Item 1. Business
ITEM 1. BUSINESS
Forward-Looking Statements
This annual 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 annual report, unless otherwise specified, all
references to common shares refer to the common shares in our capital stock.
As used in this annual report on Form 10-K, the terms we,
us our, the Company and Alkaline refer to The Alkaline Water Company
Inc., a Nevada corporation, and its wholly-owned subsidiaries A88 Infused
Beverage Division, Inc. (a Nevada Corporation hereinafter referred to as A88
Infused), A88 International, Inc. (a Nevada Corporation), and Alkaline 88, LLC
(an Arizona Limited Liability Company), unless otherwise specified.
Corporate Overview
We offer retail consumers bottled alkaline water in
500-milliliter, 700-milliliter, 1-liter, 1.5 -liter, 3-liter and 1-gallon sizes
under the trade name Alkaline88 ® . Our product is produced through an
electrolysis process that uses specialized electronic cells coated with a
variety of rare earth minerals to produce our 8.8 pH drinking water without the
use of any manmade chemicals. Our product also incorporates 84 trace minerals
from Himalayan pink rock salt. Our product is designed to have a clean smooth
taste using only purified water and the Himalayan pink rock salt. We believe
consumers drink our water because of the taste profile and the preconceived
health benefits (although we do not market our products as having any potential health benefits), as well as because of our brand and
trademark, which we believe is one of the most easily identifiable in the
category. Measured by sales volume in 2018, we believe we are now one of the
largest alkaline water companies in the United States.
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Our product is presently available in all 50 states and the
District of Columbia, although over 50% of our current sales are concentrated in
the Southwest and Texas. We distribute our product through several channels. We
sell through large national distributors, including UNFI, KeHE, C&S, and
Core-Mark. We also sell our product to retail clients, including convenience
stores, natural food products stores, large ethnic markets and national
retailers. Examples of our retail clients include Walmart, Food Lion,
Albertsons, Safeway, Kroger, Schnucks, Smart & Final, Jewel-Osco, Sprouts,
Bashas, Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta,
Superior Foods, Ingles, HEB and Brookshires. 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 clients own warehouse
distribution network.
Our operating subsidiary, Alkaline 88, LLC, operates primarily
as a marketing, distribution, and manufacturing company. It has entered into
co-packing agreements with eight different bottling companies located in
Virginia, Georgia, California, Texas, Nevada and Arizona to act as co-packers
for our product. Our current capacity at all plants exceeds approximately $8.3
million per month wholesale.
Our component materials are readily available through multiple
vendors. Our principal suppliers are Vav Plastics Inc., Amcor Inc. and Packaging
Corporation of America.
A88 Infused Beverage Division, Inc.
In August 2018, we formed A88 Infused Beverage Division, Inc.,
or A88 Infused, a Nevada corporation and a wholly-owned subsidiary of our
company. A88 Infused's focus is brand extension and product innovations in the
wellness water category. We formed A88 Infused to meet what we believe is
increasing consumer demand for enhanced and functional (value-added) beverages.
We expect A88 Infused to capitalize on this and potential consumer demand with
the development and launch of new products focused on growing trends in the
beverage space.
To prepare for the launch of products by A88 Infused, we have
expanded our packaging capabilities. We announced in January, 2019 that
Nevada-based Western Group Packing has agreed to produce A88 Infused's flavored
Alkaline88 ® water products and its planned hemp extract-infused water
product at its 150,000+ square foot facility located in North Las Vegas, NV. We
have received verbal confirmation from many of our current retail clients of
their interest in purchasing our flavored Alkaline88 ® waters. The
production of A88 Infused's planned hemp extract product is contingent on U.S.
Food and Drug Administration, or the FDA, and state laws, regulations, and
guidance. While the Agriculture Improvement Act of 2018 removed hemp from
Schedule I of the Controlled Substances Act, the law did not change the FDA's
authorities with respect to food or drugs. As of June 28, 2019, the FDA has not
made a determination that the use of hemp extract in food is safe.The FDA has
evaluated Generally Recognized as Safe (GRAS) notices for three hemp
seed-derived food ingredients and determined that the agency has no questions
that those ingredients are GRAS under their intended conditions of use.
In early February 2019, at the Convenience EPPS trade show in
Chicago, Illinois and in May, 2019 at the Western Association of Food Chains
Convention, we sampled and offered up for sale "Alkaline88 ®
Flavored," which is available in four different, all natural, sugar-free
flavors. We believe "Alkaline88 ® Flavored" is the first flavored
bottled alkaline water to be sold in the United States.
A88 Infused is also developing and preparing for the initial
launch of its planned hemp extract product, which will be marketed under the
trademark Soothe . In the event the FDA issues appropriate regulations or
guidance or determines that it has no questions that hemp extract is GRAS under
intended conditions of use that would permit A88 Infused to market hemp extract
in water without food additive approval, we expect to produce and sell
Soothe as still water in bottles. We may also decide to market
Soothe in any states, districts or territories if applicable laws allow
for such sale or if a supplier meets and complies with the FDA's GRAS
regulations with respect to a self-certification regarding the safety and GRAS
status of the use of hemp extract. We expect to produce Soothe as a low
calorie or no calorie, hemp extract-infused water in three flavors. We
may change the composition of our planned hemp-extract-infused product as
necessary to comply with federal, state or local laws, regulations or
guidance.
We intend to comply in full with all federal, state, and local
laws, rules and regulations as we develop our hemp extract alkaline water and
other product lines. We will not pursue the production or sale of hemp
extract-infused products until legally permitted.
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Plan of Operations
In order for us to implement our business plan over the next 12
months, we have identified the following milestones that we expect to
achieve:
Expansion of Broker Network We expect to continue to develop our
working relationship with our national broker network. We continually meet,
train, and go on sales call with our national broker network in order to take
advantage of the momentum currently being created by their efforts. We
anticipate a considerable amount of travel and ongoing expenses to be incurred
as part of this expansion.
Increase Manufacturing Capacity (i) Flagship Alkaline88 product:
we expect to add one to two new co-packer facilities, strategically located to
reduce freight costs and meet current volumes and future growth objectives;
and (ii) A88 Infused: we expect to add three to five new co-packer facilities
strategically located to meet anticipated volumes by product type and future
growth objectives.
Expand Retail Distribution We continue to expand our retail
presence.
Addition of Support Staff In order to support expansion efforts
and to continue the training and support of our broker network, we anticipate
that we will need to hire approximately four more people on the corporate
level for the specific purpose of supporting the broker, distributor and
retailers and their logistical and accounting requirements. We continue to
seek and interview candidates to fill our growing need for additional
staffing.
Capital Considerations Our business plan can be adjusted based on
the available capital to the business. In March, 2019, we raised net proceeds
of $10,450,900 via a public offering of our common stock. We believe the
proceeds from this offering, plus anticipated warrant exercises (we have
received $1,180,486 from warrant exercises since March 31, 2019) will
adequately fund our operations and capital needs for the next 12 months.
The milestones set forth above reflect our current judgment and
belief regarding the direction of our business. Actual events, expenditures and
results will almost always vary, sometimes materially, from any estimates,
predictions, projections or assumptions suggested herein.
If our own financial resources and future cash-flows from
operations are insufficient to satisfy our capital requirements, we may seek to
sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity securities will result in dilution to
our stockholders. The incurrence of indebtedness will result in increased debt
service obligations and could require us to agree to operating and financial
covenants that could restrict our operations or modify our plans to grow the
business. Financing may not be available in amounts or on terms acceptable to
us, if at all. Any failure by us to raise additional funds on terms favorable to
us, or at all, will limit our ability to expand our business operations and
could harm our overall business prospects.
Distribution Method for Our Products
Our distribution network is a broker-distributor-retailer
network, whereby brokers represent our products to distributors and retailers.
Our target retail markets are: (a) chain and independent health food stores; (b)
grocery stores; (c) convenience stores; (d) drug stores; and (e) the mass retail
market. We have recently gained broker representation through Advantage
Solutions for the continued expansion into our target retail markets.
We have distribution agreements with large national
distributors (UNFI, KeHe, CoreMark, and C&S), representing over 150,000
retail establishments. Our current retailers include convenience stores, natural
food products stores, large ethnic markets and national retailers. Currently, we
sell all of our products to our retailers through brokers and distributors. Our
larger retail clients bring the water in through their own warehouse
distribution network. Our current retail clients are made up of a variety of the
following; convenience stores, including 7-11s; large national retailers,
including Walmart, CVS, Albertsons/Safeway, Kroger companies, and regional
grocery chains such as Schnucks, Smart & Final, Jewel-Osco, Sprouts,
Bashas, Bristol Farms, Stater Brothers, Publix, Vallarta, Superior Foods,
Brookshires, HEB and other companies throughout the United States. In total we
are now in more than half of the top 75 grocery retailers in the
United States.
We have engaged a producer of private labeled bottled water to
assist in the manufacturing, procurement and logistical aspects of our business.
Their specialized water production capabilities are expected to allow us to
support the growing demand for our products. We believe this arrangement will
enable us to further scale production and distribution as the
Alkaline88 ® brand continues to gain market share.
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Dependence on Few Customers
We have 2 major customers that together account for 46% (28%
and 18%, respectively) of accounts receivable at March 31, 2019, and 2 customers
that together account for 43% (25% and 18%, respectively) of the total revenues
earned for the year ended March 31, 2019.
There can be no assurance that such customers will continue to
order our products in the same level or at all. A reduction or delay in orders
from such customers, including reductions or delays due to market, economic or
competitive conditions, could have a material adverse effect on our business,
operating results and financial condition.
Marketing
We intend to continue to market our product through our broker
network and to avail ourselves to the promotional activities of other companies
and competitors regarding the benefits of alkaline water. We anticipate that our
initial marketing thrust will be to support the retailers and distribution
network with point of sales displays and other marketing materials,
strategically adding an extensive public relations program and other marketing
as the markets dictate.
We have engaged a business and marketing consulting firm and
sales broker to assist our company in all aspects of our marketing, trade
promotion, public relations and brand development. Their expertise in all
aspects of consumer goods brand development, marketing and promotional programs
is expected to help us meet the growing consumer demand for both our flagship
Alkaline88 ® product and our upcoming A88 Infused product line. We
have also engaged a sales and merchandising broker to implement a unique Van
Program (where sales representatives sell products directly from vans to the
retailers) throughout Texas and California which is intended to bring both our
flagship Alkaline88 ® products and, once launched, A88 Infuseds
products to over 13,000 independently owned convenience stores in those markets.
We expect to be able to expand the program to an additional nine US markets over
the next few years.
Competition
The commercial retail beverage industry, and in particular its
non-alcoholic beverage segment, is highly competitive. Market participants are
of various sizes, with various market shares and geographical reach, some of
whom have access to substantially more sources of capital.
We compete generally with all liquid refreshments, including
bottled water and numerous specialty beverages, such as: CORE® Hydration, SOBE®,
Snapple®, AriZona® Iced Tea, Vitaminwater®, Gatorade Perform®, and POWERADE®.
We compete indirectly with major international beverage
companies including but not limited to: The Coca-Cola Company®, PepsiCo, Inc.,
The Nestlé Group, Dr Pepper Snapple Group, Inc, Danone S.A., The Kraft Heinz
Company, and Unilever PLC. These companies have established market presence in
the United States and globally, and offer a variety of beverages that are
competitors to our products. We face potential direct competition from such
companies, because they have the financial resources, and access to
manufacturing and distribution channels to rapidly enter the alkaline water
market.
