ALKALINE WATER Co INC 10-Q

Item 1. Financial Statements. THE ALKALINE WATER COMPANY INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) December 31, 2021 March 31, 2021 ASSETS Current assets Cash $ 3,293,292 $ 9,130,956 Accounts receivable, net 7,773,196 8,458,176 Inventory 8,829,559 4,407,720 Prepaid expenses 2,262,704 1,037,961 Operating lease right-of-use asset - current portion 167,299 236,446 Total current assets 22,326,050 23,271,259 Fixed assets - net 1,026,467 1,010,183 Operating lease right-of-use asset 143,693 269,167 Total assets $ 23,496,210 $ 24,550,609 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 7,389,169 $ 7,055,348 Accrued expenses 1,409,648 1,306,106 Revolving financing 6,426,601 4,324,412 PPP loan payable - current portion - 328,570 Operating lease liability - current portion 162,147 229,605 Total current liabilities 15,387,565 13,244,041 Operating lease liability 175,043 292,582 Total liabilities 15,562,608 13,536,623 Commitments and contingencies (Note 10) Stockholders' equity Preferred stock, $ 0.001 par value, 100,000,000 shares authorized, 4,454,060 Series S issued and outstanding on December 31, 2021 and nil issued and outstanding on March 31, 2021 4,454 - Common stock, Class A - $ 0.001 par value, 200,000,000 shares authorized 107,242,070 and 87,465,178 shares issued and outstanding at December 31, 2021 and March 31, 2021, respectively 107,244 87,464 Additional paid in capital 106,293,256 80,857,742 Accumulated deficit ( 98,471,352 ) ( 69,931,220 ) Total stockholders' equity 7,933,602 11,013,986 Total liabilities and stockholders' equity $ 23,496,210 $ 24,550,609 The accompanying notes are an integral part of these condensed consolidated financial statements. THE ALKALINE WATER COMPANY INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) For the Three Months For the Nine Months December 31, 2021 December 31, 2020 December 31 , 2021 December 31, 2020 Revenue $ 15,110,400 $ 9,616,200 $ 44,479,743 $ 33,209,062 Cost of Goods Sold 10,128,144 6,263,961 29,530,570 21,368,066 Gross Profit 4,982,256 3,352,239 14,949,173 11,840,996 Operating expenses Sales and marketing expenses 9,572,279 4,091,435 26,849,554 12,199,001 General and administrative 6,333,663 3,484,221 16,549,788 10,926,786 Total operating expenses 15,905,942 7,575,656 43,399,342 23,125,787 Total operating loss ( 10,923,686 ) ( 4,223,417 ) ( 28,450,169 ) ( 11,284,791 ) Other expense Gain on forgiveness of PPP loan payable 330,551 - 330,551 - Interest expense ( 142,898 ) ( 136,917 ) ( 420,514 ) ( 458,174 ) Total other expense 187,653 ( 136,917 ) ( 89,963 ) ( 458,174 ) Net loss $ ( 10,736,033 ) $ ( 4,360,334 ) $ ( 28,540,132 ) $ ( 11,742,965 ) LOSS PER SHARE (Basic and Diluted) $ ( 0.10 ) $ ( 0.06 ) $ ( 0.30 ) $ ( 0.18 ) WEIGHTED AVERAGE SHARES OUTSTANDING (Basic and Diluted) 105,580,951 73,528,255 95,891,561 66,286,634 The accompanying notes are an integral part of these condensed consolidated financial statements. THE ALKALINE WATER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited) Preferred Stock Common Stock Additional Accumulated Number Par Value Number Par Value Paid-in Capital Stock Payable Deficit Total Balance, March 31, 2020 3,400,000 $ 3,400 45,585,592 $ 45,585 $ 54,094,848 $ 1,000,000 $ ( 53,521,700 ) $ 1,622,133 Preferred stock conversion ( 3,400,000 ) ( 3,400 ) 3,400,000 3,400 - Common shares issued in connection with offerings 9,750,000 9,750 3,890,250 ( 1,000,000 ) 2,900,000 Common shares issued upon exercise of warrants 287,666 288 258,612 258,900 Common shares issued to non-employees and employees 472,000 472 486,828 487,300 Stock Option expense 661,959 661,959 Stock Option exercise 116,000 116 61,364 61,480 Stock Payable 1,999,998 1,999,998 Net (loss) ( 3,021,003 ) ( 3,021,003 ) Balance, June 30, 2020 - $ - 59,611,258 $ 59,611 $ 59,453,861 $ 1,999,998 $ ( 56,542,703 ) $ 4,970,767 Common shares issued in connection with offerings 4,444,440 4,444 1,995,554 ( 1,999,998 ) - Common shares issued upon exercise of warrants 8,839,399 8,839 4,555,484 4,564,323 Common shares issued to non-employees 191,136 191 326,408 326,599 Stock Option expense 204,594 204,594 Stock Option exercise 236,239 236 ( 236 ) - Net (loss) ( 4,361,628 ) ( 4,361,628 ) Balance, September 30, 2020 - $ - 73,322,472 $ 73,321 $ 66,535,665 $ - $ ( 60,904,331 ) $ 5,704,655 Common shares issued upon exercise of warrants 166,666 167 91,498 91,665 Common shares issues to non-employees 97,977 99 119,900 119,999 Common shares issued to employees 50,000 50 49,950 50,000 Stock Option expense 213,698 213,698 Net (loss) ( 4,360,334 ) ( 4,360,334 ) Balance, December 31, 2020 - $ - 73,637,115 $ 73,637 $ 67,010,711 $ - $ ( 65,264,665 ) $ 1,819,683 Balance, March 31, 2021 - $ - 87,465,178 $ 87,464 $ 80,857,742 $ - $ ( 69,931,220 ) $ 11,013,986 Preferred stock issuance 6,681,090 6,681 2,220,350 2,227,031 Common shares issued upon exercise of warrants 1,277,777 1,278 651,499 652,777 Common shares issued to non-employees and employees 855,499 856 39,144 40,000 Stock option and RSU-related stock compensation expense 651,648 651,648 Stock Option exercise 162,668 163 48,068 48,231 Net (loss) ( 7,425,626 ) ( 7,425,626 ) Balance, June 30, 2021 6,681,090 $ 6,681 89,761,122 $ 89,761 $ 84,468,451 $ - $ ( 77,356,846 ) $ 7,208,047 Common shares issued in connection with offerings 4,757,381 4,757 4,990,493 4,995,250 Common shares issued upon exercise of warrants 9,523,376 9,526 11,894,694 11,904,220 Common shares issued to non-employees 172,802 173 307,546 307,719 Stock option and RSU-related stock compensation expense 625,556 625,556 Stock Option exercise 118,692 118 59,832 59,950 Net (loss) ( 10,378,473 ) ( 10,378,473 ) Balance, September 30, 2021 6,681,090 $ 6,681 104,333,373 $ 104,335 $ 102,346,572 $ - $ ( 87,735,319 ) $ 14,722,269 Common shares issued upon exercise of warrants 666,667 667 832,649 833,316 Preferred Stock conversion to common stock ( 2,227,030 ) ( 2,227 ) 2,227,030 2,227 - Common shares issued to non-employees 15,000 15 20,685 20,700 Stock option and RSU-related stock compensation expense 3,093,350 3,093,350 Net (loss) ( 10,736,033 ) ( 10,736,033 ) Balance, December 31, 2021 4,454,060 $ 4,454 107,242,070 $ 107,244 $ 106,293,256 $ - $ ( 98,471,352 ) $ 7,933,602 The accompanying notes are an integral part of these condensed consolidated financial statements. THE ALKALINE WATER COMPANY INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Nine Months December 31, 2021 December 31, 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 28,540,132 ) $ ( 11,742,965 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation expense 477,045 694,279 Shares issued and vested, options and RSU amortized for employee and non-employee services 6,966,005 2,064,149 Non-cash lease expense 9,624 932 Changes in operating assets and liabilities: Accounts receivable 684,980 27,421 Inventory ( 4,421,839 ) ( 1,193,794 ) Prepaid expenses and other current assets ( 1,224,743 ) 414,525 Accounts payable 333,821 ( 410,773 ) Accrued expenses ( 225,028 ) 543,938 NET CASH USED IN OPERATING ACTIVITIES ( 25,940,267 ) ( 9,602,288 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets ( 493,329 ) ( 152,877 ) CASH USED IN INVESTING ACTIVITIES ( 493,329 ) ( 152,877 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (repayment of) revolving financing 2,102,189 ( 3,291,739 ) Proceeds from promissory note payable - 325,800 Proceeds from sale of common stock, net 4,995,250 4,899,998 Proceeds for the exercise of warrants, net 13,390,313 4,914,888 Proceeds for the exercise of stock options, net 108,180 61,480 CASH PROVIDED BY FINANCING ACTIVITIES 20,595,932 6,910,427 NET CHANGE IN CASH ( 5,837,664 ) ( 2,844,738 ) CASH AT BEGINNING OF PERIOD 9,130,956 4,561,682 CASH AT END OF PERIOD $ 3,293,292 $ 1,716,944 INTEREST PAID $ 411,866 $ 411,507 TAXES PAID $ - $ - SUPPLEMENTAL DISCLOSURE of NON-CASH INVESTING AND FINANCIAL ACTIVITIES ISSUANCE OF COMMON SHARES TO SETTLE STOCK PAYABLE $ - $ 1,000,000 The accompanying notes are an integral part of these condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1 -NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business 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. In addition to its bottled alkaline water, the Company also offers retail consumers flavor infused bottled water in the 500-milliliter size in six flavors: Raspberry, Watermelon, Lemon, Lemon Lime, Peach Mango and Blood Orange. The Company recently introduced and began selling hemp-derived CBD topical and ingestible products under the brand name "A88CBD™". Our hemp-derived CBD products are produced and sold in compliance with the Agriculture Improvement Act of 2018 (also known as the 2018 Farm Bill, Public Law 115-334). Basis of presentation These unaudited financial statements represent the condensed consolidated financial statements of The Alkaline Water Company and its wholly owned subsidiaries (collectively, the "Company"). These unaudited condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and the notes thereto as set forth in the Company's Form 10-K, filed with the SEC on July 2, 2021, which included all disclosures required by generally accepted accounting principles ("GAAP") In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's financial position on a consolidated basis and the consolidated results of operations, equity and cash flows for the interim periods presented. The results of operations for the three and nine months ended December 31, 2021 and 2020 are not necessarily indicative of expected operating results for the full year. The information presented throughout the document as of and for the three and nine months ended December 31, 2021 and 2020 is unaudited. The consolidated balance sheet at March 31, 2021 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements. Principles of consolidation The consolidated financial statements include the accounts of The Alkaline Water Company Inc. (a Nevada Corporation) and its six wholly owned subsidiaries: A88 Infused Beverage Division Inc. (a Nevada Corporation), A88 International, Inc. (a Nevada Corporation), A88 Infused Products Inc. (a Nevada Corporation), AWC Acquisition Company Inc. (a Nevada corporation), The Clean Beverage Company Inc. (a Nevada corporation) and Alkaline 88, LLC (an Arizona Limited Liability Company). All significant intercompany balances and transactions have been eliminated. The Alkaline Water Company Inc., A88 Infused Beverage Division, Inc., A88 Infused Products Inc., A88 International, Inc., AWC Acquisition Company Inc., The Clean Beverage Company, Inc., and Alkaline 88, LLC will be collectively referred herein to as the "Company". Any reference herein to "The Alkaline Water Company Inc.", the "Company", "we", "our" or "us" is intended to mean The Alkaline Water Company Inc., including the subsidiaries indicated above, unless otherwise indicated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Cash and Cash Equivalents The Company considers all highly liquid instruments with an original maturity of three months or less to be considered cash equivalents. The carrying value of these investments approximates fair value. As of the balance sheet date and periodically throughout the period, the Company has maintained balances in various operating accounts in excess of federally insured limits. In addition, the Company has maintained balances in its attorney's client trust account in both C$ and US$. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible. The Company had $ 3,293,292 and $ 9,130,956 in cash at December 31, 2021 and March 31, 2021, respectively. Accounts Receivable and Allowance for Doubtful Accounts The Company generally does not require collateral, and the majority of its trade receivables are unsecured. The carrying amount for accounts receivable approximates fair value. Accounts receivable consisted of the following as of December 31, 2021 and March 31, 2021: December 31, March 31, 2021 2021 Trade receivables $ 8,113,196 $ 8,798,176 Less: Allowance for doubtful accounts ( 340,000 ) ( 340,000 ) Net accounts receivable $ 7,773,196 $ 8,458,176 Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions. The accounts receivable balance is pledged as collateral for the Company's revolving financing as disclosed in Note 3. Inventory Inventory represents raw materials and finished goods valued at the lower of cost or market with cost determined using the weight average method which approximates first-in first-out method, and with market defined as the lower of replacement cost or realizable value. The inventory balance is pledged as collateral for the Company's revolving financing as disclosed in Note 3. As of December 31, 2021, and March 31, 2021, inventory consisted of the following: December 31, 2021 March 31, 2021 Raw materials $ 3,625,392 $ 3,055,091 Finished goods 5,204,167 1,352,629 Total inventory $ 8,829,559 $ 4,407,720 Property and Equipment The Company records all property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line (half-life convention) method over the estimated useful life of the assets, which the Company has determined to be 3 years . Going Concern The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has not generated sufficient revenues from product sales to provide for cash flows to enable the Company to finance its operations internally thus there is substantial doubt about the Company’s ability to continue as a going concern within one year from the date of filing. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company currently anticipates its cash on hand, funds from the exercise of outstanding warrants, and access to its ATM facility, will adequately fund the Company's planned operations and capital needs for the next 12 months. However, if our current plans change or are accelerated or we choose to increase our production capacity, we may seek to sell additional equity or debt securities or obtain additional credit facilities, including seeking investments from strategic investors. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to continue as a going concern. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with Accounting Standards Codification ("ASC") 718. Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options and warrants and the closing price of the Company's common stock for common share issuances. Revenue recognition 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 $ 4,105,279 and $ 1,837,964 for the three months ended December 31, 2021 and 2020, respectively and $ 11,824,231 and $ 5,315,518 for the nine months ended December 31, 2021 and 2020, respectively. Concentration Risks We have 2 major customers that together account for 32 % ( 17 % and 15 %, respectively) of accounts receivable at December 31, 2021, 2 customer that accounts for 34 % ( 17 % and 17 %, respectively) of total revenues for the three months ended December 31, 2021 and 2 customers that accounts for 33 % ( 19 % and 14 %, respectively) of the total revenues earned for the nine months ended December 31, 2021. The Company has 3 vendors that accounts for 52 % ( 27 %, 14 % and 11 % respectively) of purchases for the three months ended December 31, 2021 and 3 vendors that accounted for 49 % ( 25 %, 14 % and 10 % respectively) of purchases for the nine months ended December 31, 2021. We have 2 major customers that together account for 35 % ( 18 % and 17 %, respectively) of accounts receivable at December 31, 2020, 2 customer that accounts for 40 % ( 25 % and 15 %, respectively) of total revenues for the three months ended December 31, 2020 and 2 customers that accounts for 40 % ( 23 % and 17 %, respectively) of the total revenues earned for the nine months ended December 31, 2020. The Company has 2 vendors that accounts for 48 % ( 24 % and 24 % respectively) of purchases for the three months ended December 31, 2020 and 3 vendors that accounted for 53 % ( 23 %, 19 % and 11 % respectively) of purchases for the nine months ended December 31, 2020. Income Taxes The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income (loss), permanent tax differences and statutory tax rates. Deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate principally to net operating loss carryforwards. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Basic and Diluted Loss Per Share Basic and diluted earnings or loss per share ("EPS") amounts in the consolidated financial statements are computed in accordance with ASC 260- 10 " Earnings per Share ", which establishes the requirements for presenting EPS. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS is based on the weighted average number of common shares outstanding and dilutive common stock equivalents. Basic EPS is computed by dividing net income or loss available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Potentially dilutive securities were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive. The Company had 4,033,949 and 1,348,566 shares relating to options and 780,009 and 2,453,243 shares relating to warrants at December 31, 2021 and 2020, respectively that were not included in the diluted earnings per share calculation because they were antidilutive. Business Segments The Company operates on one segment in one geographic location - the United States of America and therefore, segment information is not presented. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments including accounts payable, accrued expenses, and notes payable approximate fair value due to the relative short period for maturity of these instruments. The Company does not use derivative financial instruments to hedge exposures to cash-flow, market, or foreign-currency risks. Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the company's assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows: Level 1: Observable inputs such as quoted prices in active markets; Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. As of December 31, 2021, and 2020, the Company did not have any financial instruments that are measured on a recurring basis as Level 1, 2 or 3. Correction of Previously Issued Financial Statements The accompanying consolidated statement of operations for the three and nine months ended December 31, 2020 has been corrected for the following: a reclassification of depreciation expense of $ 278,751 and $ 686,372 , respectively, to cost of goods sold related to assets utilized in the production of inventory and an adjustment to reclassify sales and marketing expenses of $ 563,495 and $ 1,946,003 , respectively, as a reduction in revenue as such amounts were related to consideration payable to a customer which the Company determined was not for distinct goods or services received. The Company assessed the materiality of the misstatement quantitively and qualitatively and has concluded that the correction of the classification error is immaterial to the consolidated financials taken as a whole. As a result of the correction for the three and nine months ended December 31, 2020, cost of goods sold increased from $ 5,985,210 to $ 6,263,961 and from $ 20,681,694 to $ 21,368,066 , respectively, and revenue decreased from $ 10,179,695 to $ 9,616,200 and $ 35,155,065 to $ 33,209,062 , respectively which combined resulted in a decrease of gross profit from $ 4,194,485 to $ 3,352,239 and from $ 14,473,371 to $ 11,840,996 , respectively. The correction had no impact on total operating loss and net loss. The misstatement was identified by the Company and corrected initially in the year end results for the twelve months ending March 31, 2021. Recent Accounting Pronouncements Standards Required to be Adopted in Future Years. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2019,the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). ASU 2019-10 changes the effective date of the credit loss standard (ASU 2016-13) to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies Further, the ASU clarifies that operating lease receivables are not within the scope of ASC 326-20 and should instead be accounted for under the new leasing standard, ASC 842. The Company does not believe that the impact of adopting this standard will have a material effect on its financial statements. The Company has evaluated other recent accounting pronouncements through December 31, 2021 and believes that none of them will have a material effect on our consolidated financial statements. NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following at: December 31, 2021 March 31, 2021 Machinery and equipment $ 5,305,673 $ 4,812,344 Office equipment 55,439 55,439 Less: accumulated depreciation ( 4,334,645 ) ( 3,857,600 ) Property and equipment, net $ 1,026,467 $ 1,010,183 Depreciation expense for the three months ended December 31, 2021 and December 31, 2020 was $ 159,014 and $ 281,962 , respectively. Depreciation expense for the nine months ended December 31, 2021 and December 31, 2020 was $ 477,045 and $ 694,279 , respectively. NOTE 3 - REVOLVING FINANCING On February 1, 2017, the Company entered into a Credit and Security Agreement (the "Credit Agreement") with CNH Finance Fund I, L.P. (fka SCM Specialty Finance Opportunities Fund, L.P.) (the "Lender") which has been amended from time to time the last of which was March 2020. The Credit Agreement provides the Company with a revolving credit facility (the "Revolving Facility"), the proceeds of which are to be used to repay existing indebtedness of the Company, transaction fees incurred in connection with the Credit Agreement and for working capital needs of the Company. Under the terms of the Credit Agreement, the Lender has agreed to make cash advances to the Company in an aggregate principal at any one time outstanding not to exceed the lesser of (i) $7 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, and is subject to certain customer specific requirements). The Credit Agreement expires on July 1, 2022, unless earlier terminated by the parties in accordance with the terms of the Credit Agreement. The principal amount of the Revolving Facility outstanding bears interest at a rate per annum equal to (i) a fluctuating interest rate per annum equal at all times to the rate of interest announced, from time to time, within Wells Fargo Bank at its principal office in San Francisco as its "prime rate," plus (ii) 3.25%, payable monthly in arrears. The interest rate as of December 31, 2021 was 6.5%. To secure the payment and performance of the obligations under the Credit Agreement, the Company granted to the Lender a continuing security interest in all of the Company's assets and agreed to a lockbox account arrangement in respect of certain eligible receivables. In connection with the Credit Agreement, the Company paid to the Lender a $ 30,000 facility fee. The Company agreed to pay the Lender 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. The Company also agreed to pay the Lender as additional interest a monthly collateral management