclosure controls and procedures", as that term is defined in Rule 13a-15(e), promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer to allow timely decisions regarding required disclosure.
As required by paragraph (b) of Rules 13a-15 under the Securities Exchange Act of 1934, our management, with the participation of our principal executive officer and our principal financial officer, evaluated our company's disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our management concluded that as of the end of the period covered by this quarterly report on Form 10-Q, our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to the material weaknesses in our internal control over financial reporting disclosed in our annual report on Form 10-K for the fiscal year ended March 31, 2022. We are working on mitigating the material weaknesses.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
We know of no material pending legal proceedings to which our company or any of our subsidiaries is a party or of which any of our properties, or the properties of any of our subsidiaries, is the subject. In addition, we do not know of any such proceedings contemplated by any governmental authorities.
We know of no material proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder is a party adverse to our company or any of our subsidiaries or has a material interest adverse to our company or any of our subsidiaries.
Item 1A. Risk Factors
Information regarding risk factors appears in our Annual Report on Form 10-K filed on July 14, 2022. There have been no material changes since July 14, 2022 from the risk factors disclosed in that Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Except as disclosed below, s ince the beginning of our fiscal quarter ended September 30, 2022, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in a current report on Form 8-K.
On July 29, 2022, we granted Frank Lazaran, our president, chief executive officer and director, an award of 500,000 shares of our common stock as a "restricted award" under the employment agreement dated July 29, 2022 with Mr. Lazaran and our 2020 equity incentive plan. These shares vested as of July 29, 2022. On July 29, 2022, we granted Mr. Lazaran stock options to purchase 1,000,000 shares of our common stock pursuant the employment agreement and our 2020 equity incentive plan. Each stock option is exercisable at a price of $0.428 per share until July 29, 2032. The stock options will vest as to 50% on each anniversary of the grant date. We granted the awards of these shares and stock options to one U.S. Person (as that term is defined in Regulation S of the Securities Act of 1933) and in granting these awards we relied on the registration exemption provided for in Section 4(a)(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Description
Number
(3) Articles of Incorporation and Bylaws
3.1 Articles of Incorporation (incorporated by reference from our Form S-1 Registration Statement, filed on October 28, 2011)
3.2 Certificate of Change (incorporated by reference from our Quarterly Report on Form 10-Q, filed on August 13, 2013)
3.3 Articles of Merger (incorporated by reference from our Quarterly Report on Form 10-Q, filed on August 13, 2013)
3.4 Certificate of Amendment to Articles of Incorporation (incorporated by reference from our Current Report on Form 8-K, filed on October 11, 2013)
3.5 Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on October 11, 2013)
3.6 Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on November 12, 2013)
3.7 Certificate of Change (incorporated by reference from our Current Report on Form 8-K, filed on December 30, 2015)
3.8 Certificate of Amendment to Articles of Incorporation (incorporated by reference from our Current Report on Form 8-K, filed on January 25, 2016)
3.9 Certificate of Amendment to Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on January 25, 2016)
3.10 Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on April 5, 2016)
3.11 Certificate of Withdrawal of Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on April 4, 2017)
3.12 Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on May 4, 2017)
3.13 Certificate of Amendment to Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on November 6, 2017)
3.14 Certificate of Withdrawal of Certificate of Designation (incorporated by reference from our Quarterly Report on Form 10-Q, filed on November 20, 2017)
3.15 Certificate of Designation (incorporated by reference from our Current Report on Form 8-K, filed on May 19, 2021)
3.16 Amended and Restated Bylaws (incorporated by reference from our Current Report on Form 8-K, filed on October 15, 2018)
(10) Material Contracts
10.1 Contract Packer Agreement dated November 14, 2012 between Alkaline 84, LLC and AZ Bottled Water, LLC (incorporated by reference from our Current Report on Form 8-K, filed on June 5, 2013)
10.2 Contract Packer Agreement dated October 7, 2013 with White Water, LLC (incorporated by reference from our Quarterly Report on Form 10-Q, filed on November 13, 2013)
10.3 Manufacturing Agreement dated August 15, 2013 with Water Engineering Solutions, LLC (incorporated by reference from our Registration Statement on Form S-1, filed on November 27, 2013)
10.4 Equipment Lease Agreement dated January 17, 2014 (incorporated by reference from our Current Report on Form 8-K, filed on January 27, 2014)
10.5 Revolving Accounts Receivable Funding Agreement dated February 20, 2014 (incorporated by reference from our Current Report on Form 8-K, filed on February 25, 2014)
10.6 Form of Securities Purchase Agreement dated as of April 28, 2014, between The Alkaline Water Company Inc. and the purchasers named therein (incorporated by reference from our Current Report on Form 8-K, filed on May 6, 2014)
10.7 Form of Common Stock Purchase Warrant (incorporated by reference from our Current Report on Form 8-K, filed on May 6, 2014)
10.8 Form of Placement Agent Common Stock Purchase Warrant (incorporated by reference from our Current Report on Form 8-K, filed on May 6, 2014)
10.9 Amendment #1 dated February 12, 2014 to Equipment Lease Agreement (incorporated by reference from our Quarterly Report on Form 10-Q, filed on August 13, 2014)
10.10 Equipment Sale/Lease Back Agreement dated April 2, 2014 (incorporated by reference from our Quarterly Report on Form 10-Q, filed on August 13, 2014)
10.11 Agreement dated August 12, 2014 with H.C. Wainwright & Co., LLC (incorporated by reference from our Current Report on Form 8-K, filed on August 21, 2014)
10.12 Form of Warrant Amendment Agreement (incorporated by reference from our Current Report on Form 8-K, filed on August 21, 2014)
10.13 Form of Common Stock Purchase Warrant (incorporated by reference from our Current Report on Form 8-K, filed on August 21, 2014)
10.14 Form of Warrant Amendment Agreement (incorporated by reference from our Current Report on Form 8-K, filed on October 9, 2014)
10.15 Form of Common Stock Purchase Warrant (incorporated by reference from our Current Report on Form 8-K, filed on October 9, 2014)
10.16 Master Lease Agreement dated October 28, 2014 with Veterans Capital Fund, LLC (incorporated by reference from our Current Report on Form 8-K, filed on November 4, 2014)
10.17 Warrant Agreement dated October 28, 2014 with Veterans Capital Fund, LLC (incorporated by reference from our Current Report on Form 8-K, filed on November 4, 2014)
10.18 Registration Rights Agreement dated October 28, 2014 with Veterans Capital Fund, LLC (incorporated by reference from our Current Report on Form 8-K, filed on November 4, 2014)
10.19 Form of Amending Agreement to Stock Option Agreement (incorporated by reference from our Current Report on Form 8-K, filed on November 4, 2014)
10.20 Securities Purchase Agreement dated as of May 11, 2015 with Assurance Funding Solutions LLC (incorporated by reference from our Annual Report on Form 10-K, filed on July 14, 2015)
10.21 Secured Term Note dated May 2015 issued to Assurance Funding Solutions LLC (incorporated by reference from our Annual Report on Form 10-K, filed on July 14, 2015)
10.22 General Security Agreement dated as of May 11, 2015 with Assurance Funding Solutions LLC (incorporated by reference from our Annual Report on Form 10-K, filed on July 14, 2015)
10.23 Securities Purchase Agreement dated as of August 20, 2015 with Assurance Funding Solutions LLC (incorporated by reference from our Quarterly Report on Form 10-Q, filed on November 23, 2015)
10.24 Secured Term Note dated August 20, 2015 issued to Assurance Funding Solutions LLC (incorporated by reference from our Quarterly Report on Form 10-Q, filed on November 23, 2015)
10.25 General Security Agreement dated as of August 20, 2015 with Assurance Funding Solutions LLC (incorporated by reference from our Quarterly Report on Form 10-Q, filed on November 23, 2015)
10.26 Loan Agreement dated November 30, 2015 with Neil Rogers (incorporated by reference from our Current Report on Form 8-K, filed on December 4, 2015)
10.27 Promissory Note dated November 30, 2015 issued to Neil Rogers (incorporated by reference from our Current Report on Form 8-K, filed on December 4, 2015)
10.28 Escrow Agreement dated November 30, 2015 with Neil Rogers and Escrow Agent (incorporated by reference from our Current Report on Form 8-K, filed on December 4, 2015)
10.29 2013 Equity Incentive Plan (incorporated by reference from our Current Report on Form 8-K, filed on January 25, 2016)
10.30 Loan Agreement dated January 25, 2016 with Turnstone Capital Inc. (incorporated by reference from our Current Report on Form 8-K, filed on January 25, 2016)
10.31 Promissory Note dated January 25, 2016 issued to Turnstone Capital Inc. (incorporated by reference from our Current Report on Form 8-K, filed on January 25, 2016)
10.32 Escrow Agreement dated January 25, 2016 with Turnstone Capital Inc. and Escrow Agent (incorporated by reference from our Current Report on Form 8-K, filed on January 25, 2016)
10.33 Amendment Agreement dated January 25, 2016 with Neil Rogers (incorporated by reference from our Current Report on Form 8-K, filed on January 25, 2016)
10.34 Employment Agreement dated effective March 1, 2016 with Steven P. Nickolas (incorporated by reference from our Current Report on Form 8-K, filed on April 5, 2016)
10.35 Employment Agreement dated effective March 1, 2016 with Richard A. Wright (incorporated by reference from our Current Report on Form 8-K, filed on April 5, 2016)
10.36 Form of Promissory Note and Warrant Exchange Agreement (incorporated by reference from our Current Report on Form 8-K, filed on June 16, 2016)
10.37 Loan Facility Agreement dated September 20, 2016 with Turnstone Capital Inc. (incorporated by reference from our Current Report on Form 8-K, filed on September 22, 2016)