We will compete directly with other alkaline water producers
and brands focused on the emerging alkaline beverage market including Eternal,
Essentia, Core, Icelandic, Real Water, Aqua Hydrate, Mountain Valley, Qure,
Penta, and Alka Power. Products offered by our direct competitors are sold in
various volumes and prices with prices ranging from approximately $0.99 for a
half-liter bottle to $4.99 for a one-gallon bottle, and volumes ranging from
half-liter bottles to one-gallon bottles. We currently offer our product in a
one-gallon bottle for a suggested resale price or an SRP of $4.99, three-liter
bottle for an SRP of $3.99, 1.5 liter at an SRP of $2.49, 1 liter at an SRP of
$1.99, 700 milliliter single serving at an SRP of $1.19, and a 500 milliliter at
an SRP of $0.99. Our competitors may introduce larger sizes and offer them at an
SRP that is lower than our products. We can provide no assurances that consumers
will continue to purchase our products or that they will not prefer to purchase
a competitive product.
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Intellectual Property
Where available, we intend to obtain trademark protection in
the United States for a number of trademarks for slogans and product designs. We
intend to aggressively assert our rights under trade secret, unfair competition,
trademark and copyright laws to protect our intellectual property, including
product design, product research and concepts and recognized trademarks. These
rights are protected through the acquisition of patents and trademark
registrations, the maintenance of trade secrets, the development of trade dress,
and, where appropriate, litigation against those who are, in our opinion,
infringing these rights. The trademark for Alkaline88 ® has been
registered in the USA, Canada, Hong Kong, and has been applied for in China.
While there can be no assurance that registered trademarks will
protect our proprietary information, we intend to assert our intellectual
property rights against any infringer. Although any assertion of our rights
could result in a substantial cost to, and diversion of effort by, our company,
management believes that the protection of our intellectual property rights will
be a key component of our sales and operating strategy.
The electrolysis process through which our product is produced
is proprietary to us and, while the process is not patented, we seek to protect
the process through the maintenance of trade secrets and know-how agreements.
Seasonality of Business
The sales of our products are influenced to some extent by
weather conditions in the markets in which we operate. Unusually cold or rainy
weather during the summer months may have a temporary effect on the demand for
our product and contribute to lower sales, which could have an adverse effect on
our results of operations for such periods.
Government Regulation
The advertising, distribution, labeling, production, safety,
sale, and transportation in the United States of our product will be subject to:
the Federal Food, Drug, and Cosmetic Act; the Federal Trade Commission Act; the
Lanham Act; state consumer protection laws; competition laws; federal, state and
local workplace health and safety laws; various federal, state and local
environmental protection laws; and various other federal, state and local
statutes and regulations.
Legal requirements apply in many jurisdictions in the United
States requiring that deposits or certain ecotaxes or fees be charged for the
sale, marketing, and use of certain non-refillable beverage containers. The
precise requirements imposed by these measures vary and are constantly evolving.
Other types of statutes and regulations relating to beverage container deposits,
recycling, ecotaxes and/or product stewardship also apply in various
jurisdictions in the United States. We anticipate that additional, similar legal
requirements may be proposed or enacted in the future at the local, state and
federal levels in the United States.
Any third-party bottling facility that we may choose to utilize
in the future and any other such operations will be subject to various
environmental protection statutes and regulations, including those relating to
the use of water resources and the discharge of wastewater. It will be our
policy to comply with any and all such legal requirements. Compliance with these
provisions has not had, and we do not expect such compliance to have, any
material adverse effect on our capital expenditures, net income or competitive
position.
Employees
In addition to Richard Wright, who is our president, chief
executive officer and director, David Guarino, who is our chief financial
officer, secretary, treasurer and director, and Ronald DaVella, our executive
vice president of finance, we currently employ 14 full time employees and 3
part-time employee. We also work with retail brokers in the United States who
are paid on a contract basis. Our operations are overseen directly by management
that engages our employees to carry on our business. Our management oversees all
responsibilities in the areas of corporate administration, business development,
and research. We intend to expand our current management to retain skilled
directors, officers, and employees with experience relevant to our business
focus. Our managements relationships with manufacturers, distillers,
development/research companies, bottling concerns, and certain retail customers
will provide the foundation through which we expect to grow our business in the
future. We believe that the skill-set of our management team will be a primary
asset in the development of our brands and trademarks. We also plan to form an
independent network of contract sales and regional managers, a promotional support team, and several
market segment specialists who will be paid on a variable basis.
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