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)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered |
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 [ ] |
| Smaller reporting company [ |
|
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE ALKALINE WATER COMPANY INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
| June 30, 2023 | March 31, 2023 | |||||
| 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' DEFICIT | ||||||
| Current liabilities | ||||||
| Accounts payable | $ | $ | ||||
| Accrued expenses | ||||||
| Revolving financing | ||||||
| Notes payable, short-term | ||||||
| Operating lease liability - current portion | ||||||
| Total current liabilities | ||||||
| Operating lease liability | ||||||
| Total liabilities | ||||||
| Commitments and contingencies (Note 8) | ||||||
| Stockholders' deficit | ||||||
| Preferred stock, $ |
||||||
| Common stock, Class A - $ |
||||||
| Discount on Preferred Stock | ( |
) | ( |
) | ||
| Additional paid in capital | ||||||
| Accumulated deficit | ( |
) | ( |
) | ||
| Total stockholders' deficit | ( |
) | ( |
) | ||
| Total liabilities and stockholders' deficit | $ | $ |
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 | ||||||
| June 30, 2023 | June 30, 2022 | |||||
| Net Revenue | $ | $ | ||||
| Cost of Goods Sold | ||||||
| Gross Profit | ||||||
| Operating expenses | ||||||
| Sales and marketing expenses | ||||||
| General and administrative | ||||||
| Total operating expenses | ||||||
| Total operating loss | ( |
) | ( |
) | ||
| Other (income) expense | ||||||
| Interest expense | ( |
) | ( |
) | ||
| Total other (income) 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
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
| Preferred Stock | Common Stock | Additional | Discount of | Accumulated | |||||||||||||||||||||||
| Number | Par Value | Number | Par Value | Paid-in Capital | Preferred E | Stock Payable | Deficit | Total | |||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
| Common shares issued in connection with offerings | |||||||||||||||||||||||||||
| Stock option exercise | ( |
) | |||||||||||||||||||||||||
| Preferred stock conversion to common stock and vesting of endorsement shares | ( |
) | ( |
) | |||||||||||||||||||||||
| Stock option and RSU-related stock compensation expense |
|
||||||||||||||||||||||||||
| Net (loss) | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Preferred stock conversion to common stock and vesting of endorsement shares | ( |
) | ( |
) | |||||||||||||||||||||||
| Preferred stock series e conversion to common stock | ( |
) | ( |
) | |||||||||||||||||||||||
| Preferred stock series e issuance of dividend in shares | |||||||||||||||||||||||||||
| Preferred stock series e amortization of discount | ( |
) | |||||||||||||||||||||||||
| Preferred stock series e dividend accrual | ( |
) | ( |
) | |||||||||||||||||||||||
| Stock option and RSU-related compensation expense and common shares issued upon conversion of RSUs, net of forfeited stock options | ( |
) | ( |
) | |||||||||||||||||||||||
| Common shares issues in connection with reverse stock split | ( |
) | |||||||||||||||||||||||||
| Net (loss) | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||
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 Three Months | |||||||
| June 30, 2023 | June 30, 2022 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
| Net loss | $ | ( |
) | $ | ( |
) | |
| Adjustments to reconcile net loss to net cash used in operating activities | |||||||
| Depreciation expense | |||||||
| Shares issued and vested, options and RSU expensed for employee and non-employee services | |||||||
| Amortization of debt discount | |||||||
| Non-cash interest expense | |||||||
| Non-cash lease expense | ( |
) | ( |
) | |||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | ( |
) | |||||
| Inventory | ( |
) | |||||
| Prepaid expenses and other current assets | ( |
) | |||||
| Accounts payable | |||||||
| Accrued expenses | |||||||
| Note payable, short-term | ( |
) | |||||
| NET CASH USED IN OPERATING ACTIVITIES | ( |
) | ( |
) | |||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
| Purchase of fixed assets | ( |
) | |||||
| CASH USED IN INVESTING ACTIVITIES | ( |
) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
| Proceeds from (repayment of) revolving financing, net | ( |
) | ( |
) | |||
| Proceeds from sale of common stock, net | |||||||
| CASH PROVIDED BY FINANCING ACTIVITIES | ( |
) | |||||
| NET CHANGE IN CASH | ( |
) | |||||
| CASH AT BEGINNING OF PERIOD | |||||||
| CASH AT END OF PERIOD | $ | $ | |||||
| INTEREST PAID | $ | $ | |||||
| TAXES PAID | $ | $ | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE ALKALINE WATER COMPANY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The March 31, 2023 balance sheet was derived from audited financial statements. The financial statements include adjustments consisting of normal recurring items, which, in the opinion of management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim dates and periods set forth herein. The results for any of the interim periods are not necessarily indicative of the results to be expected for the full year or any other period. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended March 31, 2023.