10.38 Credit and Security Agreement dated February 1, 2017 with SCM Specialty Finance Opportunities Fund, L.P. (incorporated by reference from our Current Report on Form 8-K, filed on February 7, 2017)
10.39 Payoff Agreement dated February 1, 2017 with Gibraltar Business Capital, LLC (incorporated by reference from our Current Report on Form 8-K, filed on February 7, 2017)
10.40 Form of Stock Option Agreement (incorporated by reference from our Current Report on Form 8-K, filed on May 4, 2017)
10.41 Settlement Agreement and Mutual Release of Claims dated October 31, 2017 with Steven P. Nickolas, Nickolas Family Trust, Water Engineering Solutions, LLC, Enhanced Beverages, LLC, McDowell 78, LLC and Wright Investments Group, LLC (incorporated by reference from our Current Report on Form 8-K, filed on November 6, 2017)
10.42 Exchange Agreement and Mutual Release of Claims dated November 8, 2017 with Ricky Wright (incorporated by reference from our Current Report on Form 8-K, filed on November 14, 2017)
10.43 Stock Option Forfeiture & General Release dated November 8, 2017 by Ricky Wright and Sharon Wright (incorporated by reference from our Current Report on Form 8-K, filed on November 14, 2017)
10.44 Form of Warrant Amendment Agreement (incorporated by reference from our Current Report on Form 8-K, filed on February 22, 2018)
10.45 Form of Common Stock Purchase Warrant (incorporated by reference from our Current Report on Form 8-K, filed on March 5, 2018)
10.46 2018 Stock Option Plan (incorporated by reference from our Current Report on Form 8-K, filed on April 25, 2018)
10.47 Form of Subscription Agreement (incorporated by reference from our Current Report on Form 8-K filed on May 31, 2018)
10.48 Form of Subscription Agreement (incorporated by reference from our Current Report on Form 8-K filed on October 3, 2018)
10.49 Underwriting Agreement, dated March 8, 2019, by and between The Alkaline Water Company Inc. and Canaccord Genuity LLC, as representative of the underwriters named therein (incorporated by reference from our Current Report on Form 8-K, filed on March 11, 2019)
10.50 Employment Agreement dated April 25, 2019 with Ronald DaVella (incorporated by reference from our Current Report on Form 8-K filed on May 3, 2019)
10.51 Sixth Amendment to Credit and Security Agreement dated June 27, 2019 with CNH Finance Fund I, L.P. (incorporated by reference from our Annual Report on Form 10-K filed on July 1, 2019)
10.52 Agreement and Plan of Merger, dated as of September 9, 2019 among The Alkaline Water Company Inc., AQUAhydrate, Inc. and AWC Acquisition Company Inc. (incorporated by reference from our Current Report on Form 8-K filed on September 12, 2019)
10.53 Amendment to the Agreement and Plan of Merger, dated as of October 31, 2019 among The Alkaline Water Company Inc., AQUAhydrate, Inc. and AWC Acquisition Company Inc. (incorporated by reference from our Current Report on Form 8-K filed on November 6, 2019)
10.54 Form of Subscription Agreement (incorporated by reference from our Current Report on Form 8-K filed on April 20, 2020)
10.55 2020 Equity Incentive Plan (incorporated by reference from our Current Report on Form 8-K filed on April 28, 2020)
10.56 Form of Subscription Agreement (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2020)
10.57 Sales Agreement, dated as of February 22, 2021, by and between The Alkaline Water Company Inc. and Roth Capital Partners, LLC** (incorporated by reference from our Current Report on Form 8-K filed on February 23, 2021)
10.58 Form of Subscription Agreement (incorporated by reference from our Current Report on Form 8-K filed on March 2, 2021)
10.59 Endorsement Agreement executed May 12, 2021 by The Alkaline Water Company Inc. and ABG-Shaq, LLC (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2021)
10.60 Form of Subscription Agreement (incorporated by reference from our Current Report on Form 8-K filed on July 6, 2021)
10.61 Employment Agreement dated effective April 25, 2022 with Richard A. Wright (incorporated by reference from our Current Report on Form 8-K filed on April 29, 2022)
10.62 Underwriting Agreement, dated May 4, 2022, between The Alkaline Water Company Inc. and Aegis Capital Corp. (incorporated by reference from our Current Report on Form 8-K filed on May 6, 2022)
10.63 Separation Agreement & Release of All Claims dated June 2, 2022 by and between Richard Wright, The Alkaline Water Company Inc. and Alkaline 88, LLC (incorporated by reference from our Current Report on Form 8-K filed on June 2, 2022)
10.64 Employment Agreement dated July 29, 2022 with Frank Lazaran (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 15, 2022)
(31) Rule 13a-14 Certifications
31.1* Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2* Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
(32) Section 1350 Certifications
32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2* Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
(101) Interactive Data File
101.INS* INS XBRL Instance Document-the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE ALKALINE WATER COMPANY INC.
Date: November 14, 2022 By: /s/ Frank Lazaran
Frank Lazaran
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2022 By: /s/ David A. Guarino
David A. Guarino
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer)