ALKALINE WATER Co INC 10-Q for FY2022 Q2
ALKALINE WATER Co INC (WTER)
About this 10-Q
ALKALINE WATER Co INC filed this 10-Q on November 9, 2021, covering the quarter ended September 30, 2021 (FY2022 Q2).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $15.26M
- up 50.1% from $10.16M a year earlier
- Net loss
- $10.38M
- compared with a net loss of $4.36M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
Commission File Number:
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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).
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 [ ] |
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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.
CONSOLIDATED BALANCE SHEETS
(unaudited)
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September 30, 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 - $ |
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| 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.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
| For the Three Months | For the Six Months | |||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||
| Revenue | $ | $ | $ | $ | ||||||||
| Cost of Goods Sold | ||||||||||||
| Gross Profit | ||||||||||||
| Operating expenses | ||||||||||||
| Sales and marketing expenses | ||||||||||||
| General and administrative | ||||||||||||
| Total operating expenses | ||||||||||||
| Total operating loss | ( |
) | ( |
) | ( |
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| Other expense | ||||||||||||
| Interest expense | ( |
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) | ( |
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| Total other expense | ( |
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| 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
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) | ( |
) | ( |
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| 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 | ( |
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| Net (loss) | ( |
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| Balance, September 30, 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) | ( |
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| 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 | $ | $ | $ | $ | - | $ | ( |
) | $ | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Six Months | ||||||
| September 30, 2021 | September 30, 2020 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net loss | $ | ( |
) | $ | ( |
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| 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 |
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| Non-cash lease expense | ( |
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| Changes in operating assets and liabilities: | ||||||
| Accounts receivable | ( |
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| Inventory | ( |
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| Prepaid expenses and other current assets | ( |
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| Accounts payable | ( |
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| Accrued expenses | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( |
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| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Purchase of fixed assets | ( |
) | ( |
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| CASH USED IN INVESTING ACTIVITIES | ( |
) | ( |
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| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Proceeds from (repayment of) revolving financing | ( |
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| Proceeds from promissory note payable | ||||||
| Proceeds from sale of common stock, net | ||||||
| Proceeds from stock payable | ||||||
| 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 FINANCING ACTIVITIES | ||||||
| ISSUANCE OF COMMON SHARES TO SETTLE STOCK PAYABLE | $ | $ | ||||
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
Basis of presentation
Principles of consolidation
Use of Estimates
Cash and Cash Equivalents
Accounts Receivable and Allowance for Doubtful Accounts
| September 30, 2021 | March 31, 2021 | |||||
| (unaudited) | ||||||
| Trade receivables, net | $ | $ | ||||
| Less: Allowance for doubtful accounts | ( |
) | ( |
) | ||
| Net accounts receivable | $ | $ |
Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions. The accounts receivable balance is pledged as collateral for the Company's revolving financing as disclosed in Note 3.
Inventory
| September 30, 2021 | March 31, 2021 | |||||
| (unaudited) | ||||||
| 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 with cash on hand and funds from the exercise of outstanding warrants will adequately fund the Company's planned operations and capital needs for the next 12 months. However, if our current plans change or are accelerated or we choose to increase our production capacity, we may seek to sell additional equity or debt securities or obtain additional credit facilities, including seeking investments from strategic investors. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to continue as a going concern.
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification ("ASC") 718. Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options and warrants and the closing price of the Company's common stock for common share issuances.
Revenue Recognition
The Company recognizes revenue per ASC 606. The Company 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 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 September 30, 2021 and 2020, the Company did not have any financial instruments that are measured on a recurring basis as Level 1, 2 or 3.
The accompanying consolidated statement of operations for the three and six months ended September 30, 2020 has been corrected for the following: a reclassification of depreciation expense of $
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, 2021 and believes that none of them will have a material effect on our consolidated financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
Fixed assets consisted of the following at:
| Property and Equipment consisted of the following at: | September 30, 2021 (unaudited) |
March 31, 2021 |
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| Machinery and Equipment | $ | $ | ||||
| Office Equipment | ||||||
| Less: Accumulated Depreciation | ( |
) | ( |
) | ||
| Property and Equipment, net | $ | $ |
Depreciation expense for the three months ended September 30, 2021 and 2020 was $
Depreciation expense for the six months ended September 30, 2021 and 2020 was $
NOTE 3 - REVOLVING FINANCING
On February 1, 2017, we entered into a credit and security agreement (the "Credit Agreement") with SCM Specialty Finance Opportunities Fund, L.P. ("SCM" or "Lender"), which subsequently changed its name to CNH Finance Fund I, L.P.
The Credit Agreement provides our company with a revolving credit facility (the "Revolving Facility"), the proceeds of which are to be used to repay existing indebtedness of our company, transaction fees incurred in connection with the Credit Agreement and for the working capital needs of our company.
