ALKALINE WATER Co INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This report contains "forward-looking statements." All statements other than statements of historical fact are "forward-looking statements" for purposes of applicable securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "could," "estimate," "intend," "continue," "believe," "expect" or "anticipate" or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward- looking statements, which speak only as of the dates on which they are made. Except as required by applicable law, including the securities laws of the United States and Canada, we do not intend, and undertake no obligation, to update any forward-looking statement. Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to: • lack of working capital; • inability to raise additional financing; • the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain; • deterioration in general or regional economic conditions; • adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations; • inability to efficiently manage our operations; • inability to achieve future sales levels or other operating results; and • the unavailability of funds for capital expenditures. Unless otherwise indicated, all reference to "dollars", "$", "USD" or "US$" are to United States dollars and all reference to "CDN$" are to Canadian dollars. Our financial statements are stated in United States Dollars ($ or US$) unless otherwise stated and are prepared in accordance with United States Generally Accepted Accounting Principles. In this quarterly report, unless otherwise specified, all references to "common shares" refer to the common shares in our capital stock. As used in this quarterly report on Form 10-Q, the terms "we", "us" "our", the "Company" and "Alkaline" refer to The Alkaline Water Company Inc., a Nevada corporation, and its wholly-owned subsidiaries A88 Infused Beverage Division, Inc. (a Nevada Corporation hereinafter referred to as "A88 Infused"), A88 International, Inc. (a Nevada Corporation), A88 Infused Products, Inc. (a Nevada Corporation), The Clean Beverage Company Inc. (a Nevada corporation), and Alkaline 88, LLC (an Arizona Limited Liability Company), unless otherwise specified. COVID-19 In December 2019, a novel strain of COVID-19 was reported in China. Since then, the COVID-19 has spread globally including across North America and the United States. The spread of COVID-19 from China to other countries has resulted in the World Health Organization (WHO) declaring the outbreak of COVID-19 as a "pandemic," or a worldwide spread of a new disease, on March 11, 2020. Specifically, we caution that our business could be materially and adversely affected by the risks, or the public perception of the risks, related to the outbreak of COVID-19. To date, we have managed to operate successfully throughout the pandemic without any material disruptions to our supply chain. Although retailers which carry our products may be considered essential businesses and therefore be allowed to remain operational, they may experience significantly reduced demand. The risk of a pandemic, or public perception of the risk, could cause customers to avoid public places, including retail properties, and could cause temporary or long-term disruptions in our supply chains and/or delays in the delivery of our inventory to our customers. Further, such risks could also adversely affect retail customers' financial condition, resulting in reduced spending on our products, which are marketed as premium products. "Shelter-in-place" or other such orders by governmental entities could also disrupt our operations, if our employees or the employees of our sourcing partners who cannot perform their responsibilities from home, are not able to report to work. Risks related to an epidemic, pandemic or other health crisis, such as COVID-19, could also lead to the complete or partial closure of one or more of our co-packing facilities or operations of our sourcing partners. Results of Operations Three Months Ended December 31, 2021 and December 31, 2020 Our results of operations for the three months ended December 31, 2021 and December 31, 2020 are as follows : For the three For the three months ended months ended December 31, December 31, 2021 2020 Revenue $ 15,110,400 $ 9,616,200 Cost of goods sold 10,128,144 6,623,961 Gross profit $ 4,982,256 $ 3,352,239 Net Loss $ (10,736,033 ) $ (4,360,334 ) Revenue and Cost of Goods Sold We had revenue from sales of our product for the three months ended December 31, 2021 of $15,110,400 as compared to $9,616,200 for the three months ended December 31, 2020, an increase of 57% generated by sales of our alkaline water and flavored infused water. The increase in sales is due to the expanded distribution of our products to additional retailers throughout the country and increased demand due to Covid-19. We distribute our