fee equal to 0.35 % per month calculated on the basis of the average daily balance under the Revolving Facility outstanding during the preceding month. The collateral management fee will be payable monthly in arrears. Upon a termination of the Revolving Facility, the Company agreed to pay the Lender a termination fee in an amount equal to 1 % of the Revolving Loan Commitment Amount if the termination occurs before July 1, 2022. The Company must also pay certain fees in the event that receivables are not properly deposited in the appropriate lockbox account. The interest rate will be increased by 5 % in the event of a default under the Credit Agreement. Events of default under the Credit Agreement, some of which are subject to certain cure periods, include a failure to pay obligations when due, the making of a material misrepresentation to the Lender, the rendering of certain judgments or decrees against the Company and the commencement of a proceeding for the appointment of a receiver, trustee, liquidator or conservator or filing of a petition seeking reorganization or liquidation or similar relief. The Credit Agreement contains customary representations and warranties and various affirmative and negative covenants including the right of first refusal to provide financing for the Company and the financial and loan covenants, such as the loan turnover rate, minimum EBITDA, fixed charge coverage ratio and minimum liquidity requirements. The Company was in compliance with those covenants as of December 31, 2021. The balance of the revolving financing was $ 6,426,601 and $ 4,324,412 at December 31, 2021 and March 31, 2021, respectively. 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 $ 325,800 , pursuant to the Paycheck Protection Program (the "PPP") under Division A, Title I of the CARES Act, which was enacted March 27, 2020 (the "PPP Loan"). The promissory note issued by Borrower, matures on April 29, 2022 and bears interest at a rate of 1 % per annum. Borrower shall pay principal plus interest accrued under the promissory note in 18 equal monthly installments beginning on October 29, 2020 . The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. 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 $ 325,800 along with accrued interest of $ 4,751 totaling $ 330,551 was forgiven. NOTE 5 - STOCKHOLDER EQUITY Preferred Shares On October 7, 2013, the Company amended its articles of incorporation to create 100,000,000 shares of preferred stock by filing a Certificate of Amendment to Articles of Incorporation with the Secretary of State of Nevada. The preferred stock may be divided into and issued in series, with such designations, rights, qualifications, preferences, limitations and terms as fixed and determined by our board of directors. Series S Convertible Preferred Stock On May 12, 2021, The Alkaline Water Company Inc. (the "Company") entered into an Endorsement Agreement (the "Endorsement Agreement"), with ABG-Shaq, LLC ("ABG-Shaq"), an entity affiliated with Shaquille O'Neal, for the personal services of Mr. O'Neal. Pursuant to the Endorsement Agreement, the Company received the right and license to use Mr. O'Neal's name, nickname, initials, autograph, voice, video or film portrayals, photograph, likeness and certain other intellectual property rights, in each case, solely as approved by ABG-Shaq, in connection with the advertising, promotion and sale of the Company's branded products. Mr. O'Neal will also provide brand ambassador services related to appearances, social media and public relations matters. The Endorsement Agreement also includes customary exclusivity, termination, and indemnification clauses. As consideration for the rights and services granted under the Endorsement Agreement, the Company agreed to pay to ABG-Shaq aggregate cash payments of $ 3 million over the three years of the Endorsement Agreement. The Company will also pay expenses related to the marketing and personal services provided by Mr. O'Neal. As of December 31, 2021, the Company has paid $ 1,000,000 under this agreement. The Company will be paying $ 250,000 in each quarter in the fiscal years ended March 31, 2023 and March 31, 2024. In addition, the Company agreed to grant 6,681,090 shares of Series S Preferred Stock to ABG, each vested share of which is convertible into one share of the Company's common stock. The shares of Series S Preferred Stock will vest as to 1/3 on May 12, 2021, May 1, 2022, and May 1, 2023, respectively. The term of the Endorsement Agreement is three years, commencing on May 1, 2021 and terminating on May 1, 2024 (the " Term"). The Series S Preferred Stock was value at $ 6,681,090 based on the Company's closing stock price of $ 1.00 per share on May 12, 2021. The Company valued the vested Series S Preferred Stock at $ 2,227,030 , which amount was recognized by the Company as a prepaid expense that is being expensed over the initial twelve months of the Endorsement Agreement's Term. The prepaid expense at December 31, 2021 was $ 742,342 . In the three and nine months ended December 31, 2021, the Company recognized an expense of $ 556,758 and $ 2,484,687 respectively, in connection with the agreement. Common Shares Share Issuance Effective as of November 19, 2021, we issued 2,227,030 shares of our common stock to one entity upon conversion of 2,227,030 shares of our Series S Preferred Stock without the payment of any additional consideration. On December 20, 2021, the Issuer granted an award of 15,000 shares of common stock as a "restricted award" under their 2020 Equity Incentive Plan to a director. Restricted Awards On November 11, 2021, we granted awards of an aggregate of 2,000,000 shares of our common stock as "restricted awards" under our 2020 Equity Incentive Plan to certain directors, officers, employees, and consultants, fourteen persons in total. These shares will vest on January 15, 2022. In the three and nine months ended December 31, 2021, the Company recognized an expense of $ 2,460,000 in connection with the grant and anticipates recognizing an expense of $ 820,000 in the quarter ended March 31, 2022 for a total expense of $ 3,280,000 for the year ended March 31, 2022. The grantees have no rights or privileges as stockholders of our company with respect to the unvested shares including, without limitation, the right to vote such shares and receive all dividends or other distributions paid with respect to such shares. NOTE 6 - OPTIONS AND WARRANTS Options Issuance of Options On November 11, 2021, we granted an aggregate of 129,000 stock options to five employees for the purchase of up to 129,000 shares of our common stock pursuant to our 2020 Equity Incentive Plan. Each stock option is exercisable at a price of US$ 1.64 per share until November 10, 2031. The stock options will vest as to 50% on each anniversary of the grant date. Warrants Exercise of Warrants Effective as of November 15, 2021, we issued an aggregate of 666,667 shares of our common stock to one individual upon exercise of our common stock purchase warrants with an exercise price of $ 1.25 per share for aggregate gross proceeds of $ 833,334 . NOTE 7 - LEASES The Company adopted ASC 842 on April 1, 2019 which requires lessees to recognize right-of-use ("ROU") asset and lease liability for all leases. The Company elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are or contain leases, lease classification and determination of initial direct costs. As of October 1, 2020, the company entered into a lease for 9,166 square feet of corporate office and warehouse space from a third party through September 2023 at a rate of $ 10,083 per month for the first twelve months, then at a rate of $ 10,385 for the next 12 months, and $ 10,697 for the final 12 months of the lease. The Company determined this lease was an operating lease under ASC 842 and using an interest rate of 7 %, the Company determined that the ROU for this lease was $ 337,932 and the lease liability for this lease was $ 337,932 , at inception of this lease, respectively. Previously, the Company leased its corporate office space with a size of 3,352 square feet leased from a third party which leased through November 2020 at the current rate of $ 7,891 per month. As of November 1, 2020, the company entered into a lease for 2,390 square feet of corporate office space from a third party through January 2024 at a rate of $ 5,280 per month for the first twelve months starting January 2021, then at a rate of $ 5,377 for the next 12 months, and $ 5,497 for the final 13 months of the lease. The Company determined this lease was an operating lease under ASC 842 and using an interest rate of 7 %, the Company determined that the ROU for this lease was $ 177,629 and the lease liability for this lease was $ 177,629 , at inception of this lease, respectively. At inception the ROU and Lease Liability was calculated based on the net present value of the future lease payments over the term of the lease. When available, the Company uses the rate implicit in the lease discount payments as the incremental borrowing rate to calculate the net present value; however, the rate implicit in the lease is not readily determinable for our corporate office lease. In this case, the Company estimated its incremental borrowing rate as the interest rate it could borrow an amount equal to the lease payments over a similar term, with similar collateral as the lease, and in a similar economic environment. The Company estimated its rate using available evidence such as rates imposed by third-party lenders to the Company in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to the Company's estimated creditworthiness. For operating leases that include rent holidays and rent escalation clauses, the Company recognizes lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. The Company records the straight-line lease expense and any contingent rent, if applicable, in general and administrative expenses on the condensed consolidated statements of operations. The corporate office, lease also requires the Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in the general and administrative expenses on the condensed consolidated statements of operations. Operating Lease expense for the three and nine months ended December 31, 2021 was $ 92,481 and $ 285,007 , respectively. Operating lease expense for the three and nine months ended December 31, 2020 was $ 64,225 and $ 158,440 , respectively. Operating Leases: December 31, 2021 Operating lease right-of-use asset - current portion $ 167,299 Operating lease right-of-use asset - non-current portion 143,693 Total Operating lease right-of-use asset $ 310,992 Operating lease liability - current portion $ 162,147 Operating lease liability - non-current portion 175,043 Total Operating lease liability $ 337,190 Weighted average remaining lease term (in years): Operating leases 1.0 Weighted average discount rate: Operating leases 7.0 % Supplemental cash flow information related to leases is as follows: Maturities of undiscounted lease liabilities as of December 31, 2021 are as follows: Operating Leases Year ending March 31, 2022 $ 47,288 Year ending March 31, 2023 191,379 Year ending March 31, 2024 119,150 Total lease payments 357,816 Adjusted for interest ( 20,626 ) Total lease obligations $ 337,190 NOTE 8 - RISKS AND UNCERTAINTIES In December 2019, a novel strain of COVID-19 was reported in China. Since then, the COVID-19 has spread globally including across North America and the United States. The spread of COVID-19 from China to other countries has resulted in the World Health Organization (WHO) declaring the outbreak of COVID-19 as a "pandemic," or a worldwide spread of a new disease, on March 11, 2020. Specifically, the Company cautions that our business could be materially and adversely affected by the risks, or the public perception of the risks, related to the outbreak of COVID-19. To date, the Company has managed to operate successfully throughout the pandemic without any material disruptions to our supply chain. Although retailers which carry our products may be considered essential businesses and therefore be allowed to remain operational, they may experience significantly reduced demand. The risk of a pandemic, or public perception of the risk, could cause customers to avoid public places, including retail properties, and could cause temporary or long-term disruptions in our supply chains and/or delays in the delivery of our inventory to our customers. Further, such risks could also adversely affect retail customers' financial condition, resulting in reduced spending on our products, which are marketed as premium products. "Shelter-in-place" or other such orders by governmental entities could also disrupt our operations, if our employees or the employees of our sourcing partners who cannot perform their responsibilities from home, are not able to report to work. Risks related to an epidemic, pandemic or other health crisis, such as COVID-19, could also lead to the complete or partial closure of one or more of our co-packing facilities or operations of our sourcing partners. NOTE 9 - SUBSEQUENT EVENTS On January 11, 2022, we issued 1,617 shares of our common stock on account of an employee exercising 3,000 stock options on a cashless basis with an exercise price of $ 0.53 per share. On January 15, 2022, we issued an aggregate of 2,000,000 shares of our common stock that had vested from "restricted awards" granted on November 11, 2021 under our 2020 Equity Incentive Plan to certain directors, officers, employees, and consultants, fourteen persons in total. On January 15, 2022, we issued 6,666 shares of our common stock to an employee that had vested from a restricted award previously granted.