The Credit Agreement expires on July 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, we granted to SCM a continuing security interest in all of our assets and agreed to a lockbox account arrangement in respect of certain eligible receivables.
The Company agreed to pay to SCM monthly an unused line fee in amount equal to
The interest rate will be increased by
The Credit Agreement contains customary representations and warranties and various affirmative and negative covenants including the right of first refusal to provide financing for our company and the financial and loan covenants, such as the loan turnover rate, minimum EBITDA, fixed charge coverage ratio and minimum liquidity requirements.
NOTE 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 $
NOTE 5 - STOCKHOLDERS EQUITY
Preferred Shares
On October 7, 2013, the Company amended its articles of incorporation to create
Series S Convertible Preferred Stock
On May 12, 2021, The Alkaline Water Company Inc. (the "Company") entered into an Endorsement Agreement (the "Endorsement Agreement"), with ABG-Shaq, LLC ("ABG-Shaq"), an entity affiliated with Shaquille O'Neal, for the personal services of Mr. O'Neal. Pursuant to the Endorsement Agreement, the Company received the right and license to use Mr. O'Neal's name, nickname, initials, autograph, voice, video or film portrayals, photograph, likeness and certain other intellectual property rights, in each case, solely as approved by ABG-Shaq, in connection with the advertising, promotion and sale of the Company's branded products. Mr. O'Neal will also provide brand ambassador services related to appearances, social media and public relations matters. The Endorsement Agreement also includes customary exclusivity, termination, and indemnification clauses.
As consideration for the rights and services granted under the Endorsement Agreement, the Company agreed to pay to ABG-Shaq aggregate cash payments of $
In addition, the Company issued
In the three and six months ended September 30, 2021, the Company recognized an expense of
Common Stock
Private Placement
On July 6, 2021, we completed a private placement of
Share Issuance
Effective as of April 15, 2021, the Company issued
Effective as of August 20, 2021, the Company issued
Restricted Awards
On May 3, 2021, the Company issued
NOTE 6 - OPTIONS AND WARRANTS
Options
The Company issued
The Company issued
On July 27, 2021, the Company granted an aggregate of
Warrants
The Company issued
The Company issued
On September 29, 2021, the Company issued
NOTE 7 - LEASES
As of July 1, 2020, the Company entered into a lease for
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 six months ended September 30, 2021 was $
Operating Lease expense for the three and six months ended September 30, 2020 was $
| September 30, 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 September 30, 2021 are as follows:
| Operating Leases | |||
| Year ending March 31, 2022 | $ | ||
| Year ending March 31, 2023 | |||
| Year ending March 31, 2024 | |||
| Total lease payments | |||
| Less: Imputed interest | ( |
) | |
| Total lease obligations | $ |
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not believe that the disposition of matters that are pending or asserted will have a material effect on its consolidated financial statements.
NOTE 9 - SUBSEQUENT EVENTS
As of October 14, 2021, the Company's loan under the Paycheck Protection Program ("PPP") was forgiven as authorized by Section 1106 of the CARES Act. The outstanding principal balance of $
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This report contains "forward-looking statements." All statements other than statements of historical fact are "forward-looking statements" for purposes of applicable securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "could," "estimate," "intend," "continue," "believe," "expect" or "anticipate" or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward- looking statements, which speak only as of the dates on which they are made. Except as required by applicable law, including the securities laws of the United States and Canada, we do not intend, and undertake no obligation, to update any forward-looking statement.
Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:
• lack of working capital'
• inability to raise additional financing;
• the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
• deterioration in general or regional economic conditions;
• adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
• inability to efficiently manage our operations;
• inability to achieve future sales levels or other operating results; and
• the unavailability of funds for capital expenditures.
Unless otherwise indicated, all reference to "dollars", "$", "USD" or "US$" are to United States dollars and all reference to "CDN$" are to Canadian dollars.
Our financial statements are stated in United States Dollars ($ or US$) unless otherwise stated and are prepared in accordance with United States Generally Accepted Accounting Principles.
In this quarterly report, unless otherwise specified, all references to "common shares" refer to the common shares in our capital stock.
As used in this quarterly report on Form 10-Q, the terms "we", "us" "our", the "Company" and "Alkaline" refer to The Alkaline Water Company Inc., a Nevada corporation, and its wholly-owned subsidiaries A88 Infused Beverage Division, Inc. (a Nevada Corporation hereinafter referred to as "A88 Infused"), A88 Infused Products, Inc. (a Nevada Corporation), A88 International, Inc. (a Nevada Corporation), 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 September 30, 2021 and September 30, 2020
Our results of operations for the three months ended September 30, 2021 and September 30, 2020 are as follows:
| For the three | For the three | |||||
| months ended | months ended | |||||
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Revenue | $ | 15,255,765 | $ | 10,160,552 | ||
| Cost of goods sold | 10,091,415 | 6,509,264 | ||||
| Gross profit | $ | 5,164,350 | $ | 3,651,288 | ||
| Net Loss | $ | (10,378,473 | ) | $ | (4,361,628 | ) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the three months ended September 30, 2021 of $15,255,765, as compared to $10,160,552 for the three months ended September 30, 2020, an increase of 50% generated by sales of our alkaline water and flavor 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 September 30, 2021, we had cost of goods sold of $10,091,415 or 66% of revenue, as compared to cost of goods sold of $6,509,264 or 64% of revenue, for the three months ended September 30, 2020.
Expenses
Our operating expenses for the three months ended September 30, 2021 and September 30, 2020 are as follows:
| For the three | For the three | |||||
| months ended | months ended | |||||
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Sales and marketing expenses | $ | 10,120,875 | $ | 4,389,335 | ||
| General and administrative expenses | 5,251,751 | 3,492,648 | ||||
| Total operating expenses | $ | 15,372,626 | $ | 7,881,983 |
For the three months ended September 30, 2021, our total operating expenses were $ 15,372,626 as compared to $7,881,983 for the three months ended September 30, 2020.
For the three months ended September 30, 2021, the total included $10,120,875 of sales and marketing expenses. Sales and marketing expenses increased as a result of increased out-bound freight expenses (from approximately $1.7 million to $4.8 million) and sales promotional expenses (from approximately $0.3 million to approximately $2.5 million), increase which is primarily due to signing Alkaine88 brand ambassador. 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.
For the three months ended September 30, 2020, the total included $4,389,335 of sales and marketing expenses. Sales and marketing expenses increased as a result of increased freight and sales promotional expenses due to our increase in sales. General and administrative expenses of $3,492,648, consisted primarily of approximately $1.6 million of professional fees, media fees and legal fees, stock option expense in the amount of approximately $0.8 million and approximately $0.7 million of wages and wage related expenses.
Six Months Ended September 30, 2021 and September 30, 2020
Our results of operations for the six months ended September 30, 2021 and September 30, 2020 are as follows:
| For the six months | For the six months | |||||
| ended | ended | |||||
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Revenue | $ | 29,369,343 | $ | 23,592,862 | ||
| Cost of goods sold | 19,402,426 | 15,104,105 | ||||
| Gross profit | 9,966,917 | 8,488,757 | ||||
| Net Loss | $ | (17,804,099 | ) | $ | (7,382,631 | ) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the six months ended September 30, 2021 of $29,369,343 as compared to $23,592,862 for the six months ended September 30, 2020, an increase of 24% generated by sales of our alkaline water and flavor infused water. We distribute our product through several channels. We sell through large national distributors (UNFI, KeHE, C&S, and Core-Mark), which together represent over 150,000 retail outlets. We also sell our products directly to retail clients, including convenience stores, natural food products stores, large ethnic markets and national retailers and through Direct Store Distributors in selected markets, including Mahaska, Nevada Beverage, and Hensley, covering Nevada, Arizona, and Midwest region. Combined, they service over 16,000 customers in five states. Each one carries our full line of non-CBD waters. Some examples of retail clients are: Walmart, CVS, Rite-Aid Family Dollar, Food Lion, Albertson's/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB and Brookshire's.
Cost of goods sold is comprised of production costs, shipping and handling costs. For the six months ended September 30, 2021, we had cost of goods sold of $19,402,426, or 66% of revenue, as compared to cost of goods sold of $15,104,105 or 64% of revenue, for the six months ended September 30, 2020. The decrease in gross profit rate is a result of increased raw material cost from our suppliers.
Expenses
Our operating expenses for the six months ended September 30, 2021 and September 30, 2020 are as follows:
| For the six | For the six | |||||
| months ended | months ended | |||||
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Sales and marketing expenses | $ | 17,277,275 | $ | 8,107,566 | ||
| General and administrative expenses | 10,216,125 | 7,442,565 | ||||
| Total operating expenses | $ | 27,493,400 | $ | 15,550,131 |
For the six months ended September 30, 2021, our total operating expenses were $27,493,400, as compared to $15,550,131 for the six months ended September 30, 2020.
For the six months ended September 30, 2021, the total included $17,277,275 of sales and marketing expenses. Sales and marketing expenses increased as a result of increased out-bound freight expense (from approximately $3.5 million to $7.7 million) and sales promotional expenses (from approximately $0.4 million to approximately $4.0 million), increase which is primarily due to signing Alkaine88 brand ambassador. 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.
For the six months ended September 30, 2020, the total included $8,107,566 of sales and marketing expenses and $7,442,565 of general and administrative expenses, consisting primarily of approximately $3.3 million of professional fees, stock option expense in the amount of approximately $1.9 million and approximately $1.4 million of wage and wage related expenses.
