WTER 10-Q
ALKALINE WATER Co INC (WTER)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
Commission File Number
(Exact name of registrant as specified in its charter)
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(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
THE ALKALINE WATER COMPANY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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December 31, 2021 |
March 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Operating lease right-of-use asset - current portion | ||||||||
| Total current assets | ||||||||
| Fixed assets - net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Revolving financing | ||||||||
| PPP loan payable - current portion | ||||||||
| Operating lease liability - current portion | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, $ |
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| Common stock, Class A - $ |
||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
| For the Three Months | For the Nine Months | |||||||||||
| December 31, 2021 | December 31, 2020 |
December 31, 2021 |
December 31, 2020 | |||||||||
| Revenue | $ | $ | $ | $ | ||||||||
| Cost of Goods Sold | ||||||||||||
| Gross Profit | ||||||||||||
| Operating expenses | ||||||||||||
| Sales and marketing expenses | ||||||||||||
| General and administrative | ||||||||||||
| Total operating expenses | ||||||||||||
| Total operating loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Other expense | ||||||||||||
| Gain on forgiveness of PPP loan payable | ||||||||||||
| Interest expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Total other expense | ( |
) | ( |
) | ( |
) | ||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| LOSS PER SHARE (Basic and Diluted) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| WEIGHTED AVERAGE SHARES OUTSTANDING (Basic and Diluted) | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
| Preferred Stock | Common Stock | Additional | Accumulated | |||||||||||||||||||||
| Number | Par Value | Number | Par Value | Paid-in Capital | Stock Payable | Deficit | Total | |||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Preferred stock conversion | ( |
) | ( |
) | - | |||||||||||||||||||
| Common shares issued in connection with offerings | ( |
) | ||||||||||||||||||||||
| Common shares issued upon exercise of warrants | ||||||||||||||||||||||||
| Common shares issued to non-employees and employees | ||||||||||||||||||||||||
| Stock Option expense | ||||||||||||||||||||||||
| Stock Option exercise | ||||||||||||||||||||||||
| Stock Payable | ||||||||||||||||||||||||
| Net (loss) | ( |
) | ( |
) | ||||||||||||||||||||
| Balance, June 30, 2020 | - | $ | - | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Common shares issued in connection with offerings | ( |
) | - | |||||||||||||||||||||
| Common shares issued upon exercise of warrants | ||||||||||||||||||||||||
| Common shares issued to non-employees | ||||||||||||||||||||||||
| Stock Option expense | ||||||||||||||||||||||||
| Stock Option exercise | ( |
) | - | |||||||||||||||||||||
| Net (loss) | ( |
) | ( |
) | ||||||||||||||||||||
| Balance, September 30, 2020 | - | $ | - | $ | $ | $ | - | $ | ( |
) | $ | |||||||||||||
| Common shares issued upon exercise of warrants | ||||||||||||||||||||||||
| Common shares issues to non-employees | ||||||||||||||||||||||||
| Common shares issued to employees | ||||||||||||||||||||||||
| Stock Option expense | ||||||||||||||||||||||||
| Net (loss) | ( |
) | ( |
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| Balance, December 31, 2020 | - | $ | - | $ | $ | $ | - | $ | ( |
) | $ | |||||||||||||
| Balance, March 31, 2021 | - | $ | - | $ | $ | $ | - | $ | ( |
) | $ | |||||||||||||
| Preferred stock issuance | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants | ||||||||||||||||||||||||
| Common shares issued to non-employees and employees | ||||||||||||||||||||||||
| Stock option and RSU-related stock compensation expense | ||||||||||||||||||||||||
| Stock Option exercise | ||||||||||||||||||||||||
| Net (loss) | ( |
) | ( |
) | ||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | - | $ | ( |
) | $ | |||||||||||||||
| Common shares issued in connection with offerings | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants | ||||||||||||||||||||||||
| Common shares issued to non-employees | ||||||||||||||||||||||||
| Stock option and RSU-related stock compensation expense | ||||||||||||||||||||||||
| Stock Option exercise | ||||||||||||||||||||||||
| Net (loss) | ( |
) | ( |
) | ||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | - | $ | ( |
) | $ | |||||||||||||||
| Common shares issued upon exercise of warrants | ||||||||||||||||||||||||
| Preferred Stock conversion to common stock | ( |
) | ( |
) | - | |||||||||||||||||||
| Common shares issued to non-employees | ||||||||||||||||||||||||
| Stock option and RSU-related stock compensation expense | ||||||||||||||||||||||||
| Net (loss) | ( |
) | ( |
) | ||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | - | $ | ( |
) | $ | |||||||||||||||
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 Nine Months | ||||||
| December 31, 2021 | December 31, 2020 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net loss | $ | ( |
) | $ | ( |
) |
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||
| Depreciation expense | ||||||
| Shares issued and vested, options and RSU amortized for employee and non-employee services | ||||||
| Non-cash lease expense | ||||||
| Changes in operating assets and liabilities: | ||||||
| Accounts receivable | ||||||
| Inventory | ( |
) | ( |
) | ||
| Prepaid expenses and other current assets | ( |
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| Accounts payable | ( |
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| Accrued expenses | ( |
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| NET CASH USED IN OPERATING ACTIVITIES | ( |
) | ( |
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| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Purchase of fixed assets | ( |
) | ( |
) | ||
| CASH USED IN INVESTING ACTIVITIES | ( |
) | ( |
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| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Proceeds from (repayment of) revolving financing | ( |
) | ||||
| Proceeds from promissory note payable | ||||||
| Proceeds from sale of common stock, net | ||||||
| Proceeds for the exercise of warrants, net | ||||||
| Proceeds for the exercise of stock options, net | ||||||
| CASH PROVIDED BY FINANCING ACTIVITIES | ||||||
| NET CHANGE IN CASH | ( |
) | ( |
) | ||
| CASH AT BEGINNING OF PERIOD | ||||||
| CASH AT END OF PERIOD | $ | $ | ||||
| INTEREST PAID | $ | $ | ||||
| TAXES PAID | $ | $ | ||||
|
SUPPLEMENTAL DISCLOSURE of NON-CASH INVESTING AND FINANCIAL ACTIVITIES |
||||||
| ISSUANCE OF COMMON SHARES TO SETTLE STOCK PAYABLE | $ | $ | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Basis of presentation
These unaudited financial statements represent the condensed consolidated financial statements of The Alkaline Water Company and its wholly owned subsidiaries (collectively, the "Company"). These unaudited condensed consolidated financial statements should be read in conjunction 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 by generally accepted accounting principles ("GAAP") In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's financial position on a consolidated basis and the consolidated results of operations, equity and cash flows for the interim periods presented. The results of operations for the three and nine months ended December 31, 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 nine months ended December 31, 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 all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements.
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) and 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 subsidiaries indicated above, unless otherwise indicated.
Use of Estimates
Cash and Cash Equivalents
Accounts Receivable and Allowance for Doubtful Accounts
| December 31, | March 31, | |||||
| 2021 | 2021 | |||||
| Trade receivables | $ | $ | ||||
| Less: Allowance for doubtful accounts | ( |
) | ( |
) | ||
| Net accounts receivable | $ | $ |
Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions. The accounts receivable balance is pledged as collateral for the Company's revolving financing as disclosed in Note 3.
Inventory
| December 31, 2021 | March 31, 2021 | |||||
| Raw materials | $ | $ | ||||
| Finished goods | ||||||
| Total inventory | $ | $ |
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
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 its cash on hand, funds from the exercise of outstanding warrants, and access to its ATM facility, 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 recognizes revenue when the Company's performance obligations are satisfied. The Company's primary obligation (the distribution and sale of beverage products) is satisfied upon the delivery of products to the Company's 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 require 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 recognizes it as variable consideration. The amounts are not considered material. After evaluating the revenue disclosure requirements, the Company does not believe that any revenues are required to be disaggregated.
Revenue consists of the gross sales price, less variable consideration, consisting of 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. 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 $
Concentration Risks
We have
We have
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 earnings or loss per share ("EPS") amounts in the consolidated financial statements are computed in accordance with 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
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 December 31, 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 nine months ended December 31, 2020 has been corrected for the following: a reclassification of depreciation expense of $
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 2019,the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). ASU 2019-10 changes the effective date of the credit loss standard (ASU 2016-13) to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies 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 December 31, 2021 and believes that none of them will have a material effect on our consolidated financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
| December 31, 2021 | March 31, 2021 | |||||
| Machinery and equipment | $ | $ | ||||
| Office equipment | ||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||
| Property and equipment, net | $ | $ |
Depreciation expense for the three months ended December 31, 2021 and December 31, 2020 was $
Depreciation expense for the nine months ended December 31, 2021 and December 31, 2020 was $
NOTE 3 - REVOLVING FINANCING
On February 1, 2017, the Company entered into a Credit and Security Agreement (the "Credit Agreement") with CNH Finance Fund I, L.P. (fka SCM Specialty Finance Opportunities Fund, L.P.) (the "Lender") which has been amended from time to time the last of which was March 2020.
The Credit Agreement provides the Company with a revolving credit facility (the "Revolving Facility"), the proceeds of which are to be used to repay existing indebtedness of the Company, transaction fees incurred in connection with the Credit Agreement and for working capital needs of the Company.
The Credit Agreement expires on July 1, 2022, unless earlier terminated by the parties in accordance with the terms of the Credit Agreement.
To secure the payment and performance of the obligations under the Credit Agreement, the Company granted to the Lender a continuing security interest in all of the Company's assets and agreed to a lockbox account arrangement in respect of certain eligible receivables.
In connection with the Credit Agreement, the Company paid to the Lender a $
The interest rate will be increased by
The Credit Agreement contains customary representations and warranties and various affirmative and negative covenants including the right of first refusal to provide financing for the Company and the financial and loan covenants, such as the loan turnover rate, minimum EBITDA, fixed charge coverage ratio and minimum liquidity requirements. The Company was in compliance with those covenants as of December 31, 2021.
The balance of the revolving financing was $
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 $
The promissory note issued by Borrower, matures on
NOTE 5 - STOCKHOLDER EQUITY
Preferred Shares
On October 7, 2013, the Company amended its articles of incorporation to create
Series S Convertible Preferred Stock
On May 12, 2021, The Alkaline Water Company Inc. (the "Company") entered into an Endorsement Agreement (the "Endorsement Agreement"), with ABG-Shaq, LLC ("ABG-Shaq"), an entity affiliated with Shaquille O'Neal, for the personal services of Mr. O'Neal. Pursuant to the Endorsement Agreement, the Company received the right and license to use Mr. O'Neal's name, nickname, initials, autograph, voice, video or film portrayals, photograph, likeness and certain other intellectual property rights, in each case, solely as approved by ABG-Shaq, in connection with the advertising, promotion and sale of the Company's branded products. Mr. O'Neal will also provide brand ambassador services related to appearances, social media and public relations matters. The Endorsement Agreement also includes customary exclusivity, termination, and indemnification clauses.
As consideration for the rights and services granted under the Endorsement Agreement, the Company agreed to pay to ABG-Shaq aggregate cash payments of $
In addition, the Company agreed to grant
In the three and nine months ended December 31, 2021, the Company recognized an expense of $
Common Shares
Share Issuance
Effective as of November 19, 2021, we issued
On December 20, 2021, the Issuer granted an award of
Restricted Awards
On November 11, 2021, we granted awards of an aggregate of
NOTE 6 - OPTIONS AND WARRANTS
Options
Issuance of Options
On November 11, 2021, we granted an aggregate of
Warrants
Exercise of Warrants
Effective as of November 15, 2021, we issued an aggregate of
NOTE 7 - LEASES
The Company adopted ASC 842 on April 1, 2019 which requires lessees to recognize right-of-use ("ROU") asset and lease liability for all leases. The Company elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are or contain leases, lease classification and determination of initial direct costs.
As of October 1, 2020, the company entered into a lease for
As of November 1, 2020, the company entered into a lease for
At inception the ROU and Lease Liability was calculated based on the net present value of the future lease payments over the term of the lease. When available, the Company uses the rate implicit in the lease discount payments as the incremental borrowing rate to calculate the net present value; however, the rate implicit in the lease is not readily determinable for our corporate office lease. In this case, the Company estimated its incremental borrowing rate as the interest rate it could borrow an amount equal to the lease payments over a similar term, with similar collateral as the lease, and in a similar economic environment. The Company estimated its rate using available evidence such as rates imposed by third-party lenders to the Company in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to the Company's estimated creditworthiness.
For operating leases that include rent holidays and rent escalation clauses, the Company recognizes lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. The Company records the straight-line lease expense and any contingent rent, if applicable, in general and administrative expenses on the condensed consolidated statements of operations. The corporate office, lease also requires the Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in the general and administrative expenses on the condensed consolidated statements of operations.
Operating Lease expense for the three and nine months ended December 31, 2021 was $
| Operating Leases: | |||
| December 31, 2021 | |||
| Operating lease right-of-use asset - current portion | $ | ||
| Operating lease right-of-use asset - non-current portion | |||
| Total Operating lease right-of-use asset | $ | ||
| Operating lease liability - current portion | $ | ||
| Operating lease liability - non-current portion | |||
| Total Operating lease liability | $ | ||
| Weighted average remaining lease term (in years): | |||
| Operating leases |
|
||
| Weighted average discount rate: | |||
| Operating leases |
Supplemental cash flow information related to leases is as follows:
Maturities of undiscounted lease liabilities as of December 31, 2021 are as follows:
| Operating Leases |
|||
| Year ending March 31, 2022 | $ | ||
| Year ending March 31, 2023 | |||
| Year ending March 31, 2024 | |||
| Total lease payments | |||
| Adjusted for interest | ( |
) | |
| Total lease obligations | $ |
NOTE 8 - RISKS AND UNCERTAINTIES
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, the Company cautions that 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, the Company has 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.
NOTE 9 - SUBSEQUENT EVENTS
On January 11, 2022, we issued
On January 15, 2022, we issued an aggregate of
On January 15, 2022, we issued
| 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. |
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 International, Inc. (a Nevada Corporation), A88 Infused Products, Inc. (a Nevada Corporation), The Clean Beverage Company Inc. (a Nevada corporation), and 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 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.
Results of Operations
Three Months Ended December 31, 2021 and December 31, 2020
Our results of operations for the three months ended December 31, 2021 and December 31, 2020 are as follows:
| For the three | For the three | |||||
| months ended | months ended | |||||
| December 31, | December 31, | |||||
| 2021 | 2020 | |||||
| Revenue | $ | 15,110,400 | $ | 9,616,200 | ||
| Cost of goods sold | 10,128,144 | 6,623,961 | ||||
| Gross profit | $ | 4,982,256 | $ | 3,352,239 | ||
| Net Loss | $ | (10,736,033 | ) | $ | (4,360,334 | ) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the three months ended December 31, 2021 of $15,110,400 as compared to $9,616,200 for the three months ended December 31, 2020, an increase of 57% generated by sales of our alkaline water and flavored infused water. 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. 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. 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 December 31, 2021, we had cost of goods sold of $10,128,144, or 67% of revenue, as compared to cost of goods sold of $6,263,961 or 65% of revenue, for the three months ended December 31, 2020.
Expenses
Our operating expenses for the three months ended December 31, 2021 and December 31, 2020 are as follows:
| For the three | For the three | |||||
| months ended | months ended | |||||
| December 31, | December 31, | |||||
| 2021 | 2020 | |||||
| Sales and marketing expenses | $ | 9,572,279 | $ | 4,091,435 | ||
| General and administrative expenses | 6,333,663 | 3,484,221 | ||||
| Total operating expenses | $ | 15,905,942 | $ | 7,575,657 |
For the three months ended December 31, 2021, our total operating expenses were $15,905,942 as compared to $7,575,656 for the three months ended December 31, 2020.
For the three months ended December 31, 2021, the total included $9,572,279 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. General and administrative expenses of $6,333,663, consisted primarily of approximately $1.3 million of professional fees, media fees and legal fees, stock option and restricted stock expense in the amount of approximately $2.3 million and approximately $1.5 million of wages and wage related expenses.
For the three months ended December 31, 2020, the total included $4,091,435 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. General and administrative expenses of $3,484,221, consisted primarily of approximately $2,0 million of professional fees, media fees and legal fees, stock option expense in the amount of approximately $0.4 million and approximately $0.8 million of wages and wage related expenses.
Nine Months Ended December 31, 2021 and December 31, 2020
Our results of operations for the nine months ended December 31, 2021 and December 31, 2020 are as follows:
| For the nine | For the nine | |||||
| months ended | months ended | |||||
| December 31, | December 31, | |||||
| 2021 | 2020 | |||||
| Revenue | $ | 44,479,743 | $ | 33,209,062 | ||
| Cost of goods sold | 29,530,570 | 21,368,066 | ||||
| Gross profit | $ | 14,949,173 | $ | 11,840,996 | ||
| Net Loss | $ | (28,540,132 | ) | $ | (11,742,965 | ) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the nine months ended December 31, 2021 of $44,479,743 as compared to $33,209,062 for the nine months ended December 31, 2020, an increase of 34% generated by sales of our alkaline water and flavored infused water. 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. 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. 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.
For the nine months ended December 31, 2021, we had cost of goods sold of $29,530,570, or 66% of revenue, as compared to cost of goods sold of $21,368,066 or 64% of revenue, for the nine months ended December 31, 2020.
Expenses
Our operating expenses for the nine months ended December 31, 2021 and December 31, 2020 are as follows:
| For the nine | For the nine | |||||
| months ended | months ended | |||||
| December 31, | December 31, | |||||
| 2021 | 2020 | |||||
| Sales and marketing expenses | $ | 26,849,554 | $ | 12,199,001 | ||
| General and administrative expenses | 16,549,788 | 10,926,786 | ||||
| Total operating expenses | $ | 43,399,342 | $ | 23,125,788 |
For the nine months ended December 31, 2021, our total operating expenses were $43,399,342, as compared to $23,125,788 for the nine months ended December 31, 2020.
For the nine months ended December 31, 2021, the total included $26,849,554 of sales and marketing expenses. Sales and marketing expenses increased compared to the nine months ended December 31, 2020 as a result of increased out bound freight to our customers of approximately $6.5 million, increased advertising and promotional expenses of approximately $2.9 million and increased non-cash stock expense of approximately $1.7 million. General and administrative expenses of $16,549,788, consisted primarily of approximately $6.8 million of professional fees, stock option and stock award expense in the amount of approximately $3.7 million and approximately $3.6 million of wage and wage related expenses.
For the nine months ended December 31, 2020, the total included $12,199,001 of sales and marketing expenses and $10,926,786 of general and administrative expenses, consisting primarily of approximately $5.3 million of professional fees, stock option expense in the amount of approximately $2.3 million and approximately $2.2 million of wage and wage related expenses.
Liquidity and Capital Resources
Working Capital
| At December | At March 31, | |||||
| 31, 2021 | 2021 | |||||
| Current assets | $ | 22,326,050 | $ | 23,271,259 | ||
| Current liabilities | 15,387,565 | 13,244,041 | ||||
| Working capital | $ | 6,938,485 | $ | 10,027,218 |
Current Assets
Current assets as of December 31, 2021 and March 31, 2021 primarily relate to $3,293,292 and $9,130,956 in cash, $7,773,196 and $8,458,176 in accounts receivable and $8,829,559 and $4,407,720 in inventory, respectively.
Current Liabilities
Current liabilities as of December 31, 2021 and March 31, 2021 primarily relate to $7,389,169 and $7,055,348 in accounts payable, revolving financing of $6,426,601 and $4,324,412, and accrued expenses of $1,409,648 and $1,306,106 respectively.
Cash Flows
Our cash flows for the nine months ended December 31, 2021 and December 31, 2020 are as follows:
| For the nine | For the nine | |||||
| months | Months | |||||
| ended | ended | |||||
| December | December | |||||
| 31, | 31, | |||||
| 2021 | 2020 | |||||
| Net cash used in operating activities | $ | (25,940,267 | ) | $ | (9,602,288 | ) |
| Net cash used in investing activities | (493,329 | ) | (152,877 | ) | ||
| Net cash provided by financing activities | 20,595,932 | 6,910,427 | ||||
| Net increase (decrease) in cash and cash equivalents | $ | (5,837,664 | ) | $ | (2,844,738 | ) |
Operating Activities
Net cash used in operating activities was $25,940,267 for the nine months ended December 31, 2021, as compared to $9,602,288 used in operating activities for the nine months ended December 31, 2020. The increase of approximately $16 million in net cash used in operating activities is primarily due to approximately $16 million increase of net loss in the nine months ended December 31, 2021 compared to the nine months ended December 31, 2020.
Investing Activities
Net cash used in investing activities was $493,329 for the nine months ended December 31, 2021, as compared to $152,877 used in investing activities for the nine months ended December 31, 2020.
Financing Activities
Net cash provided by financing activities for the nine months ended December 31, 2021 was $20,595,932, as compared to $6,910,427 for the nine months ended December 31, 2020. The increase of approximately $13.7 million in net cash provided by financing activities is primarily due to increase of approximately $8.5 million increase of proceeds provided by sale of common stock and proceeds from the exercise of warrants, and by an increase of approximately $5.4 million of cash flows from revolving financing, net of repayments in the nine months ended December 31, 2021 compared to the nine months ended December 31, 2020.
Cash Requirements
We believe that between the cash on hand as of December 31, 2021, expected warrant exercises, and our credit line, we will have sufficient cash to sustain operations including our cash needs through at least December 31, 2022. If our own financial resources and future cash-flows from operations beyond December 31, 2022 are insufficient to sustain operations, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.
Item 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-15I, 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.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2021 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. There have been no material changes since July 6, 2021 from the risk factors disclosed in that Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Since the beginning of our fiscal quarter ended December 31, 2021, 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.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
| Item 6. | Exhibits |
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE ALKALINE WATER COMPANY INC.
| Date: February 14, 2022 | By: | /s/ Richard A. Wright |
| Richard A. Wright | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: February 14, 2022 | By: | /s/ David A. Guarino |
| David A. Guarino | ||
| Chief Financial Officer and Treasurer | ||
| (Principal Financial Officer and Principal | ||
| Accounting Officer) |