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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-02-14 · 60 added, 68 removed, 66 unchanged (66% of the section changed)

22 unchanged sentences

• 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.

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.

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.

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.

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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.

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, 2023.

These steps include (1) an approximate 9% across the board price increase (effective across all banners for the entire fiscal 2023);

(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

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

Our results of operations for the three months ended June 30, 2022 and June 30, 2021 are as follows:

Cost of goods sold

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 had revenue from sales of our product for the three months ended June 30, 2022 of $16,894,403 as compared to $14,113,578 for the three months ended June 30, 2021, an increase of 20%.

The increase in sales is due to the expanded distribution of our products to additional 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 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.

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, Rite-Aid Family Dollar, Food Lion, Albertson's/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros.

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.

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.

Our operating expenses for the three months ended December 31, 2021 and December 31, 2020 are as follows:

For the three months ended June 30, 2022, we had cost of goods sold of $13,399,774, or 79% of revenue, as compared to cost of goods sold of $9,311,011 or 66% of revenue, for the three months ended June 30, 2021.

The increase in cost of goods sold is due to increased raw material costs and increased freight costs to our co-packers.

Our operating expenses for the three months ended June 30, 2022 and June 30, 2021 are as follows:

For the three

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Total operating expenses

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:

Cost of goods sold

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.

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.

Our operating expenses for the nine months ended December 31, 2021 and December 31, 2020 are as follows:

Sales and marketing expenses

General and administrative expenses

Total operating expenses

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.

For the three months ended June 30, 2022, our total operating expenses were $9,785,839 as compared to $12,120,774 for the three months ended June 30, 2021.

For the three months ended June 30, 2022, the total included $6,951,846 of sales and marketing expenses.

For the three months ended June 30, 2021 the total included $7,156,400 of sales and marketing expenses.

Compared to the three months ended June 30, 2021, sales and marketing expenses for the three months ended June 30, 2022 decreased due to lower advertising and promotion of approximately $0.2 million and lower professional fees of approximately $0.6 million offset by an increase of freight to our customers in the amount of $0.9 million.

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, stock compensation expense of approximately $0.2 million and approximately $2.0 million of wages and wage related expenses.

For the three months ended June 30, 2021, general and administrative expenses of $4,964,374, consisted primarily of approximately $2.6 million of professional fees, media fees and legal fees, stock compensation expense of approximately $1.1 million and approximately $1.0 million of wages and wage related expenses.

Liquidity and Capital Resources

Working Capital

June 30, 2022

March 31, 2022

Current assets

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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 assets as of June 30, 2022 and March 31, 2022 primarily include $2,945,924 and $1,531,062 in cash, $8,422,415 and $7,927,065 in accounts receivable and $10,678,339 and $8,583,664 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.

Our cash flows for the nine months ended December 31, 2021 and December 31, 2020 are as follows:

Current liabilities as of June 30, 2022 and March 31, 2022 primarily include $11,934,494 and $10,441,879 in accounts payable, revolving financing of $6,539,787 and $7,043,870, and accrued expenses of $5,946,778 and $2,036,736, respectively.

The increase in accrued expenses during the three-month period ending June 30, 2022 is primarily due to approximately $3 million of proceeds received early by the Company as of June 30, 2022 for warrants exercised by third parties as part of the debt settlement transaction that did not close until July 25, 2022 as detailed below.

Our cash flows for the three months ended June 30, 2022 and June 30, 2021 are as follows:

For the three

Net Cash used in operating activities

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Net Cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net increase (decrease) in cash

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.

Net cash used in operating activities was $2,494,650 for the three months ended June 30, 2022, as compared to $6,055,313 used in operating activities for the three months ended June 30, 2021.

The decrease in net cash used in operating activities was primarily due to the receipt of approximately $3 million for the exercise of warrants that were not exercised until July 25, 2022 (see below Financing Activities Subsequent to June 30, 2022).

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.

Net cash used in investing activities was $854,997 for the three months ended June 30, 2022, as compared to $61,444 used in investing activities for the three months ended June 30, 2021.

The increase in net cash used in investing activities 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 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.

Net cash provided by financing activities for the three months ended June 30, 2022 was $4,764,509, as compared to $1,483,706 for the three months ended June 30, 2020.

The increase in net cash provided by financing activities was primarily to due proceeds from the sale of common stock in the amount of $5.2 million in the three months ended June 30, 2022.

Financing Activities Subsequent to June 30, 2022

We entered into debt settlement and subscription agreements with four creditors, and we issued units to three creditors and special warrants to one creditor in settlement of debt in an aggregate of $3,869,962 (principal of $3,800,000 and accrued and unpaid interest of $69,962) owing the creditors in connection with certain convertible notes.

Effective as of July 25, 2022, we issued an aggregate of 9,633,616 units of our company at a deemed price of $0.37 per unit to three creditors.

Each unit was comprised of one share of common stock and one warrant.

Each warrant entitled the holder to purchase an additional share of our common stock at a price of $0.44 per share for a period of three years.

As a condition of the debt settlement, each of the creditors who has received the units has agreed to immediately exercise the creditor's respective warrants.

Accordingly, the creditors exercised warrants for an aggregate of $4,238,791 (of which approximately $3 million was received as of June 30, 2022 and recorded as an accrued liability of the Company pending the closing of this debt settlement transaction) resulting in an aggregate of an additional 9,633,616 shares of our common stock being issued to such creditors.

Effective as of July 25, 2022, we issued 825,738 special warrants at a deemed price of $0.37 per special warrant to one creditor.

Each special warrant is automatically exercisable (without payment of any further consideration and subject to customary anti-dilution adjustments) into units on the date that is the earlier of:

(i) the date that is three business days following the date on which our company obtains a receipt from the British Columbia Securities Commission for a (final) short form prospectus qualifying the distribution of the units issuable upon exercise of the special warrants, and (ii) the date that is four months and one day after the issuance of the special warrants.

Each unit will be comprised of one share of common stock and one warrant.

Each warrant will entitle the holder to purchase an additional share of our common stock at a price of $0.44 per share.

As consideration for the debt settlement and the issuance of the special warrants, the creditor agreed to exercise the warrants immediately upon automatic exercise of the special warrants by payment of $363,325, which amount is held in trust by the creditor's solicitors until the automatic exercise date, for an additional 825,735 shares of our common stock.

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.

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 warrant exercises, our line of credit and the sales agreement with Roth Capital Partners, LLC is planned to fund our current planned operations and capital needs.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis