ALKALINE WATER Co INC 10-Q

Item 1. Financial Statements. THE ALKALINE WATER COMPANY INC. CONSOLIDATED BALANCE SHEETS (unaudited) December 31, 2022 March 31, 2022 ASSETS Current assets Cash $ 2,192,867 $ 1,531,062 Accounts receivable, net 8,774,283 7,927,065 Inventory 8,737,717 8,583,664 Prepaid expenses 2,361,399 2,928,085 Operating lease right-of-use asset - current portion 159,384 187,545 Total current assets 22,225,650 21,157,421 Fixed assets - net 1,828,570 1,200,797 Operating lease right-of-use asset 29,862 142,359 Total assets $ 24,084,082 $ 22,500,577 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities Accounts payable $ 14,109,479 $ 10,441,879 Accrued expenses 2,225,366 2,036,739 Revolving financing 6,391,316 7,043,870 Convertible note payable, net of debt discount - 2,223,633 Operating lease liability - current portion 176,251 174,565 Total current liabilities 22,902,412 21,920,686 Operating lease liability 32,840 178,753 Total liabilities 22,935,252 22,099,439 Commitments and contingencies (Note 8) Stockholders' equity Preferred stock, $ 0.001 par value, 100,000,000 shares authorized, 1,100,000 Series E issued and outstanding on December 31, 2022 and nil issued and outstanding on March 31, 2022 and 2,227,030 Series S issued and outstanding on December 31, 2022 and 4,453,970 issued and outstanding on March 31, 2022 3,327 4,454 Common stock, Class A - $ 0.001 par value, 200,000,000 shares authorized 147,930,459 and 110,571,812 shares issued and outstanding at December 31, 2022 and March 31, 2022, respectively 147,932 110,572 Discount on Preferred Stock ( 193,847 ) - Subscription Receivable - ( 62,388 ) Additional paid in capital 130,601,692 109,864,080 Accumulated deficit ( 129,410,274 ) ( 109,515,580 ) Total stockholders' equity 1,148,830 401,138 Total liabilities and stockholders' equity $ 24,084,082 $ 22,500,577 The accompanying notes are an integral part of these condensed consolidated financial statements. THE ALKALINE WATER COMPANY INC. CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) For the Three Months For the Nine Months December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Net Revenue $ 15,874,967 $ 13,100,048 $ 51,277,376 $ 39,684,465 Cost of Goods Sold 11,947,892 10,128,144 40,296,127 29,530,570 Gross Profit 3,927,075 2,971,904 10,981,249 10,153,895 Operating expenses Sales and marketing expenses 4,949,002 7,561,927 17,924,034 22,054,276 General and administrative 2,539,959 6,333,663 7,979,938 16,549,788 Total operating expenses 7,488,961 13,895,590 25,903,972 38,604,064 Total operating loss ( 3,561,886 ) ( 10,923,686 ) ( 14,922,723 ) ( 28,450,169 ) Other (income) expense Interest expense ( 424,569 ) ( 142,898 ) ( 2,548,736 ) ( 420,514 ) Debt conversion expense - - ( 2,405,612 ) - Gain on forgiveness of PPP loan payable - 330,551 - 330,551 Total other (income) expense ( 424,569 ) 187,653 ( 4,954,348 ) ( 89,963 ) Net loss $ ( 3,986,455 ) $ ( 10,736,033 ) $ ( 19,877,071 ) $ ( 28,540,132 ) LOSS PER SHARE (Basic and Diluted) $ ( 0.03 ) $ ( 0.10 ) $ ( 0.15 ) $ ( 0.30 ) WEIGHTED AVERAGE SHARES OUTSTANDING (Basic and Diluted) 145,825,459 105,580,951 133,957,675 95,891,561 The accompanying notes are an integral part of these condensed consolidated financial statements. THE ALKALINE WATER COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited) Preferred Stock Common Stock Additional Discount on Subscription Accumulated Number Par Value Number Par Value Paid-in Capital Preferred Stock Receivable Deficit Total 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) ( 7,425,656 ) ( 7,425,656 ) Balance, June 30, 2021 6,681,090 $ 6,681 89,761,122 $ 89,761 $ 84,468,451 $ - $ - $ ( 77,356,876 ) $ 7,208,017 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 and 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 $ - $ - $ ( 87,735,349 ) $ 14,722,239 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 $ - $ - $ ( 98,471,382 ) $ 7,933,572 Balance, March 31, 2022 4,453,970 $ 4,454 $ 110,571,812 $ 110,572 $ 109,864,080 $ - $ ( 62,388 ) $ ( 109,515,580 ) $ 401,138 Preferred stock conversion to common stock and vesting of endorsement shares ( 2,226,940 ) ( 2,227 ) 2,227,030 2,227 2,227,030 2,227,030 Common Shares issued in connection with offerings 9,083,574 9,083 5,197,121 62,388 5,268,592 Stock option exercise 16,956 17 ( 17 ) - Stock option and RSU-related compensation expense and common shares issued upon conversion of RSUs 221,665 222 221,795 222,017 Net (loss) ( 7,493,408 ) ( 7,493,408 ) Balance, June 30, 2022 2,227,030 $ 2,227 $ 122,121,037 $ 122,121 $ 117,510,009 $ - $ - $ ( 117,008,988 ) $ 625,369 Common shares issued in connection with conversion of note payable 10,459,354 10,460 4,966,013 4,976,473 Common shares issued upon exercise of warrants 12,745,068 12,746 5,640,798 5,653,544 Stock option and RSU-related compensation expense and common shares issued upon conversion of RSUs 500,000 500 385,572 386,072 Net (loss) ( 8,397,208 ) ( 8,397,208 ) Balance, September 30, 2022 2,227,030 $ 2,227 145,825,459 $ 145,827 $ 128,502,392 $ - $ - $ ( 125,406,196 ) $ 3,244,250 Preferred stock and common shares issued in connection with issuance of preferred stock series e 1,100,000 1,100 880,000 880 1,309,490 ( 193,847 ) ( 17,623 ) 1,100,000 Stock option and RSU-related compensation expense and common shares issued upon conversion of RSUs 1,225,000 1,225 789,810 791,035 Net (loss) ( 3,986,455 ) ( 3,986,455 ) Balance, December 31, 2022 3,327,030 $ 3,327 147,930,459 $ 147,932 $ 130,601,692 $ ( 193,847 ) $ - $ ( 129,410,274 ) $ 1,148,830 The accompanying notes are an integral part of these condensed consolidated financial statements. THE ALKALINE WATER COMPANY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Nine Months December 31, 2022 December 31, 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 19,877,071 ) $ ( 28,540,132 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation expense 610,162 477,045 Shares issued and vested, options and RSU expensed for employee and non-employee services 2,512,640 6,966,005 Amortization of debt discount 1,598,855 - Debt conversion expense 2,405,612 - Non-cash interest expense 47,472 - Non-cash lease expense ( 3,569 ) 9,624 Changes in operating assets and liabilities: Accounts receivable ( 847,218 ) 684,980 Inventory ( 154,053 ) ( 4,421,839 ) Prepaid expenses and other current assets 381,101 ( 1,224,743 ) Accounts payable 3,217,482 333,821 Accrued expenses 188,627 ( 225,028 ) NET CASH USED IN OPERATING ACTIVITIES ( 9,919,960 ) ( 25,940,267 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets ( 787,817 ) ( 493,329 ) CASH USED IN INVESTING ACTIVITIES ( 787,817 ) ( 493,329 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (repayment of) revolving financing, net ( 652,554 ) 2,102,189 Proceeds from sale of common stock, net 5,268,592 4,995,250 Proceeds from sale of preferred stock, net 1,100,000 - Proceeds for the exercise of warrants, net 5,653,544 13,390,313 Proceeds for the exercise of stock options, net - 108,180 CASH PROVIDED BY FINANCING ACTIVITIES 11,369,582 20,595,932 NET CHANGE IN CASH 661,805 ( 5,837,664 ) CASH AT BEGINNING OF PERIOD 1,531,062 9,130,956 CASH AT END OF PERIOD $ 2,192,867 $ 3,293,292 INTEREST PAID $ 892,687 $ 411,866 TAXES PAID $ - $ - 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. The Company also sells a line of Alkaline88® Sports Drinks and hemp-derived CBD bottled water under the brand name "Alkaline88CBD™". Our hemp-derived CBD bottled water is 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 The consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in U.S. dollars, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. Principles of consolidation The consolidated financial statements include the accounts of The Alkaline Water Company Inc. (a Nevada Corporation) and its wholly owned subsidiary, Alkaline 88, LLC (an Arizona Limited Liability Company). All significant intercompany balances and transactions have been eliminated. The Alkaline Water Company Inc. and Alkaline 88, LLC will be collectively referred herein to as the "Company". Any reference herein to "The Alkaline Water Company Inc.", the "Company", "we", "our" or "us" is intended to mean The Alkaline Water Company Inc., including its Alkaline 88, LLC subsidiary indicated above, unless otherwise indicated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. 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. 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 $ 2,192,867 and $ 1,531,062 in cash at December 31, 2022 and March 31, 2022, 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, 2022 and March 31, 2022: December 31, March 31, 2022 2022 Trade receivables $ 9,414,283 $ 8,397,065 Less: Allowance for doubtful accounts ( 640,000 ) ( 470,000 ) Net accounts receivable $ 8,774,283 $ 7,927,065 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 4. As of December 31, 2022, and March 31, 2022, inventory consisted of the following: December 31, 2022 March 31, 2022 Raw materials $ 5,143,712 $ 4,734,914 Finished goods 3,594,005 3,848,750 Total inventory $ 8,737,717 $ 8,583,664 As of March 31, 2022, the presentation in the table above has been corrected for a transposition error as the amounts for raw materials and finished goods. 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 . 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 $ 3,021,744 and $ 4,105,279 for the three months ended December 31, 2022 and 2021, respectively and $ 10,555,978 and $ 11,824,231 for the nine months ended December 31, 2022 and 2021, respectively. Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company's retail customers or distributors including, but not limited to the following: (a) discounts granted off list prices to support price promotions to end-consumers by retailers; (b) reimbursements given to the Company's distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; and (c) the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers, club stores and/or wholesalers; The Company's promotional allowance programs with its retailers or distributors are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, typically ranging from one week to one year. The Company's promotional and other allowances are calculated based on various programs with retailers and distributors, and accruals are established at the time of initial product sale for the Company's anticipated liabilities. The Company believes that adequate provision has been made for cash discounts, returns and spoilage based on the Company's historical experience. Disaggregated Net Revenues The following table reflects disaggregated net revenue by sales channel for the three months ended December 31, 2022 and December 31, 2021 are as follows: December 31, 2022 December 31, 2021 Retailers $ 10,828,060 $ 9,781,170 Distributors 4,904,169 3,188,802 Ecommerce/Other 142,738 130,076 Total Net Revenue $ 15,874,967 $ 13,100,048 The following table reflects disaggregated net revenue by sales channel for the nine months ended December 31, 2022 and December 31, 2021 are as follows: December 31, 2022 December 31, 2021 Retailers $ 34,640,713 $ 29,402,105 Distributors 15,757,777 9,767,904 Ecommerce/Other 878,886 514,456 Total Net Revenue $ 51,277,376 $ 39,684,465 Concentration Risks We have 2 major customers that together account for 23 % ( 13 % and 10 %, respectively) of accounts receivable at December 31, 2022, 3 customer that accounts for 42 % ( 17 %, 15 %, and 10 % respectively) of total revenues for the three months ended December 31, 2022 and 2 customers that accounts for 30 % ( 17 % and 13 %, respectively) of the total revenues earned for the nine months ended December 31, 2022. The Company has 1 vendors that accounts for 17 % of purchases for the three months ended December 31, 2022 and 2 vendors that accounted for 38 % ( 27 %,and 11 % respectively) of purchases for the nine months ended December 31, 2022. The Company had 2 major customers that together accounted for 32 % ( 17 % and 15 %, respectively) of accounts receivable at December 31, 2021, 2 customer that accounted for 34 % ( 17 % and 17 %, respectively) of total revenues for the three months ended December 31, 2021 and 2 customers that accounted for 33 % ( 19 % and 14 %, respectively) of the total revenues earned for the nine months ended December 31, 2021. The Company had 3 vendors that accounted 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. 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 8,679,234 and 4,033,949 shares relating to options and 1,805,000 and 780,009 shares relating to warrants at December 31, 2022 and 2021, respectively that were not included in the diluted earnings per share calculation because they were antidilutive. Business Segments The Company operates as a single operating segment for purposes of presenting financial information and evaluating performance. As such, the accompanying consolidated financial statements present financial information in a format that is consistent with the internal financial information used by management. 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, 2022, and 2021, 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 months and nine months ended December 31, 2021 have been corrected for the following: an adjustment to reclassify Sales and marketing expenses of $ 2,010,352 for the three months ended December 31, 2021 and $ 4,795,278 for the nine months ended December 31, 2021 as a reduction of Revenue as such amounts were related to consideration payable to a customer which the Company subsequently determined was not for distinct goods or services received. The Company assessed the materiality of the misstatement quantitatively 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, total Revenue decreased from $ 15,110,400 to $ 13,100,048 for the three months ended December 31, 2021 and from $ 44,479,743 to $ 39,684,465 for the nine months ended December 31, 2021 with a corresponding decrease of Gross Profit from $ 4,982,256 to $ 2,971,904 for the three months ended December 31, 2021 and from $ 14,949,173 to $ 10,153,895 for the nine months ended December 31, 2021. The correction had no impact on Total operating loss or Net loss for either the three or nine months ended December 31, 2021. Recent Accounting Pronouncements Standards Required to be Adopted in Future Years. The Company has evaluated recent accounting pronouncements through December 31, 2022 and believes that none of them will have a material effect on our consolidated financial statements. NOTE 2 - GOING CONCERN The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in developing its business plan and building its initial customer and distribution base for its products. As a result, the Company incurred accumulated net losses from Inception (June 19, 2012) through the period ended December 31, 2022 of ($ 129,410,274 ). In addition, the Company's development activities since inception have been financially sustained through debt and equity financing. These factors raise substantial doubt about the Company's ability to continue as a going concern within one year from the of the date that the financial statements are issued. The Company's cash position may not be sufficient to support the Company's daily operations. Management plans to raise additional funds by way of a private or ongoing public offering. While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise additional funds, there can be no assurances to that effect. Should the Company fail to raise additional capital, it may be compelled to reduce the scope of its planned future business activities. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following at: December 31, 2022 March 31, 2022 Machinery and equipment $ 6,004,239 $ 4,766,303 Office equipment 55,439 55,439 Less: accumulated depreciation ( 4,231,108 ) ( 3,620,945 ) Property and equipment, net $ 1,858,570 $ 1,200,797 Depreciation expense for the three months ended December 31, 2022 and December 31, 2021 was $ 203,777 and $ 159,014 , respectively. Depreciation expense for the nine months ended December 31, 2022 and December 31, 2021 was $ 610,162 and $ 477,045 , respectively. NOTE 4 - REVOLVING FINANCING On February 1, 2017, we entered into a credit and security agreement (the "Credit Agreement") with SCM Specialty Finance Opportunities Fund, L.P. ("SCM" or "Lender"), which subsequently changed its name to CNH Finance Fund I, L.P. The Credit Agreement provides our company with a revolving credit facility (the "Revolving Facility"), the proceeds of which are to be used to repay existing indebtedness of our company, transaction fees incurred in connection with the Credit Agreement and for the working capital needs of our company. Under the terms of the Credit Agreement, SCM has agreed to make cash advances to our company in an aggregate principal at any one time outstanding not to exceed the lesser of (i) $10 million (the "Revolving Loan Commitment Amount") and (ii) the Borrowing Base (defined to mean, as of any date of determination, 85% of net eligible billed receivables plus 65% of eligible unbilled receivables, minus certain reserves). The advanced under the credit agreement as of December 31, 2022 was $ 6,391,316 . The Credit Agreement expires on July 3, 2023, 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, 2022 and March 31, 2022 was 9.5% and 8.0%, respectively. To secure the payment and performance of the obligations under the Credit Agreement, we granted to SCM a continuing security interest in all of our assets and agreed to a lockbox account arrangement in respect of certain eligible receivables. The Company agreed to pay to SCM monthly an unused line fee in amount equal to 0.083 % per month of the difference derived by subtracting (i) the average daily outstanding balance under the Revolving Facility during the preceding month, from (ii) the Revolving Loan Commitment Amount. The unused line fee will be payable monthly in arrears. We also agreed to pay SCM as additional interest a monthly collateral management fee equal to 0.35 % per month calculated on the basis of the average daily balance under the Revolving Facility outstanding during the preceding month. The collateral management fee will be payable monthly in arrears. Upon a termination of the Revolving Facility, we agreed to pay SCM a termination fee in an amount equal to 1 % of the Revolving Loan Commitment Amount if the termination occurs before July 3, 2023. We must also pay certain fees in the event that receivables are not properly deposited in the appropriate lockbox account. The interest rate will be increased by 5 % in the event of a default under the Credit Agreement. Events of default under the Credit Agreement, some of which are subject to certain cure periods, include a failure to pay obligations when due, the making of a material misrepresentation to SCM, the rendering of certain judgments or decrees against our company and the commencement of a proceeding for the appointment of a receiver, trustee, liquidator or conservator or filing of a petition seeking reorganization or liquidation or similar relief. The Credit Agreement contains customary representations and warranties and various affirmative and negative covenants including the right of first refusal to provide financing for our company and the financial and loan covenants, such as the loan turnover rate, minimum EBITDA, fixed charge coverage ratio and minimum liquidity requirements. NOTE 5 - 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, 2022, the Company has paid $ 1,750,000 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 each annual vested Series S Preferred Stock in the amount of $ 2,227,030 , is being expensed over twelve months, for the three and nine months ended December 31, 2022, the expense relating to the Series S Preferred Stock was $ 556,758 and $ 1,670,273 , respectively. In the three and nine months ended December 31, 2022, the Company recognized an expense of $ 806,758 and $ 2,420,273 in connection with the agreement and anticipates recognizing an expense of $ 806,758 in the quarter ended March 31, 2023 for a total expense of $ 3,227,030 for the year ended March 31,2023. In the years ended March 31, 2024 and March 31, 2025, the Company anticipates recognizing an expense in the amount of $ 3,227,030 and $ 185,586 respectively. Series E Convertible Preferred Stock On November 23, 2022, we entered into private placement subscription agreements, whereby we issued an aggregate of 1,100,000 shares of our Series E Preferred Stock ("Series E Preferred Stock") at a deemed price of $ 1.00 per share of Series E Preferred Stock for gross proceeds of $ 1,100,000 . Pursuant to the subscription agreements, in consideration for the subscribers' execution and delivery of the subscription agreements, we also issued an aggregate of 880,000 shares of our common stock (the "Commitment Shares") at a deemed price of $ 0.25 per Commitment Share. Holders of the Series E Preferred Stock (the "Holders") are entitled to receive dividends at the rate per share (as a percentage of the stated value per share) of 6 % per annum, payable on each anniversary date of the original issue date of shares of Series E Preferred Stock held by applicable Holders in a number of shares of our common stock per share of the Series E Preferred Stock equal to the quotient obtained by dividing the dollar amount of such dividend payment by applicable market price. As of December 31, 2022 the company has a dividend payable of $ 5,500 . A stated value of each share of the Series E Preferred Stock is $ 1.00 . Any accrued but unpaid dividends on the Series E Preferred Stock being converted will be paid in our common stock upon the conversion of the Series E Preferred Stock. If we pay a dividend on our common stock while the shares of the Series E Preferred Stock are outstanding, the Holders will be entitled to receive a dividend per share of Series E Preferred Stock equal to the dividend per share of our common stock. Such dividend will be payable on the same terms and conditions as the payment of the dividend on our common stock. Each share of Series E Preferred Stock will be convertible, at any time after the date that is twelve months from the original issue date, at our option, into that number of units (each, a "Unit") determined by dividing the stated value of such share of Series E Preferred Stock by $ 0.25 (the "Conversion Price"). Each Unit will consist of one share of our common stock and one-half of one common stock purchase warrant with each whole common stock purchase warrant entitling the holder thereof to acquire one additional share of our common stock at an exercise price equal of 125% of the Conversion Price for a period of three years following the conversion date. The Company identified the conversion into a Unit (one share of preferred stock and one-half warrant) as an embedded beneficial conversion feature (ASC 470), thus the Company valued (using Black-Scholes option-pricing model for common stock options and warrants) each component of the Unit. The Warrant was valued at in the aggregate $ 211,470 and the Common Stock was valued at $ 888,530 . Accordingly, during the three-months ended December 31, 2022, the Company recognized an aggregate beneficial conversion feature of $ 211,470 upon issuance of the Series E Preferred Stock with a $ 211,470 increase in discount on preferred stock and a corresponding increase in additional paid-in capital. The value of the warrant is being amortized over 1 year (the period from issuance to the earliest allowable conversion date. As of December 31, 2022, the discount on preferred stock was $ 193,847 . A Holder may, at its option, at any time and from time to time after January 31, 2023, convert all, but no less than all, of shares of Series E Preferred Stock held by such Holder into that number of Units determined by dividing the stated value of such shares of Series E Preferred Stock by the Conversion Price. Each share of the Series E Preferred Stock will automatically convert, upon the occurrence of a Fundamental Transaction (as defined below), into that number of Units determined by dividing the stated value of such share of Series E Preferred Stock by the Conversion Price. The conversion right is subject to the beneficial ownership limitation, which will be 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of shares of our common stock issuable upon conversion of the Series E Preferred Stock held by the applicable Holder. The Holder may increase or decrease the beneficial ownership limitation upon not less than 61 days' prior notice to our company, but in no event will such beneficial ownership exceed 9.99%. Except with respect to a Fundamental Transaction, as required by law, or as required by the articles of incorporation of our company, the Holders and the holders of our common stock will be entitled to notice of any stockholders' meeting and to vote as a single class upon any matter submitted to the stockholders for a vote, on the following basis: (i) holders of our common stock will have one vote per share of our common stock held by them; and (ii) holders of Series E Preferred Stock will have one vote per share of Series E Preferred Stock held by them. With respect to a Fundamental Transaction, the Holders will be entitled to notice of any stockholders' meeting and to vote as a separate class and will have one vote per share of Series E Preferred Stock by them. A Fundamental Transaction means (i) any merger or consolidation of our company with or into another entity (but excluding a merger effected solely for the purpose of changing the jurisdiction of the incorporation of our company or changing the name of our company or liquidating, dissolving or winding-up one or more subsidiaries of our company), (ii) any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of our company's assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by our company or another individual or entity) is completed pursuant to which holders of our common stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding shares of our common stock, or (v) one or more related transactions consummating a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off, merger or scheme of arrangement) with another individual or entity or group of individuals or entities whereby such other individual or entity or group acquires more than 50% of the outstanding shares of our common stock (not including any shares of common stock held by the other individual or entity making or party to, or associated or affiliated with the other individual or entity making or party to, such stock or share purchase agreement or other business combination). Common Stock On March 4, 2022, the Company entered into private placement subscription agreements, whereby it issued unsecured convertible notes (the "Notes") in the aggregate principal amount of $ 3.8 million. The Notes were to mature on September 4, 2022 and accrue interest at 8 % per annum, which interest will be payable on the date of the maturity. Pursuant to the terms of the Notes, the holders of the Notes may convert all or any part of the principal amount outstanding under the Notes into units (the "Conversion Units") at a conversion price of $ 0.80 per Conversion Unit. Each Conversion Unit will consist of one share of the Company's common stock and one share purchase warrant. Each share purchase warrant would entitle the holder thereof to acquire one share of the Company's common stock at a price of $1.10 per share until March 4, 2025. Pursuant to the aforementioned subscription agreements, in consideration for the subscribers' execution and delivery of the subscription agreements, the Company issued an aggregate of 475,000 shares which the Company recognized a debt discount in the amount of $ 345,455 which will be amortized over the term of the Notes. For the three and six months ended September 30, 2022, the Company recognized interest expense in connection with the amortization of the debt discount of $ 121,619 and $ 294,346 , respectively. In addition, the Company recognized a beneficial conversion feature in connection with the warrants in the amount of $ 1,524,750 which will be amortized over the term of the Notes. For the three and six months ended September 30, 2022, the Company recognized interest expense in connection with the amortization of the beneficial conversion feature of $ 542,133 and $ 1,304,508 , respectively. On July 25, 2022, the Company entered into debt settlement agreements the holders of the Notes in which the Company issued 10,459,354 common shares in settlement of the Company's Notes in an aggregate amount of $ 3,869,962 (principal of $ 3,800,000 and accrued and unpaid interest of $ 69,962 ) at settlement price per share of $ 0.37 . The original conversion price per share of the Notes was $ 0.80 per share and the stock price at the date of the debt settlement was $ 0.429 per share. The settlement of the debt at $ 0.37 per share resulted in a non-cash debt settlement expense of $ 2,405,612 . Upon conversion of the Notes, the holders of the Notes received warrants to purchase 10,459,354 common shares in the Company at $ 1.10 per share. The Company lowered the warrant exercise price from $ 1.10 to $ 0.44 for thirty days. The holders of the Notes exercised all of the warrants, resulting in the Company receiving net proceeds of $ 4,602,116 and the issuance of 10,459,354 shares of its common stock. In connection with this exercise of the warrants, the Company expensed the unamortized amount of the above referenced beneficial conversion feature recognized in connection with the issuance of the warrants. Share Issuances Effective as of August 29, 2022, we issued an aggregate of 2,285,714 shares of our common stock upon exercise of our common stock purchase warrants with an exercise price of $ 0.46 per share for aggregate gross proceeds to the Company of $ 1,051,428 . These warrants had an original exercise price of $ 1.25 per share. The Company reduced the exercise price of these warrants from $ 1.25 to $ 0.46 per share for a period of 30 days, commencing on August 9, 2022, in order to entice the holders of these warrant to exercise their warrants. Klutch Financial Corp., a company wholly owned by Aaron Keay, a director of the Company, exercised their 1,000,000 warrants during the aforementioned period allowed for the exercise price reduction. The Company received net proceeds of $ 460,000 in connection with the exercise of these 1,000,000 warrants by Klutch Financial Corp. Restricted Awards On November 16, 2022, we granted an award of 2,550,000 shares of our common stock as a "restricted award" under our 2020 Equity Incentive Plan to certain directors, officers and employees of the Company. Of these restricted awards: (i) 2,450,000 vest as to 50% on the grant date and 50% on the six month anniversary of the grant date; and (ii) 100,000 vest as to 50% on the six month anniversary of the grant date and 50% on the one year anniversary of the grant date. NOTE 6 - OPTIONS Options Issuance of Options On November 16, 2022, we granted an aggregate of 900,000 stock options to certain directors, officers and employees of the Company for the purchase of up to 900,000 shares of our common stock pursuant to our 2020 Equity Incentive Plan. Each stock option is exercisable at a price of US$ 0.25 per share until November 16, 2032. All of these stock options vest 50% on each of the first and second anniversary of their grant date. The Company valued the stock options (using Black-Scholes option-pricing model for common stock options and warrants) at an implied price of $ 0.22 or an aggregate value of $ 194,400 which will be expensed over the 2-year vesting period. The Company recorded an expense of $ 8,100 in the three months ended December 31, 2022. Forfeiture of Options During the quarter, there were 948,000 options from 11 holders that were forfeited due to the Company’s reduced headcount. The forfeiture of these options resulted in a reversal of prior stock option expense in the amount of $ 394,044 . In addition, on November 16, 2022, the Company cancelled a previously issued granted to Mr. Aaron Keay, a director of the Company, of 750,000 stock options. The Company reversed the prior expense of $ 14,187 during the three months ended December 31, 2022. NOTE 7 - LEASES 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. As of April 1, 2022, the Company entered into a lease for 1,520 square feet of warehouse space from a third party through March 2025 at a rate of $ 1,812 per month for the first twelve months, then at a rate of $ 1,867 per month for the last next twelve months and then at a rate of $ 1,923 for the last twelve months. 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 $ 60,737 and the lease liability for this lease was $ 60,737 , 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, 2022 was $ 66,563 and $ 188,094 , respectively. Operating lease expense for the three and nine months ended December 31, 2021 was $ 92,481 and $ 285,007 , respectively. Operating Leases: December 31, 2022 Operating lease right-of-use asset - current portion $ 159,384 Operating lease right-of-use asset - non-current portion 29,862 Total Operating lease right-of-use asset $ 189,246 Operating lease liability - current portion $ 176,251 Operating lease liability - non-current portion 32,840 Total Operating lease liability $ 209,091 Weighted average remaining lease term (in years): Operating leases 1.5 Weighted average discount rate: Operating leases 7 % Supplemental cash flow information related to leases is as follows: Maturities of undiscounted lease liabilities as of December 31, 2022 are as follows: Operating Leases Year ending March 31, 2023 $ 54,018 Year ending March 31, 2024 141,552 Year ending March 31, 2025 23,075 Total lease payments 218,645 Adjusted for interest ( 9,554 ) Total lease obligations $ 209,091 NOTE 8 - COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not believe that the disposition of matters that are pending or asserted will have a material effect on its consolidated financial statements. NOTE 9 – RELATED PARTY TRANSACTIONS Effective as of August 29, 2022, the Company issued an aggregate of 2,285,714 shares of its common stock upon exercise of common stock purchase warrants with an exercise price of $ 0.46 per share for aggregate gross proceeds to the Company of $ 1,051,428 . These warrants had an original exercise price of $ 1.25 per share. The Company reduced the exercise price of these warrants from $ 1.25 to $ 0.46 per share for a period of 30 days, commencing on August 9, 2022, in order to entice the holders of these warrants to exercise their warrants. Klutch Financial Corp., a company wholly owned by Aaron Keay, a director of the Company, exercised its 1,000,000 warrants during the aforementioned period allowed for the exercise price reduction. The Company received net proceeds of $ 460,000 in connection with the exercise of these 1,000,000 warrants by Klutch Financial Corp. On November 16, 2022, the Company cancelled a previously issued grant to Mr. Aaron Keay, a director of the Company, of 750,000 stock options. The Company reversed the prior expense of $ 14,187 during the three months ended December 31, 2022. On November 16, 2022, the Company granted awards of and aggregate of 2,550,000 shares of its common stock as a "restricted award" under our 2020 Equity Incentive Plan to certain directors, officers and employees of the Company. Of these restricted awards: (i) 2,450,000 vest as to 50% on the grant date and 50% on the six-month anniversary of the grant date; and (ii) 100,000 vest as to 50% on the six-month anniversary of the grant date and 50% on the one-year anniversary of the grant date. The restricted stock awards granted to the officers and directors of the Company totaled 2,200,000 . On November 16, 2022, the Company granted an aggregate of 900,000 stock options to certain directors, officers and employees of the Company for the purchase of up to 900,000 shares of its common stock pursuant to the 2020 Equity Incentive Plan. Each stock option is exercisable at a price of US$ 0.25 per share until November 16, 2032. All of these stock options vest 50% on each of the first and second anniversary of their grant date. The stock options granted to the directors and officers of the Company totaled 750,000 . On November 23, 2022, the Company entered into private placement subscription agreements, whereby it issued an aggregate of 1,100,000 shares of its Series E Preferred Stock ("Series E Preferred Stock") at a deemed price of $ 1.00 per share of Series E Preferred Stock for gross proceeds of $ 1,100,000 . Pursuant to the subscription agreements, in consideration for the subscribers' execution and delivery of the subscription agreements, the Company also issued an aggregate of 880,000 shares of its common stock (the "Commitment Shares") at a deemed price of $ 0.25 per Commitment Share. Mr. David Rauch, before he become a director of the Company, purchased $ 100,000 of the Series E Preferred Stock transaction and as part of the transaction received 80,000 Commitment shares. In addition, the general counsel of the Company purchased $ 500,000 of the Series E Preferred Stock and as part of the transaction received 400,000 Commitment shares. NOTE 10 - SUBSEQUENT EVENTS On January 11, 2023, the Company issued an aggregate of 78,821 shares of its common stock in consideration for $ 40,000 of services rendered to the Company at an average price of $ 0.51 per share.