The Alkaline Water pany (WTER) - 2022 Q4 - Annual Report

FORM 10-K Filing Information Registrant Information Key identification details for The Alkaline Water Company Inc.'s Form 10-K, including filing year, commission number, and filer status - The Alkaline Water Company Inc. filed its annual report on Form 10-K for the fiscal year ended March 31, 2022[2] Registrant Key Details | Detail | Value | | :----- | :---- | | Fiscal Year Ended | March 31, 2022 | | Commission File Number | 001-38754 | | State of Incorporation | Nevada | | Principal Executive Offices | 8541 E. Anderson Drive, Suite 100, AZ 85255 | | Registrant's Telephone Number | (480) 656-2423 | | Common Stock Trading Symbol | WTER | | Exchange Registered | The Nasdaq Stock Market LLC | | Well-known Seasoned Issuer | No | | Required to File Reports | Yes | | Filed All Required Reports (past 12 months) | Yes | | Submitted Interactive Data File (past 12 months) | Yes | | Filer Status | Non-accelerated filer, Smaller reporting company | | Shell Company | No | | Market Value of Non-Affiliate Voting Equity (as of last business day of Q2) | $154,664,451.60 (97,273,240 shares at $1.59/share) | | Shares Outstanding (as of July 14, 2022) | 122,121,037 | PART I ITEM 1. BUSINESS Overview of The Alkaline Water Company, its Alkaline88® and CBD-infused products, distribution, and strategic growth plans - The Alkaline Water Company, founded in 2012, is headquartered in Scottsdale, Arizona, and is known for its Alkaline88® alkaline water brand[14] - The company's flagship product, Alkaline88®, is available in various sizes and eco-friendly aluminum packaging, utilizing a proprietary electrolysis process to achieve 8.8 pH balanced water[14] - The company has expanded its product line to include CBD water and Alkaline88® Sports Drinks through its A88 Infused Beverage Division Inc., with CBD products sold in compliance with the 2018 Farm Bill[14][18] - Alkaline88® products are available in over 75,000 stores across all 50 U.S. states, the District of Columbia, the Caribbean, Mexico, and Canada, distributed through national distributors, direct retail, and Direct Store Distributors (DSDs)[15] - The company's operating subsidiary, Alkaline 88, LLC, manages marketing, distribution, and manufacturing, with co-packing agreements with nine bottling companies, providing a current capacity exceeding $14.0 million per month wholesale[16] - Key operational milestones for the next 12 months include expanding the broker network, adding DSD partners in strategic markets, increasing manufacturing capacity (adding 3 new co-packers for Alkaline88 and 1-3 for A88 Infused), and expanding retail, on-premise, and international distribution[19][20][21][22][23] - The company's capital considerations include a sales agreement with Roth Capital Partners, LLC to sell up to $20,000,000 in common stock. As of March 31, 2022, $260,844 was raised, with an additional $631,203 subsequent to that date[23] - The company's ability to continue as a going concern depends on obtaining adequate capital, and it has initiated a cost-reduction strategy, anticipating funding from cash on hand, warrant exercises, debt settlements, a line of credit, and the sales agreement[24] Forward-Looking Statements The report includes forward-looking statements on earnings, revenue, and operations, subject to inherent risks and uncertainties - The report contains forward-looking statements regarding projections of earnings, revenue, future operations, new services, economic conditions, and beliefs, which are subject to change and inherent risks and uncertainties[9][10] - Key risk factors impacting future financial condition and results include lack of working capital, inability to raise additional financing, accounting policy estimates, deteriorating economic conditions, adverse legislation, operational management difficulties, inability to achieve sales levels, and unavailability of capital for expenditures[12] Corporate Overview Overview of the company's founding, flagship products, distribution channels, and operational structure - The Alkaline Water Company (NASDAQ and CSE: WTER) was founded in 2012 and is headquartered in Scottsdale, Arizona[14] - Its flagship product, Alkaline88®, is a premier alkaline water brand available in various sizes and eco-friendly aluminum packaging, produced using a proprietary electrolysis process for 8.8 pH balanced water[14] - The company launched A88 Infused Beverage Division Inc., which includes CBD water and Alkaline88® Sports Drinks, with hemp-derived CBD products sold in compliance with the 2018 Farm Bill[14] - Products are available in over 75,000 stores across all 50 U.S. states, the District of Columbia, the Caribbean, Mexico, and Canada[15] - Distribution channels include large national distributors (UNFI, KeHE, C&S, Core-Mark), direct sales to retail clients (Walmart, CVS, Kroger, etc.), and Direct Store Distributors (DSDs) in selected markets[15] - Alkaline 88, LLC, the operating subsidiary, handles marketing, distribution, and manufacturing, with co-packing agreements with nine bottling companies, providing a current capacity exceeding $14.0 million per month wholesale[16] - A88 Infused Products, Inc. was formed in September 2019 to focus on brand extension and product innovations in the CBD-infused products category, selling Alkaline88® CBD infused bottled water through e-commerce and brick-and-mortar locations[18] Plan of Operations Strategic initiatives for expanding distribution, increasing manufacturing capacity, and securing capital for future growth - The company plans to expand its broker network, adding new brokers for on-premise and international sales channels[19] - Strategic initiatives include adding Direct Store Distributors (DSD) partners in the Northeast, Northwest, and Mid-Atlantic to boost convenience store penetration[20] - Manufacturing capacity will increase with three new co-packer facilities for Alkaline88® and one to three new co-packers for A88 Infused products to reduce freight costs and meet growth objectives[21] - Retail distribution will expand by securing new customers and increasing product SKUs with existing customers[22] - On-premise distribution will be expanded through new personnel, brokers, and distributors targeting hotels, national parks, airports, universities, and other facilities[23] - International sales initiatives in Canada, Mexico, the Caribbean, and potential parts of Asia will be supported by new brokers, distributors, and co-packers[23] - The company plans to hire three to five more corporate-level support staff for hospitality/on-premise and DSD sales[23] - Capital considerations include a sales agreement with Roth Capital Partners, LLC to sell up to $20,000,000 in common stock. As of March 31, 2022, $260,844 was raised, with an additional $631,203 subsequent to that date[23] - The company's ability to operate as a going concern relies on obtaining adequate capital, with plans to fund operations through a cost-reduction strategy, cash on hand, warrant exercises, debt settlements, a line of credit, and the sales agreement[24] Distribution Method for Our Products The company utilizes a multi-channel distribution network to reach a wide range of retailers and consumers - The company uses a broker-distributor-retailer network, targeting chain and independent health food stores, grocery stores, convenience stores, drug stores, and the mass retail market[25] - Products are shipped to distribution centers via common carriers, reaching over 60,000 retailers through natural food distributors (KeHE, UNFI) and 110,000 retailers through convenience channel distributors (Core-Mark, McLane, DSDs)[26] - Direct deliveries are made to the distribution centers of large national and regional grocery, drug, and specialty retailers, including Walmart, Sam's Club, CVS, and Kroger companies, covering over 70% of the top 75 U.S. grocery retailers[27] Dependence on Few Customers The company's financial performance is significantly influenced by a small number of major customers - Three major customers accounted for 43% of accounts receivable (19%, 12%, and 12% respectively) at March 31, 2022[28] - Two customers collectively accounted for 34% of total revenues (19% and 15% respectively) for the year ended March 31, 2022[28] - A reduction or delay in orders from these major customers could materially adversely affect the company's business, operating results, and financial condition[29] Marketing The company's marketing strategy focuses on leveraging its broker network, promotional activities, and an in-house team for brand development - The company plans to continue marketing through its broker network and leverage promotional activities of competitors regarding alkaline water benefits[30] - Initial marketing efforts will support retailers and the distribution network with point-of-sale displays and materials, with an extensive public relations program to be added as markets dictate[30] - A chief marketing officer and an in-house marketing team have been hired to lead brand development, trade promotion, and public relations for both Alkaline88® and Alkaline88®CBD product lines[31] Competition The company operates in highly competitive beverage and CBD markets, facing diverse competitors from various segments - The commercial retail beverage industry, especially the non-alcoholic segment, is highly competitive, with participants varying in size, market share, and capital access[32] - The company competes generally with all liquid refreshments, including bottled water and specialty beverages like CORE® Hydration, SOBE®, Snapple®, and Vitaminwater®[32] - Indirect competition comes from major international beverage companies such as The Coca-Cola Company®, PepsiCo, Inc., and The Nestlé Group, which have significant financial resources and distribution channels[33] - Direct competition in the alkaline water market includes brands like Eternal, Essentia, Core, Icelandic, Real Water, AQUAHydrate, Mountain Valley, Qure, Penta, and Alka Power[34] - The CBD and hemp extract market is also highly competitive and evolving, with direct competitors including Charlotte's Web Holdings Inc., PureKana, and cbdMD[35] Intellectual Property The company actively seeks to protect its brand and product designs through trademarks and other intellectual property laws - The company aims to obtain and aggressively assert trademark protection in the U.S. for slogans and product designs, and protect intellectual property through trade secret, unfair competition, trademark, and copyright laws[36] - The trademark for Alkaline88® is registered in the USA, Canada, Mexico, United Kingdom, and Hong Kong[36] - Other registered trademarks used in marketing include Clean Beverage, Smooth Hydration, Ionized H20, A88, Hello Hydration, and A88 Infused[37] Employees The company maintains a lean corporate structure, relying on a mix of full-time employees, contract brokers, and plans for strategic management expansion - The company employs 43 full-time and 2 part-time employees, in addition to its President/CEO Frank Lazaran and CFO David A. Guarino[39] - Retail brokers in the U.S. are paid on a contract basis, and management oversees corporate administration, business development, and research[39] - Plans include expanding management to retain skilled directors, officers, and employees, and forming an independent network of contract sales and regional managers, and a promotional support team[39] ITEM 1A. RISK FACTORS Significant risks that could adversely affect the company's business, operating results, and financial condition, potentially leading to a loss of investment - The company faces significant risks in realizing consistent revenues and achieving profitability, requiring broad market acceptance of its products[41] - The company's historical recurring losses and negative cash flows raise substantial doubt about its ability to continue as a going concern, with an accumulated deficit of $108,815,742 as of March 31, 2022[43] - Disclosure controls and procedures and internal control over financial reporting were deemed ineffective as of March 31, 2022, due to inadequate segregation of duties, insufficient accounting resources, and delays in ERP system implementation[45][46] - The company is highly dependent on additional funds for production, marketing, and distribution, and failure to raise sufficient capital could lead to cessation of operations[49] - The non-alcoholic beverage market is highly competitive, with risks from changing consumer preferences, intense competition from major beverage companies, and alternative non-commercial beverages[55][57][59] - Growth and profitability depend on the performance of third-party brokers and distributors, and the loss of major customers (3 customers accounted for 43% of accounts receivable, 2 for 34% of revenues at March 31, 2022) or vendors (3 vendors accounted for 47% of purchases) could harm the business[62][63][64] - The company is subject to various regulations, including those related to beverage containers, labeling, and the use of hemp in food and beverages, with the FDA currently prohibiting the sale of food and beverages containing hemp-derived CBD[84][85][89][94] - Risks related to the company's stock include potential dilution from additional share issuance, volatile trading on Nasdaq and CSE, and the risk of delisting from Nasdaq due to not maintaining the minimum bid price rule[103][104][106] Risks Related to Our Business Various operational, market, and financial risks that could impede the company's profitability and sustainability - The company's ability to achieve profitability is uncertain, with anticipated operating losses due to development, production, marketing, and sales expenses[41][42] - As of March 31, 2022, the company had an accumulated deficit of $108,815,742, and its ability to continue as a going concern is dependent on obtaining adequate capital[43] - Material weaknesses in internal control over financial reporting include inadequate segregation of duties, insufficient accounting resources, and delays in ERP system implementation, which could affect financial reporting reliability[45][46] - The company needs additional funds for production, marketing, and distribution, and its activities are limited by available capital[49][53] - Changes in the non-alcoholic beverage business environment, consumer preferences, and retail landscape could negatively impact financial results[54] - Intense competition from both direct alkaline water producers and major international beverage companies could limit market share and profitability[55][57] - The alkaline water market is emerging, and there's no guarantee of its expansion or sufficient consumer demand for profitability[60] - Failure to successfully introduce new products or product extensions could prevent long-term profitability[61] - Dependence on third-party brokers and distributors, and the loss of major customers (3 customers for 43% of A/R, 2 for 34% of revenue) or vendors (3 vendors for 47% of purchases) pose significant risks[62][63][64] - Public perception, unproven health benefits of alkaline water, water scarcity, and increases in raw material/packaging costs could negatively impact the business[65][66][67][68] - Unfavorable economic conditions, adverse weather, and health epidemics like COVID-19 could reduce demand and disrupt operations[70][71][72] - Reliance on third-party co-packers for production creates risks related to quality, safety, and supply disruptions[75] - Product contamination, tampering, or quality concerns could adversely affect business, reputation, and financial results[76] - Being a premium beverage, there's no assurance of continued consumer market acceptance, especially if competitors offer lower prices[77] - Periodic claims and litigation could result in unexpected expenses and adverse outcomes[78] - Expansion into international markets (Caribbean, Canada, Mexico, Asia) subjects the company to risks like currency fluctuations, trade barriers, and regulatory changes[80] - Loss of key executive officers (Frank Lazaran, David A. Guarino) could adversely affect the business due to their extensive industry knowledge[81] - Failure to protect information systems against service interruption, data misappropriation, or security breaches could disrupt operations, lead to financial losses, and damage reputation[82] Risks Related to Regulations Applicable to Our Industry Regulatory changes, compliance failures, and evolving laws, particularly for CBD products, pose significant risks to the company's operations - Changes in laws and regulations concerning beverage containers and packaging (e.g., deposits, eco-taxes) could increase costs and reduce profitability[84] - Significant additional labeling or warning requirements or limitations on product availability could inhibit sales[85] - Failure to comply with various federal, state, and local laws and regulations (e.g., Federal Food, Drug, and Cosmetic Act, Federal Trade Commission Act) could increase costs or reduce net operating revenues[86] - Non-compliance with personal data protection laws could lead to adverse publicity, government enforcement actions, and private litigation[88] - The production and sale of hemp-infused beverages are subject to evolving FDA and state laws; the FDA currently has not determined the use of hemp in food to be safe and prohibits the sale of food/beverages containing hemp-derived CBD[89][94] - Compliance with diverse state-based regulatory regimes for hemp, and potential future international regulations, could incur substantial costs[91][92] - The FDA has broad authority and could force product removal, levy fines, or change advertising regulations, materially impacting the business[97] - Government reviews, inquiries, investigations, and actions could harm the business or reputation, even without fines or interruptions[98] Risks Related to Our Intellectual Property Challenges in protecting intellectual property and potential infringement claims pose risks to the company's brand and operations - Protecting intellectual property (trademarks, trade secrets) is difficult and costly, and changes in laws or interpretations could diminish its value[99] - The company may face intellectual property infringement claims, leading to costly and time-consuming litigation, potential damages, injunctions, or loss of rights[100] - Claims by third parties asserting misappropriation or ownership of the company's intellectual property could result in litigation, loss of rights, or diversion of management attention[102] Risks Related to Our Stock Risks associated with the company's common stock, including potential dilution, market volatility, and delisting concerns - Stockholders may experience dilution due to the company's authority to issue additional common and preferred shares[103] - Trading on the Nasdaq Capital Market or Canadian Securities Exchange may be volatile, depressing the market price of common stock[104] - A prolonged decline in stock price could hinder the ability to raise working capital, impacting operations and potentially leading to delisting from Nasdaq due to non-compliance with the minimum bid price rule ($1.00 per share)[105][106] - The company does not intend to pay cash dividends in the near future, meaning stockholders will only receive a return on their shares if they sell them[110] ITEM 1B. UNRESOLVED STAFF COMMENTS This section indicates that there are no unresolved staff comments from the SEC - There are no unresolved staff comments[111] ITEM 2. PROPERTIES The company's principal offices are leased in Scottsdale, Arizona, and it does not own any real estate or other property used in its current business operations - The company's principal offices are located at 8541 E. Anderson Drive, Suite 100, Scottsdale, AZ 85255[112] - The office space is 9,166 square feet, leased from a third party through September 30, 2023, at a current rate of $10,385.08 per month[112] - The company does not own any real estate or other property used in its current business operations[112] ITEM 3. LEGAL PROCEEDINGS The company is not aware of any material pending legal proceedings involving itself, its subsidiaries, or any of its properties - The company is not aware of any material pending legal proceedings to which it or its subsidiaries are a party, or of which any of its properties are the subject[113] - No material proceedings are known to be contemplated by governmental authorities[113] - No material proceedings are known in which any directors, officers, affiliates, or stockholders are adverse parties or have a material adverse interest[114] ITEM 4. MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[115] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Details on the company's common stock market information, equity compensation plans, and absence of recent unregistered securities sales or issuer purchases - The company's common stock (WTER) has been listed on the Nasdaq Capital Market since December 10, 2018, and on the Canadian Securities Exchange since May 19, 2020[117] - As of July 14, 2022, there were approximately 38 holders of record of common stock, with 122,121,037 shares outstanding[119] - The company has not declared any cash dividends since its inception and has no present intention of paying any in the foreseeable future[120] Equity Compensation Plans Summary (as of March 31, 2022) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance (c) | | :------------------------------------------------ | :--------------------------------------------------------------------------------- | :----------------------------------------------------------------- | :----------------------------------------------------------------- | | Equity compensation plans approved by security holders (2013 Equity Incentive Plan) | 1,601,900 | $0.91 | Nil | | Equity compensation plans not approved by security holders (2018 Stock Option Plan) | 2,497,667 | $0.53 | Nil | | Equity compensation plans approved by security holders (2020 Equity Incentive Plan) | 2,501,000 | $1.24 | 6,394,000 | | Total | 6,600,657 | $0.94 | 6,394,000 | - The 2013 Equity Incentive Plan, 2018 Stock Option Plan, and 2020 Equity Incentive Plan are in place to attract and retain employees, consultants, and directors, aligning their interests with stockholders[122][124][125] - No equity securities were sold that were not registered under the Securities Act of 1933 and not previously reported since the beginning of the fiscal year ended March 31, 2022[126] - There were no purchases of equity securities by the issuer or affiliated purchasers[127] ITEM 6. [RESERVED] This item is reserved and contains no information ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's perspective on the company's financial performance, liquidity challenges, and strategies for the fiscal years ended March 31, 2022, and 2021 - The Alkaline Water Company, founded in 2012, is headquartered in Scottsdale, Arizona, and its flagship product is Alkaline88® alkaline water, with an expanded line including CBD water and sports drinks[129] - The company's products are available in over 75,000 stores across the U.S., Caribbean, Mexico, and Canada, distributed through national distributors and direct retail clients[130] - Alkaline 88, LLC, the operating subsidiary, manages marketing, distribution, and manufacturing, with co-packing agreements providing a capacity exceeding $14.0 million per month wholesale[131] - The company's ability to continue as a going concern is dependent on obtaining additional capital to fund operating losses until profitability, despite initiating a cost-reduction strategy and having some cash on hand, anticipated warrant exercises, debt settlements, a line of credit, and a sales agreement[134] - The company has managed to operate successfully throughout the COVID-19 pandemic without material supply chain disruptions, but acknowledges potential risks from reduced demand and operational disruptions[135] - Significant margin contraction occurred due to inflationary pressures in the last 12 months, addressed by a ~9% price increase, potential freight cost reductions from new co-packers, and locking in raw material price breaks[136] Results of Operations (Years Ended March 31, 2022 and 2021) | Metric | Year Ended March 31, 2022 | Year Ended March 31, 2021 | | :--------------------------------------- | :------------------------ | :------------------------ | | Net Revenue | $60,596,247 | $46,069,121 | | Cost of Goods Sold | $45,377,275 | $29,622,361 | | Gross Profit | $15,218,972 | $16,446,760 | | Net Loss (after operating and other expenses) | ($39,364,118) | ($16,409,520) | - Net revenue increased by 32% to $60,596,247 in FY2022 from $46,069,121 in FY2021, driven by expanded distribution[138] - Cost of goods sold increased to 75% of net sales in FY2022 from 64% in FY2021, primarily due to higher raw material and freight costs[139] Operating Expenses (Years Ended March 31, 2022 and 2021) | Expense Category | Year Ended March 31, 2022 | Year Ended March 31, 2021 | | :----------------------------- | :------------------------ | :------------------------ | | Sales and marketing expenses | $32,636,143 | $16,420,520 | | General and administrative expenses | $21,580,739 | $15,860,147 | | Total operating expenses | $54,216,882 | $32,280,667 | - Total operating expenses increased by approximately $21.9 million (68%) in FY2022, with sales and marketing up $16.2 million (due to freight, marketing fees, endorsement fees) and G&A up $5.6 million (due to stock compensation, wage expenses)[140] Working Capital (as of March 31, 2022 and 2021) | Metric | At March 31, 2022 | At March 31, 2021 | | :---------------- | :---------------- | :---------------- | | Current assets | $21,157,421 | $23,271,259 | | Current liabilities | $21,920,686 | $13,244,041 | | Working capital | ($763,265) | $10,027,218 | - Working capital decreased significantly from $10,027,218 in FY2021 to ($763,265) in FY2022, primarily due to a decrease in cash and an increase in accounts payable, revolving financing, and accrued expenses[143][144][145] Cash Flow Summary (Years Ended March 31, 2022 and 2021) | Cash Flow Activity | Year Ended March 31, 2022 | Year Ended March 31, 2021 | | :-------------------------------- | :------------------------ | :------------------------ | | Net Cash used in operating activities | ($31,819,542) | ($14,280,238) | | Net Cash used in investing activities | ($992,009) | ($585,393) | | Net Cash provided by financing activities | $25,211,657 | $19,434,905 | | Net increase (decrease) in cash | ($7,599,894) | $4,569,274 | - Net cash used in operating activities increased to $31.8 million in FY2022 from $14.3 million in FY2021, mainly due to increased net operating loss[147] - Net cash provided by financing activities increased to $25.2 million in FY2022 from $19.4 million in FY2021, driven by proceeds from common stock sales, warrant exercises, and notes payable[149] - Subsequent to March 31, 2022, the company sold 750,240 common shares for $631,203 and completed a public offering of 8,333,334 shares at $0.60 per share for gross proceeds of $5,000,000.40[150][151] - The company has no off-balance sheet arrangements that are material to its financial condition[153] Overview Summary of The Alkaline Water Company's business, product lines, distribution, and manufacturing capabilities - The Alkaline Water Company, founded in 2012, is headquartered in Scottsdale, Arizona, and its flagship product is Alkaline88® alkaline water[129] - Alkaline88® is a leading premier alkaline water brand available in bulk and single-serve sizes, including eco-friendly aluminum packaging, produced via a proprietary electrolysis process for 8.8 pH balanced water[129] - The company launched A88 Infused Beverage Division Inc., which includes CBD water and Alkaline88® Sports Drinks, with hemp-derived CBD products sold in compliance with the 2018 Farm Bill[129][133] - Products are available in over 75,000 stores across all 50 U.S. states, the District of Columbia, the Caribbean, Mexico, and Canada, distributed through national distributors (UNFI, KeHE, C&S, Core-Mark) and direct retail clients (Walmart, CVS, Kroger, etc.)[130] - Alkaline 88, LLC, the operating subsidiary, handles marketing, distribution, and manufacturing, with co-packing agreements with nine bottling companies, providing a current capacity exceeding $14.0 million per month wholesale[131] Cash Flows Discussion of the company's going concern status and strategies to secure funding for operations - The company's financial statements are prepared assuming a going concern, but it has not yet established sufficient ongoing revenues to cover operating costs[134] - A cost-reduction strategy, cash on hand, anticipated warrant exercises, debt settlements, a line of credit, and a sales agreement are planned to fund current operations and capital needs[134] - The ability to continue as a going concern depends on obtaining additional capital, as failure to do so could force significant curtailment or cessation of operations[134] COVID-19 Assessment of potential impacts of the COVID-19 pandemic on the company's business, supply chain, and demand - The company's business could be materially and adversely affected by COVID-19 risks, though it has operated successfully without material supply chain disruptions to date[135] - Potential impacts include reduced demand from customers avoiding public places, temporary or long-term disruptions in supply chains, delays in inventory delivery, and adverse effects on retail customers' financial condition[135] - Government 'shelter-in-place' orders or health crises could disrupt operations or lead to partial/complete closure of co-packing facilities[135] Inflationary Pressure Strategies implemented to mitigate margin contraction caused by inflationary pressures on costs - The company experienced significant margin contraction due to inflationary pressures over the past 12 months[136] - To increase margins in FY2023, the company implemented an approximate 9% across-the-board price increase, anticipates potential leveling off or reduction in freight costs due to new co-packer locations, and expects to lock in price breaks on raw materials[136] Results of Operations Detailed analysis of net revenue, cost of goods sold, gross profit, and operating expenses for fiscal years 2022 and 2021 Consolidated Results of Operations (Years Ended March 31, 2022 and 2021) | Metric | Year Ended March 31, 2022 | Year Ended March 31, 2021 | | :--------------------------------------- | :------------------------ | :------------------------ | | Net Revenue | $60,596,247 | $46,069,121 | | Cost of Goods Sold | $45,377,275 | $29,622,361 | | Gross Profit | $15,218,972 | $16,446,760 | | Net Loss (after operating and other expenses) | ($39,364,118) | ($16,409,520) | - Net revenue increased by 32% to $60,596,247 in FY2022, driven by expanded distribution of alkaline water products[138] - Cost of goods sold increased to $45,377,275 (75% of net sales) in FY2022 from $29,622,361 (64% of net sales) in FY2021, primarily due to higher raw material and freight costs[139] Operating Expenses (Years Ended March 31, 2022 and 2021) | Expense Category | Year Ended March 31, 2022 | Year Ended March 31, 2021 | | :----------------------------- | :------------------------ | :------------------------ | | Sales and marketing expenses | $32,636,143 | $16,420,520 | | General and administrative expenses | $21,580,739 | $15,860,147 | | Total operating expenses | $54,216,882 | $32,280,667 | - Sales and marketing expenses increased by approximately $16.2 million, mainly due to $6.4 million in outbound freight, $4.2 million in marketing professional/endorsement fees, and $2.2 million in non-cash endorsement expenses[140] - General and administrative expenses increased by approximately $5.6 million, primarily from a $2.9 million increase in non-cash stock compensation and a $2.3 million increase in wage-related expenses[140] Liquidity and Capital Resources Analysis of the company's working capital, cash flows, and ongoing efforts to secure funding for operations Working Capital (as of March 31, 2022 and 2021) | Metric | At March 31, 2022 | At March 31, 2021 | | :---------------- | :---------------- | :---------------- | | Current assets | $21,157,421 | $23,271,259 | | Current liabilities | $21,920,686 | $13,244,041 | | Working capital | ($763,265) | $10,027,218 | - Current assets decreased due to a reduction in cash (from $9.1M to $1.5M) and accounts receivable, partially offset by an increase in inventory (from $4.4M to $8.6M) to support increased sales[144] - Current liabilities increased significantly due to higher accounts payable (from $7.1M to $10.4M) from raw material and freight costs, increased revolving financing (from $4.3M to $7.0M), and accrued expenses[145] Cash Flow Summary (Years Ended March 31, 2022 and 2021) | Cash Flow Activity | Year Ended March 31, 2022 | Year Ended March 31, 2021 | | :-------------------------------- | :------------------------ | :------------------------ | | Net Cash used in operating activities | ($31,819,542) | ($14,280,238) | | Net Cash used in investing activities | ($992,009) | ($585,393) | | Net Cash provided by financing activities | $25,211,657 | $19,434,905 | | Net increase (decrease) in cash | ($7,599,894) | $4,569,274 | - The increase in net cash used in operating activities was primarily due to a $17.9 million increase in net operating loss[147] - Net cash used in investing activities increased due to higher purchases of fixed assets[148] - The increase in net cash provided by financing activities was driven by proceeds from common stock sales, warrant exercises, and notes payable[149] - Subsequent to March 31, 2022, the company raised $631,203 from common stock sales via an ATM facility and $5,000,000.40 from an underwritten public offering of 8,333,334 shares at $0.60 per share[150][151] - The company's going concern status depends on securing adequate capital, with plans to fund operations through a cost-reduction strategy, existing cash, warrant exercises, debt settlements, a line of credit, and the sales agreement[152] Off-Balance Sheet Arrangements The company confirms the absence of material off-balance sheet arrangements that could impact its financial condition - The company has no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on its financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources[153] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section states that quantitative and qualitative disclosures about market risk are not applicable to the company - Quantitative and qualitative disclosures about market risk are not applicable[154] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Prager Metis CPAs, LLC issued an unqualified opinion on the financial statements but noted substantial doubt about the company's going concern ability - Prager Metis CPAs, LLC, the independent auditor, issued an unqualified opinion, stating the financial statements for March 31, 2022, and 2021, present fairly the company's financial position, results of operations, and cash flows in conformity with GAAP[157] - The audit report includes an explanatory paragraph regarding the company's ability to continue as a going concern, citing accumulated net losses as of March 31, 2022, which raises substantial doubt[158] - Accrued promotional allowances were identified as a critical audit matter due to the subjective nature of management's estimates for consumer participation, distributor/retailer performance, and future promotional claims[163] CONSOLIDATED BALANCE SHEETS The consolidated balance sheets show a decrease in total assets and a significant increase in total liabilities, leading to a substantial reduction in stockholders' equity Consolidated Balance Sheets (as of March 31, 2022 and 2021) | ASSETS | March 31, 2022 | March 31, 2021 | | :------------------------------------ | :------------- | :------------- | | Cash | $1,531,062 | $9,130,956 | | Accounts receivable, net | $7,927,065 | $8,458,176 | | Inventory | $8,583,664 | $4,407,720 | | Prepaid expenses | $2,928,085 | $1,037,961 | | Operating lease right-of-use asset - current portion | $187,545 | $236,446 | | Total current assets | $21,157,421 | $23,271,259 | | Fixed assets - net | $1,200,797 | $1,010,183 | | Operating lease right-of-use asset | $142,359 | $269,167 | | Total assets | $22,500,577 | $24,550,609 | | LIABILITIES | | | | Accounts payable | $10,441,879 | $7,055,348 | | Accrued expenses | $2,036,739 | $1,306,106 | | Revolving financing | $7,043,870 | $4,324,412 | | Convertible note payable, net of debt discount | $2,223,633 | - | | PPP loan payable - current portion | - | $328,570 | | Operating lease liability - current portion | $174,565 | $229,605 | | Total current liabilities | $21,920,686 | $13,244,041 | | Operating lease liability | $178,753 | $292,582 | | Total liabilities | $22,099,439 | $13,536,623 | | STOCKHOLDERS' EQUITY | | | | Preferred stock | $4,454 | - | | Common stock | $110,572 | $87,464 | | Subscription Receivable | ($62,388) | - | | Additional paid in capital | $109,864,080 | $80,857,742 | | Accumulated deficit | ($109,515,580) | ($69,931,220) | | Total stockholders' equity | $401,138 | $11,013,986 | | Total liabilities and stockholders' equity | $22,500,577 | $24,550,609 | - Cash decreased significantly from $9.13 million in 2021 to $1.53 million in 2022[167] - Inventory increased from $4.41 million in 2021 to $8.58 million in 2022[167] - Total current liabilities increased substantially from $13.24 million in 2021 to $21.92 million in 2022, driven by increases in accounts payable and revolving financing[167] - Total stockholders' equity decreased from $11.01 million in 2021 to $0.40 million in 2022, primarily due to an increased accumulated deficit[167] CONSOLIDATED STATEMENT OF OPERATIONS Net revenue increased by 32% in FY2022, but higher cost of goods sold and operating expenses led to a significant widening of the net loss Consolidated Statement of Operations (Years Ended March 31, 2022 and 2021) | Metric | For the Year Ended March 31, 2022 | For the Year Ended March 31, 2021 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Revenue | $60,596,247 | $46,069,121 | | Cost of Goods Sold | $45,377,275 | $29,622,361 | | Gross Profit | $15,218,972 | $16,446,760 | | Sales and marketing expenses | $32,636,143 | $16,420,520 | | General and administrative | $21,580,739 | $15,860,147 | | Total operating expenses | $54,216,882 | $32,280,667 | | Total operating loss | ($38,997,910) | ($15,833,907) | | Gain on forgiveness of PPP loan payable | $330,551 | - | | Interest expense | ($917,001) | ($575,613) | | Total other income (expense) | ($586,450) | ($575,613) | | Net loss | ($39,584,360) | ($16,409,520) | | LOSS PER SHARE (Basic and Diluted) | ($0.40) | ($0.24) | | WEIGHTED AVERAGE SHARES OUTSTANDING (Basic and Diluted) | 99,124,659 | 69,502,652 | - Net revenue increased by 32% from $46.07 million in FY2021 to $60.60 million in FY2022[169] - Gross profit decreased from $16.45 million in FY2021 to $15.22 million in FY2022, as cost of goods sold increased at a higher rate than revenue[169] - Total operating expenses increased by 68% from $32.28 million in FY2021 to $54.22 million in FY2022[169] - Net loss significantly widened from ($16.41 million) in FY2021 to ($39.58 million) in FY2022[169] - Loss per share (basic and diluted) increased from ($0.24) in FY2021 to ($0.40) in FY2022[169] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Total stockholders' equity significantly decreased in FY2022, primarily due to a substantial increase in the accumulated deficit Consolidated Statements of Stockholders' Equity (Years Ended March 31, 2022 and 2021) | Metric | March 31, 2022 | March 31, 2021 | | :--------------------------------------- | :------------- | :------------- | | Preferred Stock (Par Value) | $4,454 | - | | Common Stock (Par Value) | $110,572 | $87,464 | | Additional Paid-in Capital | $109,864,080 | $80,857,742 | | Accumulated Deficit | ($109,515,580) | ($69,931,220) | | Total Stockholders' Equity | $401,138 | $11,013,986 | - Total stockholders' equity decreased from $11,013,986 at March 31, 2021, to $401,138 at March 31, 2022[171] - The accumulated deficit increased significantly from ($69,931,220) to ($109,515,580) during the fiscal year[171] - Additional paid-in capital increased from $80,857,742 to $109,864,080, reflecting proceeds from preferred stock issuance, common stock offerings, warrant exercises, and stock option/RSU related compensation[171] CONSOLIDATED STATEMENTS OF CASH FLOWS The company experienced a net decrease in cash in FY2022, driven by increased cash usage in operating and investing activities, partially offset by financing activities Consolidated Statements of Cash Flows (Years Ended March 31, 2022 and 2021) | Cash Flow Activity | For the Year Ended March 31, 2022 | For the Year Ended March 31, 2021 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | ($39,584,360) | ($16,409,520) | | Adjustments to reconcile net loss to net cash used in operating activities | $8,409,108 (stock-based comp) | $3,725,463 (stock-based comp) | | Gain on forgiveness of PPP loan payable | ($330,551) | - | | Amortization of debt discount | $271,350 | - | | Changes in operating assets and liabilities (net) | ($1,418,792) | ($2,597,850) | | NET CASH USED IN OPERATING ACTIVITIES | ($31,819,542) | ($14,280,238) | | CASH USED IN INVESTING ACTIVITIES | ($992,009) | ($585,393) | | Proceeds from (repayment of) revolving financing | $2,719,458 | ($2,966,805) | | Proceeds from promissory note payable | $3,800,000 | $325,800 | | Proceeds from sale of common stock, net | $5,193,706 | $14,899,545 | | Proceeds for the exercise of warrants, net | $13,390,313 | $7,114,886 | | Proceeds for the exercise of stock options, net | $108,180 | $61,479 | | CASH PROVIDED BY FINANCING ACTIVITIES | $25,211,657 | $19,434,905 | | NET CHANGE IN CASH | ($7,599,894) | $4,569,274 | | Cash at Beginning of Period | $9,130,956 | $4,561,682 | | Cash at End of Period | $1,531,062 | $9,130,956 | - Net cash used in operating activities increased from ($14.28 million) in FY2021 to ($31.82 million) in FY2022, primarily due to a larger net loss[173] - Net cash used in investing activities increased from ($0.59 million) in FY2021 to ($0.99 million) in FY2022, driven by increased fixed asset purchases[173] - Net cash provided by financing activities increased from $19.43 million in FY2021 to $25.21 million in FY2022, mainly from proceeds from common stock sales and warrant exercises[173] - Cash at the end of the period decreased from $9.13 million in FY2021 to $1.53 million in FY2022[173] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Detailed information on the company's business, accounting policies, financial instruments, going concern status, and subsequent events - The company offers bottled alkaline water (8.8 pH) and recently introduced hemp-derived CBD bottled water and Alkaline88® Sports Drinks, produced via electrolysis[175] - The consolidated financial statements include The Alkaline Water Company Inc. and its six wholly-owned subsidiaries[177] - The company's ability to continue as a going concern is in substantial doubt due to accumulated net losses of ($109,295,337) from inception through March 31, 2022, and dependence on future debt and equity financing[202][204] Fixed Assets, Net (as of March 31, 2022 and 2021) | Asset Category | March 31, 2022 | March 31, 2021 | | :----------------------- | :------------- | :------------- | | Machinery and Equipment | $4,766,303 | $4,812,344 | | Office Equipment | $55,439 | $55,439 | | Less: Accumulated Depreciation | ($3,620,945) | ($3,857,600) | | Fixed Assets, net | $1,200,797 | $1,010,183 | - The company has a revolving credit facility with CNH Finance Fund I, L.P., providing up to $10 million, secured by assets, with an interest rate of 7.0% as of March 31, 2022[208][210][212] - The Paycheck Protection Program (PPP) loan of $325,800, plus accrued interest of $4,751, totaling $330,551, was forgiven as of October 14, 2021[217] - The company granted 6,681,090 shares of Series S Preferred Stock to ABG-Shaq, LLC as consideration for an endorsement agreement, valued at $6,681,090, with vesting over three years[221] - During FY2022, the company issued common shares through private placements, warrant exercises, and restricted awards, including 2,227,030 shares upon conversion of Series S Preferred Stock[225][226][234] - The company issued unsecured convertible notes totaling $3,800,000 in March 2022, convertible into units of common stock and warrants at $0.80 per unit[235] Stock Option Activity Summary (as of March 31, 2022) | Metric | Number of Shares | Weighted-Average Exercise Price | | :------------------------ | :--------------- | :------------------------------ | | Outstanding at March 31, 2021 | 6,259,567 | $0.83 | | Granted | 583,000 | $1.73 | | Exercised | (362,333) | $0.62 | | Expired/Forfeited | (129,000) | $1.54 | | Outstanding at March 31, 2022 | 6,351,234 | $0.91 | | Exercisable at March 31, 2022 | 4,572,567 | $0.84 | Warrant Activity Summary (as of March 31, 2022) | Metric | Number of Warrants | Weighted-Average Exercise Price | | :------------------------ | :----------------- | :------------------------------ | | Outstanding at March 31, 2021 | 10,801,155 | $1.16 | | Granted | 4,757,381 | $1.25 | | Exercised | (11,467,822) | $1.17 | | Cancelled or Expired | -0- | $0.00 | | Outstanding at March 31, 2022 | 4,090,714 | $1.25 | | Warrants exercisable at March 31, 2022 | 4,090,714 | $1.25 | - At March 31, 2022, the company had net operating loss carryforwards of approximately $65 million, with a full valuation allowance recorded due to uncertainty of realization[273] - The company adopted ASC 842 on April 1, 2019, recognizing right-of-use (ROU) assets and lease liabilities for operating leases, with total operating lease liability of $353,318 as of March 31, 2022[199][283] - Subsequent events include the sale of 750,240 common shares for $631,203, conversion of Series S Preferred Stock, an underwritten public offering of 8,333,334 shares for $5 million, and a separation agreement with former CEO Richard Wright[286][287][288] NOTE 1 -NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Detailed overview of the company's business, consolidation principles, cash management, and revenue recognition policies - The company sells bottled alkaline water (8.8 pH) produced through electrolysis, and recently introduced hemp-derived CBD bottled water and Alkaline88® Sports Drinks[175] - Consolidated financial statements include The Alkaline Water Company Inc. and its six wholly-owned subsidiaries[177] - Cash and cash equivalents were $1,531,062 at March 31, 2022, down from $9,130,956 at March 31, 2021[179] Accounts Receivable, Net (as of March 31, 2022 and 2021) | Metric | 2022 | 2021 | | :-------------------------- | :----------- | :----------- | | Trade receivables, net | $8,397,065 | $8,798,176 | | Less: Allowance for doubtful accounts | ($470,000) | ($340,000) | | Net accounts receivable | $7,927,065 | $8,458,176 | Inventory