Nature of Business
The Company offers retail consumers bottled alkaline water in 500-milliliter, 700-milliliter, 1-liter, 1.5 -liter, 2,-liter, 3-liter and 1-gallon sizes, all of which is produced through an electrolysis process that uses specialized electronic cells coated with a variety of rare earth minerals to produce 8.8 pH drinking water without the use of any manmade chemicals. The Company also sells a line of Alkaline88® Sports Drinks.
Principles of consolidation
The consolidated financial statements include the accounts of The Alkaline Water Company Inc. (a Nevada Corporation) and its wholly owned subsidiary, Alkaline 88, LLC (an Arizona Limited Liability Company). All significant intercompany balances and transactions have been eliminated. The Alkaline Water Company Inc. and Alkaline 88, LLC will be collectively referred herein to as the "Company". Any reference herein to "The Alkaline Water Company Inc.", the "Company", "we", "our" or "us" is intended to mean The Alkaline Water Company Inc., including its Alkaline 88, LLC subsidiary indicated above, unless otherwise indicated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Stock Split
Effective April 5, 2023, we effected a fifteen for one reverse stock split of our authorized and issued and outstanding shares of common stock. As a result, our authorized common stock has decreased from
Accounts Receivable and Allowance for Doubtful Accounts
The Company generally does not require collateral, and the majority of its trade receivables are unsecured. The carrying amount for accounts receivable approximates fair value.
Accounts receivable consisted of the following as of June 30, 2023 and March 31, 2023:
| June 30, 2023 | March 31, 2023 | |||||
| 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 4.
Inventory
Inventory represents raw materials and finished goods valued at the lower of cost or market with cost determined using the weight average method which approximates first-in first-out method, and with market defined as the lower of replacement cost or realizable value. The inventory balance is pledged as collateral for the Company's revolving financing as disclosed in Note 4.
As of June 30, 2023 and March 31, 2023, inventory consisted of the following:
| June 30, 2023 | March 31, 2023 | |||||
| Raw materials | $ | $ | ||||
| Finished goods | ||||||
| Total inventory | $ | $ |
Revenue Recognition
We recognize revenue when our performance obligations are satisfied. Our primary performance obligation (the distribution and sale of beverage products) is satisfied upon the delivery of products to our customers, which is also when control is transferred. The Company does not accept returns due to the nature of the product. However, the Company will provide credit to our customers for damaged goods. The Company provides credit to its customers which typically requires payment within 30 days. As an incentive to pay early the Company also typically provides a 2% discount if the customer pays within 10 days. The Company estimates the amount of the discount that the customer is likely to take and records it as reduction in revenue. The amounts are not considered material. The Company's bottled water product represents substantially all revenue for all periods presented.
Revenue consists of the gross sales price, less variable consideration, including estimated allowances for which provisions are made at the time of sale, and less certain other discounts and allowances. Shipping and handling charges that are billed to customers are included as a component of revenue. Costs incurred by the Company for shipping and handling charges are included in selling expenses and amounted to $
Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company's retail customers or distributors including, but not limited to the following: (a) discounts granted off list prices to support price promotions to end-consumers by retailers; (b) discounts to the Company's distributors for agreed portions of their promotional discounts to retailers; and (c) the Company's agreed share of in-store activities and other promotional allowances and various fees charged to the Company directly by its retailers, club stores and/or wholesalers. The Company's promotional allowance programs with its retailers or distributors are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, typically ranging from one week to one month. The accrual for promotional incentives is based on expected chargebacks from customers or distributors and typically deducted from invoices within 30 days of being earned. Historically, adjustments to our estimated accrual for customers' allowances have not been significant.
Disaggregated Net Revenues
The following table reflects disaggregated net revenue by sales channel for the years ended June 30, 2023 and June 30, 2022 are as follows:
| June 30, 2023 | June 30, 2022 | |||||
| Retailers | $ | $ | ||||
| Distributors | ||||||
| Ecommerce/Other | ||||||
| Total Net Revenue | $ | $ |
Concentration Risks
The Company has
The Company had
Correction of Previously Issued Financial Statements
The accompanying condensed consolidated statement of operations for the three months ended March 31, 2022 has been corrected for an adjustment to reclassify Sales and marketing expenses of $
Business Segments
The Company operates as a single operating segment for the purposes of presenting financial information and evaluating performance. As such, the accompanying consolidated financial statements present financial information in a format that is consistent with the internal financial information used by management.
Recent Accounting Pronouncements
The Company has evaluated recent accounting pronouncements through June 30, 2023 and believes that none of them will have a material effect on our consolidated financial statements.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in developing its business plan and building its initial customer and distribution base for its products. As a result, the Company incurred accumulated net losses from Inception (June 19, 2012) through the period ended June 30, 2023 of ($
The Company's cash position may not be sufficient to support the Company's daily operations. Management plans to raise additional funds by way of a private or ongoing public offering. While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise additional funds, there can be no assurances to that effect. Should the Company fail to raise additional capital, it may be compelled to reduce the scope of its planned future business activities.
The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 - PROPERTY AND EQUIPMENT
Fixed assets consisted of the following at:
| Fixed assets consisted of the following at: | June 30, 2023 | March 31, 2023 | ||||
| Machinery and Equipment | $ | $ | ||||
| Office Equipment | ||||||
| Less: Accumulated Depreciation | ( |
) | ( |
) | ||
| Fixed Assets, net | $ | $ |
Depreciation expense for the quarter ended June 30, 2023 and 2022 was $
NOTE 4 - REVOLVING FINANCING
On February 1, 2017, we entered into a credit and security agreement (the "Credit Agreement") with SCM Specialty Finance Opportunities Fund, L.P. ("SCM" or "Lender"), which subsequently changed its name to CNH Finance Fund I, L.P. and then to eCapital Healthcare Corp.
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 expired on September 14, 2023.
To secure the payment and performance of the obligations under the Credit Agreement, we granted to SCM a continuing security interest in all of our assets and agreed to a lockbox account arrangement in respect of certain eligible receivables.
The Company agreed to pay to SCM monthly an unused line fee in amount equal to
The interest rate will be increased by
The Credit Agreement contains customary representations and warranties and various affirmative and negative covenants including the right of first refusal to provide financing for our company and the financial and loan covenants, such as the loan turnover rate, minimum EBITDA, fixed charge coverage ratio and minimum liquidity requirements.
NOTE 5 - STOCKHOLDERS' EQUITY (DEFICIT)
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
The Company recognized an expense of $
Series E Convertible Preferred Stock
On November 23, 2022, we entered into private placement subscription agreements, whereby we issued an aggregate of
Holders of the Series E Preferred Stock (the "Holders") are entitled to receive dividends at the rate per share (as a percentage of the stated value per share) of
Each share of Series E Preferred Stock will be convertible, at any time after the date that is twelve months from the original issue date, at our option, into that number of units (each, a "Unit") determined by dividing the stated value of such share of Series E Preferred Stock by $
The Company identified the conversion into a Unit (one share of preferred stock and one-half warrant) as an embedded beneficial conversion feature (ASC 470), thus the Company valued (using Black-Scholes option-pricing model for common stock options and warrants) each component of the Unit. The Warrant was valued at in the aggregate $
Effective as of April 4, 2023, we issued
In addition, the Company has accrued $
Common Stock
Effective April 5, 2023, we effected a
Effective as of May 8, 2023, we issued
Effective April 30 and May 1, the Company issued
NOTE 6 - OPTIONS AND WARRANTS
The Company in the three months ended June 30, 2023, recorded an expense in the amount of $
NOTE 7 - LEASES
As of October 1, 2020, the company entered into a lease for
As of November 1, 2020, the company entered into a lease for
As of April 1, 2022, the Company entered into a lease for
At inception the ROU and Lease Liability was calculated based on the net present value of the future lease payments over the term of the lease. When available, the Company uses the rate implicit in the lease discount payments as the incremental borrowing rate to calculate the net present value; however, the rate implicit in the lease is not readily determinable for our corporate office lease. In this case, the Company estimated its incremental borrowing rate as the interest rate it could borrow an amount equal to the lease payments over a similar term, with similar collateral as the lease, and in a similar economic environment. The Company estimated its rate using available evidence such as rates imposed by third-party lenders to the Company in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to the Company's estimated creditworthiness.
For operating leases that include rent holidays and rent escalation clauses, the Company recognizes lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. The Company records the straight-line lease expense and any contingent rent, if applicable, in general and administrative expenses on the condensed consolidated statements of operations. The corporate office, lease also requires the Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in the general and administrative expenses on the condensed consolidated statements of operations.
Operating Lease expense for the three months ended June 30, 2023 was $
| Operating Leases: | June 30, 2023 | ||
| Operating lease right-of-use asset - current portion | $ | ||
| Operating lease right-of-use asset - non-current portion | |||
| Total Operating lease right-of-use asset | $ | ||
| Operating lease liability - current portion | $ | ||
| Operating lease liability - non-current portion | |||
| Total Operating lease liability | $ | ||
| Weighted average remaining lease term (in years): | |||
| Operating leases | |||
| Weighted average discount rate: | |||
| Operating leases |
Maturities of undiscounted lease liabilities as of June 30, 2023 are as follows:
| Operating Leases | |||
| Year ending March 31, 2024 | |||
| Year ending March 31, 2025 | |||
| Total lease payments | |||
| Less: Imputed interest | ( |
) | |
| Total lease obligations |
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not believe that the disposition of matters that are pending or asserted will have a material effect on its consolidated financial statements.
NOTE 9 - SUBSEQUENT EVENTS
On July 12, 2023, the Company entered into a settlement agreement and stipulation ("Settlement Agreement") with Silverback Capital Corporation ("Silverback") in connection with the settlement of $
As of September 20, 2023, the Company 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.
Our financial statements are stated in United States Dollars ($ or US$) unless otherwise stated and are prepared in accordance with United States Generally Accepted Accounting Principles.
In this quarterly report, unless otherwise specified, all references to "common shares" refer to the common shares in our capital stock.
As used in this quarterly report on Form 10-Q, the terms "we", "us" "our", the "Company" and "Alkaline" refer to The Alkaline Water Company Inc., a Nevada corporation, and its wholly owned subsidiary Alkaline 88, LLC (an Arizona Limited Liability Company), unless otherwise specified.
Inflationary Pressure
We have seen significant margin contraction as a result of inflationary pressures over the last 12 months. We've taken a number of steps that will allow us to increase our margins in the year ended March 31, 2024. These steps include (1) an approximate 9% across the board price increase (effective across all banners for the entire fiscal 2024); (2) a potential leveling off or small reduction in freight costs due to the geographic distribution of our new co-packers and suppliers; and (3) our buying power allowing us to lock in price breaks on raw materials over the next 12 months.
Results of Operations
Our results of operations for the three months ended June 30, 2023 and June 30, 2022 are as follows:
| For the three months ended June 30, 2023 | For the three months ended June 30, 2022 | |||||
| Revenue | $ | 14,933,785 | $ | 16,318,786 | ||
| Cost of goods sold | 11,162,216 | 13,399,774 | ||||
| Gross profit | $ | 3,771,569 | $ | 2,919,012 | ||
| Net Loss | $ | (2,840,938 | ) | $ | (7,493,408 | ) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the three months ended June 30, 2023 of $14,933,785 as compared to $16,318,786 for the three months ended June 30, 2022, a decrease of 8%. The decrease in sales is due to the expanded promotional allowances of our products to retailers throughout the country. We distribute our product through several channels. We sell through large national distributors (UNFI, KeHe, C&S, and Core-Mark), which together represent over 150,000 retail outlets. We also sell our product directly to retail clients, including convenience stores, natural food products stores, large ethnic markets and national retailers. Some examples of retail clients are: Walmart, CVS, Sam's Club, Family Dollar, Albertson/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB and Brookshire's.
Cost of goods sold is comprised of production costs, shipping and handling costs. For the three months ended June 30, 2023, we had cost of goods sold of $11,162,216, or 75% of revenue, as compared to cost of goods sold of $13,399,774 or 82% of revenue, for the three months ended June 30, 2022. The decrease in cost of goods sold is due to decreased raw material costs.
Expenses
Our operating expenses for the three months ended June 30, 2023 and June 30, 2022 are as follows:
| For the three months ended June 30, 2023 | For the three months ended June 30, 2022 | |||||
| Sales and marketing expenses | $ | 4,614,499 | $ | 6,346,229 | ||
| General and administrative expenses | 1,574,240 | 2,863,993 | ||||
| Total operating expenses | $ | 6,188,739 | $ | 9,210,222 |
For the three months ended June 30, 2023, our total operating expenses were $6,188,739 as compared to $9,210,222 for the three months ended June 30, 2022.
For the three months ended June 30, 2023, the total included $4,614,499 of sales and marketing expenses. Compared to the three months ended June 30, 2022, sales and marketing expenses for the three months ended June 30, 2023 decreased due to lower freight costs to our customers of approximately $0.7 million, lower advertising and promotion of approximately $0.3 million, and lower professional fees of approximately 0.5 million.
For the three months ended June 30, 2023, general and administrative expenses of $1,574,240 consisted primarily of approximately $0.4 million of professional fees, media fees and legal fees, and approximately $1.1 million of wages and wage related expenses. For the three months ended June 30, 2022, general and administrative expenses of $2,863,993, consisted primarily of approximately $0.4 million of professional fees, media fees and legal fees and approximately $1.8 million of wages and wage related expenses.
Liquidity and Capital Resources
Working Capital
| June 30, 2023 | March 31, 2023 | |||||
| Current assets | $ | 13,384,132 | $ | 15,951,725 | ||
| Current liabilities | 23,261,935 | 23,344,608 | ||||
| Working capital | $ | (9,877,803 | ) | $ | (7,392,883 | ) |
Current Assets
Current assets as of June 30, 2023 and March 31, 2023 primarily include $414,648 and $1,038,754 in cash, $5,059,617 and $6,520,232 in accounts receivable and $5,544,390 and $5,591,351 in inventory, respectively.
Current Liabilities
Current liabilities as of June 30, 2023 and March 31, 2023 primarily include $12,609,187 and $11,616,247 in accounts payable, revolving financing of $6,188,332 and $6,403,447, and accrued expenses of $2,406,839 and $1,996,387, respectively.
Cash Flow
Our cash flows for the three months ended June 30, 2023 and June 30, 2022 are as follows:
| For the three months ended June 30, 2023 | For the three months ended June 30, 2022 | |||||
| Net Cash used in operating activities | $ | (408,991 | ) | $ | (2,494,650 | ) |
| Net Cash used in investing activities | (-0- | ) | (854,997 | ) | ||
| Net Cash provided/(used) by financing activities | (215,115 | ) | 4,764,509 | |||
| Net increase (decrease) in cash | $ | (624,106 | ) | $ | 1,414,862 |
Operating Activities
Net cash used in operating activities was $408,991 for the three months ended June 30, 2023, as compared to $2,494,650 used in operating activities for the three months ended June 30, 2022. The decrease in net cash used in operating activities was primarily due to the reduction in net loss after adjustments to reconcile net income to net cash in the amount of $1.3 million.
Investing Activities
Net cash used in investing activities was $-0- for the three months ended June 30, 2023, as compared to $854,997 used in investing activities for the three months ended June 30, 2022. The cash used in investing activities for the three months ended June 30, 2022 was primarily due to the purchase of equipment for 2 new co-packing plants and the purchase of a new model for our 1-gallon bottle.
Financing Activities
Net cash used by financing activities for the three months ended June 30, 2023 was $215,115, as compared to net cash provided by financing activities in the amount of $4,764,509 for the three months ended June 30, 2022. The decrease in net cash provided was a result of no proceeds from the sale of common stock, net in the three months ended June 30, 2023 compared to approximately $5.3 million of proceeds from the sale of common stock, net in the three months ended June 30, 2022.
Cash Requirements
Our ability to operating as a going concern is dependent on obtaining adequate capital to fund operating losses until we become profitable. We announced on July 9, 2022 that we have begun implementing a combination of cost-reduction measures and margin enhancements. The cost reduction measures include a) organizational restructuring; b) reductions in professional services; and c) reductions in marketing and promotional expenses and the margin enhancements will include a) packaging changes; b) improved manufacturing efficiencies; c) pricing and promotional optimization; and d) decreases in freight costs due to an enhanced distribution network.
Our cash on hand, plus the implementation of our cost-reduction and margin enhancement strategy, anticipated financing or equity offerings is planned to fund our current planned operations and capital needs. However, if our current plans change or are accelerated, we may seek to sell additional equity or debt securities or obtain additional credit facilities, including seeking investments from strategic investors. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain "disclosure controls and procedures", as that term is defined in Rule 13a-15(e), promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer to allow timely decisions regarding required disclosure.
As required by paragraph (b) of Rules 13a-15 under the Securities Exchange Act of 1934, our management, with the participation of our principal executive officer and our principal financial officer, evaluated our company's disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our management concluded that as of the end of the period covered by this quarterly report on Form 10-Q, our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to the material weaknesses in our internal control over financial reporting disclosed in our annual report on Form 10-K for the fiscal year ended March 31, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2023 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 August 17, 2023. There have been no material changes since August 17, 2023 from the risk factors disclosed in that Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Except as disclosed below, since the beginning of our fiscal quarter ended June 30, 2023, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in a current report on Form 8-K.
On July 12, 2023, we entered into a settlement agreement and stipulation ("Settlement Agreement") with Silverback Capital Corporation ("Silverback") in connection with the settlement of $1,809,256.03 of bona fide obligations we owed to certain of our creditors. The Settlement Agreement was subject to a fairness hearing, and on September 6, 2023, the Circuit Courts within the Twelfth Judicial Circuit of Palm Beach County, Florida held a fairness hearing and, on September 12, 2023 entered an order granting approval of the Settlement Agreement. If the Settlement Agreement is satisfied in full, we must reduce our debt obligations equal to $1,809,256.03 in exchange for 30,000 common shares to cover Silverback's expenses and the issuance of settlement shares of our common stock pursuant to the terms of section 3(a)(10) of the Securities Act of 1933, in multiple tranches, at a price that is seventy percent (70%) of the average of the three lowest bid prices during the ten (10) trading days immediately preceding the delivery of such tranche. At no time may Silverback beneficially own more than 4.99% of our outstanding common stock.
As of September 20, 2023, we issued 500,000 shares of our common stock, to be valued at 70% of the three lowest bid prices during the ten (10) trading days immediately preceding the delivery of such shares.
Item 3. Defaults Upon Senior Securities
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. and then to eCapital Healthcare Corp. The Credit Agreement provides our company with a revolving credit facility (the "Revolving Facility"), the proceeds of which are to be used to repay existing indebtedness of our company, transaction fees incurred in connection with the Credit Agreement and for the working capital needs of our company.
Under the terms of the Credit Agreement, SCM has agreed to make cash advances to our company in an aggregate principal at any one time outstanding not to exceed the lesser of (i) $10 million (the "Revolving Loan Commitment Amount") and (ii) the Borrowing Base (defined to mean, as of any date of determination, 85% of net eligible billed receivables plus 65% of eligible unbilled receivables, minus certain reserves). The advanced under the credit agreement as of June 30, 2023 was $6,064,975.
The Credit Agreement expired on September 14, 2023.
The principal amount of the Revolving Facility outstanding bears interest at a rate per annum equal to (i) a fluctuating interest rate per annum equal at all times to the rate of interest announced, from time to time, within Wells Fargo Bank at its principal office in San Francisco as its "prime rate," plus (ii) 3.25%, payable monthly in arrears. The interest rate as of June 30, 2023 was 16.5%.
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.
We agreed to pay to SCM monthly an unused line fee in amount equal to 0.083% per month of the difference derived by subtracting (i) the average daily outstanding balance under the Revolving Facility during the preceding month, from (ii) the Revolving Loan Commitment Amount. The unused line fee will be payable monthly in arrears. We also agreed to pay SCM as additional interest a monthly collateral management fee equal to 0.35% per month calculated on the basis of the average daily balance under the Revolving Facility outstanding during the preceding month. The collateral management fee will be payable monthly in arrears. We must also pay certain fees in the event that receivables are not properly deposited in the appropriate lockbox account.
The interest rate will be increased by 5% in the event of a default under the Credit Agreement. Events of default under the Credit Agreement, some of which are subject to certain cure periods, include a failure to pay obligations when due (the Credit Agreement expired on September 14, 2023 and while we are in discussions with SCM, there is an event of default due to the expiration of the agreement), the making of a material misrepresentation to SCM, the rendering of certain judgments or decrees against our company and the commencement of a proceeding for the appointment of a receiver, trustee, liquidator or conservator or filing of a petition seeking reorganization or liquidation or similar relief.
The amount of the owed under the Credit Agreement as of September 20, 2023 was $4,865,545.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
See Item 2 of Part II of this quarterly report on Form 10-Q for the information responsive to this item.
Item 6. Exhibits
*Filed herewith.
**Non-material schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the SEC.
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: September 22, 2023 | By: | /s/ Frank Chessman |
| Frank Chessman | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
Date: September 22, 2023 | By: | /s/ David A. Guarino |
| David A. Guarino | ||
| Chief Financial Officer and Treasurer | ||
| (Principal Financial Officer and Principal | ||
| Accounting Officer) | ||