Liquidity and Capital Resources
Working Capital
| At September 30, 2021 | At March 31, 2021 | |||||
| Current assets | $ | 30,626,644 | $ | 23,271,259 | ||
| Current liabilities | 16,908,486 | 13,244,041 | ||||
| Working capital | $ | 13,718,158 | $ | 10,027,218 |
Current Assets
Current assets as of September 30, 2021 and March 31, 2021 primarily relate to $10,419,065 and $ 9,130,956 in cash, $10,983,231 and $ 8,458,176 in accounts receivable and $6,277,844 and $ 4,407,720 in inventory.
Current Liabilities
Current liabilities as of September 30, 2021 and March 31, 2021 primarily relate to $7,984,651 and $ 7,055,348 in accounts payable, revolving financing of $6,997,928 and $ 4,324,412, and accrued expenses of $1,388,349 and $1,306,106 respectively.
Cash Flows
Our cash flows for the six months ended September 30, 2021 and September 30, 2020 are as follows:
| For the six | For the six | |||||
| months ended | months ended | |||||
| September 30, | September 30, | |||||
| 2021 | 2020 | |||||
| Net Cash used in operating activities | $ | (18,730,426 | ) | $ | (8,111,51)6 | |
| Net Cash used in investing activities | (315,408 | ) | (90,109 | ) | ||
| Net Cash provided by financing activities | 20,333,943 | 7,616,820 | ||||
| Net (decrease) in cash and cash equivalents | $ | 1,288,109 | $ | (584,805 | ) |
Operating Activities
Net cash used in operating activities was $18,730,426 for the six months ended September 30, 2021, as compared to $8,111,516 used in operating activities for the six months ended September 30, 2020. The increase in net cash used in operating activities was primarily due the increased net loss after adjusting for non-cash activity of approximately $8.3 million and increases in accounts receivable and inventory.
Investing Activities
Net cash used in investing activities was $315,408 for the six months ended September 30, 2021, as compared to $90,109 used in investing activities for the six months ended September 30, 2020. 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, 2021 was $20,333,943, as compared to $7,616,820 for the six months ended September 30, 2020. The increase in net cash provided by financial activities is primarily due to an increase in the proceeds from the exercise of warrants of approximately $7.7 million and an increase in proceeds of $5.2 million in the Company's revolver financing.
Cash Requirements
On February 22, 2021, we entered into a sales agreement (the "Sales Agreement") with Roth Capital Partners, LLC, as sales agent (the "Agent"), pursuant to which we may offer and sell, from time to time, through or to the Agent, as sales agent and/or principal (the "Offering") up to $20,000,000 in shares of our common stock. Subject to the terms and conditions of the Sales Agreement, the Agent agreed to use its commercially reasonable efforts to sell the shares from time to time, based upon our instructions. Under the Sales Agreement, the Agent may sell the shares by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. We have no obligation to sell any of the shares and may at any time suspend offers under the Sales Agreement. The Offering will terminate upon (a) the election of the Agent upon the occurrence of certain adverse events, (b) five days' advance notice from one party to the other, or (c) the sale of all of the shares specified in the Sales Agreement. Under the terms of the Sales Agreement, the Agent will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of the shares under the Sales Agreement. We will also reimburse the Agent for certain expenses incurred in connection with the Sales Agreement.
We believe cash on hand, plus the anticipated exercise of outstanding warrants will adequately fund the Company'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.
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, 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 September 30, 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 year ended March 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: November 9, 2021 | By: | /s/ Richard A. Wright |
| Richard A. Wright | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 9, 2021 | By: | /s/ David A. Guarino |
| David A. Guarino | ||
| Chief Financial Officer and Treasurer | ||
| (Principal Financial Officer and Principal | ||
| Accounting Officer) |
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard A. Wright, certify that:
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I have reviewed this quarterly report on Form 10-Q of The Alkaline Water Company Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
November 9, 2021
| /s/ Richard A. Wright |
| Richard A. Wright President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David A. Guarino, certify that:
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I have reviewed this quarterly report on Form 10-Q of The Alkaline Water Company Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
November 9, 2021
| /s/ David A. Guarino |
| David A. Guarino Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Richard A. Wright, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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the quarterly report on Form 10-Q of The Alkaline Water Company Inc. for the period ended September 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of The Alkaline Water Company Inc. |
November 9, 2021
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/s/ Richard A. Wright |
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Richard A. Wright |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, David A. Guarino, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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the quarterly report on Form 10-Q of The Alkaline Water Company Inc. for the period ended September 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of The Alkaline Water Company Inc. |
November 9, 2021
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/s/ David A. Guarino |
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David A. Guarino |
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Chief Financial Officer and Treasurer |
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(Principal Financial Officer and Principal Accounting Officer) |