product through several channels. We sell through large national distributors (UNFI, KeHE, C&S, and Core-Mark), which together represent over 150,000 retail outlets. We also sell our products directly to retail clients, including convenience stores, natural food products stores, large ethnic markets and national retailers and through Direct Store Distributors in selected markets, including Mahaska, Nevada Beverage, and Hensley, covering Nevada, Arizona, and Midwest region. Combined, they service over 16,000 customers in five states. Each one carries our full line of non-CBD waters. Some examples of retail clients are: Walmart, CVS, Rite-Aid Family Dollar, Food Lion, Albertson's/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB and Brookshire's. The majority of our sales to retail clients are through brokers and distributors, however, sales to our larger retail clients are often direct to the client's own warehouse distribution network. Our CBD products are presently available for purchase on our E-commerce websites, www.a88cbd.com and www.a88hemp.com, in addition to a growing number of brick and mortar retail locations Cost of goods sold is comprised of production costs, shipping and handling costs. For the three months ended December 31, 2021, we had cost of goods sold of $10,128,144, or 67% of revenue, as compared to cost of goods sold of $6,263,961 or 65% of revenue, for the three months ended December 31, 2020. Expenses Our operating expenses for the three months ended December 31, 2021 and December 31, 2020 are as follows: For the three For the three months ended months ended December 31, December 31, 2021 2020 Sales and marketing expenses $ 9,572,279 $ 4,091,435 General and administrative expenses 6,333,663 3,484,221 Total operating expenses $ 15,905,942 $ 7,575,657 For the three months ended December 31, 2021, our total operating expenses were $15,905,942 as compared to $7,575,656 for the three months ended December 31, 2020. For the three months ended December 31, 2021, the total included $9,572,279 of sales and marketing expenses. Sales and marketing expenses increased as a result of increased freight and sales promotional expenses due to our increase in sales. General and administrative expenses of $6,333,663, consisted primarily of approximately $1.3 million of professional fees, media fees and legal fees, stock option and restricted stock expense in the amount of approximately $2.3 million and approximately $1.5 million of wages and wage related expenses. For the three months ended December 31, 2020, the total included $4,091,435 of sales and marketing expenses. Sales and marketing expenses increased as a result of increased freight and sales promotional expenses due to our increase in sales. General and administrative expenses of $3,484,221, consisted primarily of approximately $2,0 million of professional fees, media fees and legal fees, stock option expense in the amount of approximately $0.4 million and approximately $0.8 million of wages and wage related expenses. Nine Months Ended December 31, 2021 and December 31, 2020 Our results of operations for the nine months ended December 31, 2021 and December 31, 2020 are as follows: For the nine For the nine months ended months ended December 31, December 31, 2021 2020 Revenue $ 44,479,743 $ 33,209,062 Cost of goods sold 29,530,570 21,368,066 Gross profit $ 14,949,173 $ 11,840,996 Net Loss $ (28,540,132 ) $ (11,742,965 ) Revenue and Cost of Goods Sold We had revenue from sales of our product for the nine months ended December 31, 2021 of $44,479,743 as compared to $33,209,062 for the nine months ended December 31, 2020, an increase of 34% generated by sales of our alkaline water and flavored infused water. The increase in sales is due to the expanded distribution of our products to additional retailers throughout the country and increased demand due to Covid-19. We distribute our product through several channels. We sell through large national distributors (UNFI, KeHE, C&S, and Core-Mark), which together represent over 150,000 retail outlets. We also sell our products directly to retail clients, including convenience stores, natural food products stores, large ethnic markets and national retailers and through Direct Store Distributors in selected markets, including Mahaska, Nevada Beverage, and Hensley, covering Nevada, Arizona, and Midwest region. Combined, they service over 16,000 customers in five states. Each one carries our full line of non-CBD waters. Some examples of retail clients are: Walmart, CVS, Rite-Aid Family Dollar, Food Lion, Albertson's/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB and Brookshire's. The majority of our sales to retail clients are through brokers and distributors, however, sales to our larger retail clients are often direct to the client's own warehouse distribution network. Our CBD products are presently available