Composition (as of March 31, 2022 and 2021) | Metric | 2022 | 2021 | | :-------------- | :----------- | :----------- | | Raw materials | $3,848,750 | $3,055,951 | | Finished goods | $4,734,914 | $1,351,769 | | Total inventory | $8,583,664 | $4,407,720 | - Revenue is recognized when performance obligations are satisfied upon product delivery, with provisions for estimated discounts and allowances[186] - Shipping and handling costs are included in selling expenses, amounting to $13,850,620 in FY2022 and $7,432,077 in FY2021[187] Disaggregated Net Revenue by Sales Channel (Years Ended March 31, 2022 and 2021) | Sales Channel | Year Ended March 31, 2022 | Year Ended March 31, 2021 | | :-------------- | :------------------------ | :------------------------ | | Retailers | $41,139,443 | $32,078,181 | | Distributors | $18,006,093 | $12,922,907 | | Ecommerce/Other | $1,499,900 | $1,068,033 | | Total Net Revenue | $60,596,247 | $46,069,121 | - Three major customers accounted for 43% of accounts receivable and two customers for 34% of total revenues in FY2022; three vendors accounted for 47% of purchases[190] - The company operates as one segment in the United States[194] - The company adopted ASC 842 (Leases) on April 1, 2019, recognizing ROU assets and lease liabilities[199] NOTE 2 - GOING CONCERN The company's ability to continue as a going concern is in substantial doubt due to accumulated losses and dependence on future capital - The company's financial statements are prepared assuming a going concern, but accumulated net losses of ($109,295,337) as of March 31, 2022, raise substantial doubt about its ability to continue[202] - Management plans to raise additional funds through private or public offerings to support operations, but there are no assurances of success[203] - The ability to continue as a going concern depends on implementing its business plan, generating sufficient revenue, and raising additional capital[204] NOTE 3 - PROPERTY AND EQUIPMENT Details on the company's fixed assets, including machinery, office equipment, and accumulated depreciation Fixed Assets (as of March 31, 2022 and 2021) | Asset Category | March 31, 2022 | March 31, 2021 | | :----------------------- | :------------- | :------------- | | Machinery and Equipment | $4,766,303 | $4,812,344 | | Office Equipment | $55,439 | $55,439 | | Less: Accumulated Depreciation | ($3,620,945) | ($3,857,600) | | Fixed Assets, net | $1,200,797 | $1,010,183 | - Depreciation expense was $801,395 for FY2022 and $997,791 for FY2021[206] - Certain machinery and equipment were no longer in service as of March 31, 2022, resulting in a $1 million reduction in machinery and equipment and corresponding accumulated depreciation[207] NOTE 4 - REVOLVING FINANCING Information on the company's revolving credit facility, including terms, outstanding balance, and compliance with covenants - The company has a revolving credit facility with CNH Finance Fund I, L.P. (formerly SCM Specialty Finance Opportunities Fund, L.P.) since February 1, 2017[208] - The facility provides up to $10 million, or 85% of net eligible billed receivables plus 65% of eligible unbilled receivables, whichever is less[210] - The outstanding advance as of March 31, 2022, was $7,043,870[210] - The credit agreement expires on July 3, 2023, and bears interest at Wells Fargo's prime rate plus 3.25%, which was 7.0% as of March 31, 2022[211][212] - The company granted a security interest in all its assets and agreed to a lockbox account arrangement[212] - The company received a waiver for its loan turnover rate covenant, ensuring compliance with financial covenants as of March 31, 2022[215] NOTE 5 - PAYCHECK PROTECTION PROGRAM LOAN Details on the Paycheck Protection Program (PPP) loan received and its subsequent forgiveness - Alkaline 88, LLC received a $325,800 promissory note under the Paycheck Protection Program (PPP) on April 29, 2020[216] - The PPP loan, including $325,800 principal and $4,751 accrued interest, totaling $330,551, was forgiven as of October 14, 2021[217] NOTE 6 - STOCKHOLDERS' EQUITY (DEFICIT) Comprehensive details on preferred and common stock, endorsement agreements, private placements, convertible notes, and restricted awards - The company's articles of incorporation were amended on October 7, 2013, to authorize 100,000,000 shares of preferred stock, issuable in series with terms determined by the board[218] - On May 12, 2021, the company entered an endorsement agreement with ABG-Shaq, LLC (affiliated with Shaquille O'Neal), granting rights to use Mr. O'Neal's likeness for advertising and promotion[219] - Consideration for the endorsement included $3 million in cash payments over three years and 6,681,090 shares of Series S Preferred Stock, convertible into common stock, vesting over three years[220][221] - The Series S Preferred Stock was valued at $6,681,090, with $2,227,030 recognized as a prepaid expense expensed over the initial twelve months[221] - The company recognized an expense of $3,041,444 for the endorsement in FY2022, with anticipated expenses of $3,227,030 for FY2023 and FY2024, and $185,586 for FY2025[222] - Common stock issuances included private placements in April 2020 ($3.9M gross proceeds), May 2020 ($2M gross proceeds), March 2021 ($10M gross proceeds), and July 2021 ($5M gross proceeds), each with associated warrants[223][224][225][226] - Various common shares were issued to non-employees for services rendered, with fair values based on NASDAQ closing prices[227][228][229][230][231][232][233] - On November 19, 2021, 2,227,030 shares of Series S Preferred Stock were converted into common stock[234] - In March 2022, the company issued unsecured convertible notes totaling $3,800,000, with an 8% interest rate and a conversion price of $0.80 per unit (common stock + warrant)[235] - The company sold 281,459 common shares through its ATM facility in March 2022[236] - Restricted awards of common stock were granted to directors, officers, employees, and consultants under the 2020 Equity Incentive Plan, with various vesting schedules[237][238][239][242][243] - Total stock compensation expense for restricted awards was $828,967 for FY2021, with additional expenses anticipated in future fiscal years[240] NOTE 7 - OPTIONS AND WARRANTS Detailed information on the company's equity incentive plans, stock option activity, and warrant issuances and exercises - The company operates under the 2013 Equity Incentive Plan, 2018 Stock Option Plan, and 2020 Equity Incentive Plan to provide equity incentives to employees, consultants, and directors[245][246][247] - Stock options were granted to directors, officers, consultants, and employees with various exercise prices and vesting schedules[248][250][251][252][253](index=253&type