for purchase on our E-commerce websites, www.a88cbd.com and www.a88hemp.com, in addition to a growing number of brick and mortar retail locations. For the nine months ended December 31, 2021, we had cost of goods sold of $29,530,570, or 66% of revenue, as compared to cost of goods sold of $21,368,066 or 64% of revenue, for the nine months ended December 31, 2020. Expenses Our operating expenses for the nine months ended December 31, 2021 and December 31, 2020 are as follows: For the nine For the nine months ended months ended December 31, December 31, 2021 2020 Sales and marketing expenses $ 26,849,554 $ 12,199,001 General and administrative expenses 16,549,788 10,926,786 Total operating expenses $ 43,399,342 $ 23,125,788 For the nine months ended December 31, 2021, our total operating expenses were $43,399,342, as compared to $23,125,788 for the nine months ended December 31, 2020. For the nine months ended December 31, 2021, the total included $26,849,554 of sales and marketing expenses. Sales and marketing expenses increased compared to the nine months ended December 31, 2020 as a result of increased out bound freight to our customers of approximately $6.5 million, increased advertising and promotional expenses of approximately $2.9 million and increased non-cash stock expense of approximately $1.7 million. General and administrative expenses of $16,549,788, consisted primarily of approximately $6.8 million of professional fees, stock option and stock award expense in the amount of approximately $3.7 million and approximately $3.6 million of wage and wage related expenses. For the nine months ended December 31, 2020, the total included $12,199,001 of sales and marketing expenses and $10,926,786 of general and administrative expenses, consisting primarily of approximately $5.3 million of professional fees, stock option expense in the amount of approximately $2.3 million and approximately $2.2 million of wage and wage related expenses. Liquidity and Capital Resources Working Capital At December At March 31, 31, 2021 2021 Current assets $ 22,326,050 $ 23,271,259 Current liabilities 15,387,565 13,244,041 Working capital $ 6,938,485 $ 10,027,218 Current Assets Current assets as of December 31, 2021 and March 31, 2021 primarily relate to $3,293,292 and $9,130,956 in cash, $7,773,196 and $8,458,176 in accounts receivable and $8,829,559 and $4,407,720 in inventory, respectively. Current Liabilities Current liabilities as of December 31, 2021 and March 31, 2021 primarily relate to $7,389,169 and $7,055,348 in accounts payable, revolving financing of $6,426,601 and $4,324,412, and accrued expenses of $1,409,648 and $1,306,106 respectively. Cash Flows Our cash flows for the nine months ended December 31, 2021 and December 31, 2020 are as follows: For the nine For the nine months Months ended ended December December 31, 31, 2021 2020 Net cash used in operating activities $ (25,940,267 ) $ (9,602,288 ) Net cash used in investing activities (493,329 ) (152,877 ) Net cash provided by financing activities 20,595,932 6,910,427 Net increase (decrease) in cash and cash equivalents $ (5,837,664 ) $ (2,844,738 ) Operating Activities Net cash used in operating activities was $25,940,267 for the nine months ended December 31, 2021, as compared to $9,602,288 used in operating activities for the nine months ended December 31, 2020. The increase of approximately $16 million in net cash used in operating activities is primarily due to approximately $16 million increase of net loss in the nine months ended December 31, 2021 compared to the nine months ended December 31, 2020. Investing Activities Net cash used in investing activities was $493,329 for the nine months ended December 31, 2021, as compared to $152,877 used in investing activities for the nine months ended December 31, 2020. Financing Activities Net cash provided by financing activities for the nine months ended December 31, 2021 was $20,595,932, as compared to $6,910,427 for the nine months ended December 31, 2020. The increase of approximately $13.7 million in net cash provided by financing activities is primarily due to increase of approximately $8.5 million increase of proceeds provided by sale of common stock and proceeds from the exercise of warrants, and by an increase of approximately $5.4 million of cash flows from revolving financing, net of repayments in the nine months ended December 31, 2021 compared to the nine months ended December 31, 2020. Cash Requirements We believe that between the cash on hand as of December 31, 2021, expected warrant exercises, and our credit line, we will have sufficient cash to sustain operations including our cash needs through at least December 31, 2022. If our own financial resources and future cash-flows from operations beyond December 31, 2022 are insufficient to sustain operations, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable.