Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains "forward-looking statements." All statements other than statements of historical fact are "forward-looking statements" for purposes of applicable securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "could," "estimate," "intend," "continue," "believe," "expect" or "anticipate" or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward- looking statements, which speak only as of the dates on which they are made. Except as required by applicable law, including the securities laws of the United States and Canada, we do not intend, and undertake no obligation, to update any forward-looking statement.
Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:
• lack of working capital;
• inability to raise additional financing;
• the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
• deterioration in general or regional economic conditions;
• adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
• inability to efficiently manage our operations;
• inability to achieve future sales levels or other operating results; and
• the unavailability of funds for capital expenditures.
Our financial statements are stated in United States Dollars ($ or US$) unless otherwise stated and are prepared in accordance with United States Generally Accepted Accounting Principles.
In this quarterly report, unless otherwise specified, all references to "common shares" refer to the common shares in our capital stock.
As used in this quarterly report on Form 10-Q, the terms "we", "us" "our", the "Company" and "Alkaline" refer to The Alkaline Water Company Inc., a Nevada corporation, and its wholly owned subsidiary Alkaline 88, LLC (an Arizona Limited Liability Company), unless otherwise specified.
COVID-19
Our business could be materially and adversely affected by the risks, or the public perception of the risks, related to the outbreak of COVID-19. To date, we have managed to operate successfully throughout the pandemic without any material disruptions to our supply chain. Although retailers which carry our products may be considered essential businesses and therefore be allowed to remain operational, they may experience significantly reduced demand. The risk of a pandemic, or public perception of the risk, could cause customers to avoid public places, including retail properties, and could cause temporary or long-term disruptions in our supply chains and/or delays in the delivery of our inventory to our customers. Further, such risks could also adversely affect retail customers' financial condition, resulting in reduced spending on our products, which are marketed as premium products. "Shelter-in-place" or other such orders by governmental entities could also disrupt our operations, if our employees or the employees of our sourcing partners who cannot perform their responsibilities from home, are not able to report to work. Risks related to an epidemic, pandemic or other health crisis, such as COVID-19, could also lead to the complete or partial closure of one or more of our co-packing facilities or operations of our sourcing partners.
Inflationary Pressure
We have seen significant margin contraction as a result of inflationary pressures over the last 12 months. We've taken a number of steps that will allow us to increase our margins in the year ended March 31, 2023. These steps include (1) an approximate 9% across the board price increase (effective across all banners for the entire fiscal 2023); (2) a potential leveling off or small reduction in freight costs due to the geographic distribution of our new co-packers and suppliers; and (3) our buying power allowing us to lock in price breaks on raw materials over the next 12 months.
Results of Operations
Three Months Ended September 30, 2022 and September 30, 2021
Our results of operations for the three months ended September 30, 2022 and September 30, 2021 are as follows:
| | For the three | | | For the three | |
| | months ended | | | months ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | |
Revenue | $ | 19,574,953 | | $ | 15,225,765 | |
Cost of goods sold | | 14,948,461 | | | 10,091,415 | |
Gross profit | $ | 4,626,492 | | $ | 5,164,350 | |
Net Loss | $ | (8,397,208 | ) | $ | (10,378,473 | ) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the three months ended September 30, 2022 of $19,874,953, as compared to $15,255,765 for the three months ended September 30, 2021, an increase of 28%. The increase in sales is due to the expanded distribution of our products to additional retailers throughout the country. We distribute our product through several channels. We sell through large national distributors (UNFI, KeHE, C&S, and Core-Mark), which together represent over 150,000 retail outlets. We also sell our product directly to retail clients, including drug store chains, warehouse clubs, convenience stores, natural food products stores, large ethnic markets and national retailers. Some examples of retail clients are: Walmart, CVS, Rite Aid, Sam's Club, Family Dollar, Albertson/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB and Brookshire's.
Cost of goods sold is comprised of production costs, shipping and handling costs. For the three months ended September 30, 2022, we had cost of goods sold of $14,948,461 or 76% of revenue, as compared to cost of goods sold of $10,091,415 or 66% of revenue, for the three months ended September 30, 2021. The increase in cost of goods sold is due to increased raw material cost from our suppliers.
Expenses
Our operating expenses for the three months ended September 30, 2022 and September 30, 2021 are as follows:
| | For the three | | | For the three | |
| | months ended | | | months ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | |
Sales and marketing expenses | $ | 7,120,133 | | $ | 10,120,875 | |
General and administrative expenses | | 2,575,986 | | | 5,251,751 | |
Total operating expenses | $ | 9,696,119 | | $ | 15,372,626 | |
For the three months ended September 30, 2022, our total operating expenses were $9,696,119 as compared to $15,372,626 for the three months ended September 30, 2021.
For the three months ended September 30, 2022, the total included $7,120,133 of sales and marketing expenses. For the three months ended September 30, 2021, the total included $10,120,875 of sales and marketing expenses. Sales and marketing expenses decreased as a result of decreased out-bound freight expenses (from approximately $4.8 million to $3.7 million) and decreased marketing expense of approximately $1.9 million, primarily relating to higher expense in the three months ended September 30, 2021 relating to our brand ambassador. For the three months ended September 30, 2022, general and administrative expenses of $2,575,986, consisted primarily of approximately $0.2 million of professional fees, media fees and legal fees, non-cash stock award and option expense in the amount of approximately $0.4 million and approximately $1.7 million of wages and wage related expenses. For the three months ended September 30, 2021, general and administrative expenses of $5,251,751, consisted primarily of approximately $2.8 million of professional fees, media fees and legal fees, non-cash stock award and option expense in the amount of approximately $0.7 million and approximately $1.1 million of wages and wage related expenses. General and administrative expenses decreased as a result of lower professional fees, media fees and legal fees.
Six Months Ended September 30, 2022 and September 30, 2021
Our results of operations for the six months ended September 30, 2022 and September 30, 2021 are as follows:
| | For the six months | | | For the six months | |
| | ended | | | ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | |
Revenue | $ | 36,469,356 | | $ | 29,369,343 | |
Cost of goods sold | | 28,348,235 | | | 19,402,426 | |
Gross profit | | 8,121,121 | | | 9,966,917 | |
Net Loss | $ | (15,890,616 | ) | $ | (17,804,099 | ) |
Revenue and Cost of Goods Sold
We had revenue from sales of our product for the six months ended September 30, 2022 of $36,469,356 as compared to $29,369,343 for the six months ended September 30, 2021, an increase of 24%. The increase in sales is due to the expanded distribution of our products to additional retailers throughout the country. We distribute our product through several channels. We sell through large national distributors (UNFI, KeHE, C&S, and Core-Mark), which together represent over 150,000 retail outlets. We also sell our product directly to retail clients, including drug store chains, warehouse clubs, convenience stores, natural food products stores, large ethnic markets and national retailers. Some examples of retail clients are: Walmart, CVS, Rite Aid, Sam's Club, Family Dollar, Albertson/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Publix, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB and Brookshire's.
Cost of goods sold is comprised of production costs, shipping and handling costs. For the six months ended September 30, 2022, we had cost of goods sold of $28,348,235, or 78% of revenue, as compared to cost of goods sold of $19,402,426 or 66% of revenue, for the six months ended September 30, 2021. The increase in cost of goods sold is due to increased raw material cost from our suppliers.
Expenses
Our operating expenses for the six months ended September 30, 2022 and September 30, 2021 are as follows:
| | For the six | | | For the six | |
| | months ended | | | months ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | |
Sales and marketing expenses | $ | 14,041,979 | | $ | 17,277,275 | |
General and administrative expenses | | 5,439,979 | | | 10,216,125 | |
Total operating expenses | $ | 19,481,958 | | $ | 27,493,400 | |
For the six months ended September 30, 2022, our total operating expenses were $19,481,958, as compared to $27,493,400 for the six months ended September 30, 2021.
For the six months ended September 30, 2022, the total included $14,041,979 of sales and marketing expenses. For the six months ended September 30, 2021, the total included $17,277,275 of sales and marketing expenses. Sales and marketing expenses decreased as a result of decreased out-bound freight expense (from approximately $7.7 million to $7.5 million) and decreased marketing expenses of approximately $3.1, primarily relating to higher expense in the six months ended September 30, 2021 relating to our brand ambassador. For the six months ended September 30, 2022, general and administrative expenses of $5,439,979, consisted primarily of approximately $0.6 million of professional fees, stock award and option expense in the amount of approximately $0.6 million and approximately $3.7 million of wage and wage related expenses. For the six months ended September 30, 2021, general and administrative expenses of $10,216,125, consisted primarily of approximately $5.5 million of professional fees, stock award and option expense in the amount of approximately $1.4 million and approximately $2.1 million of wage and wage related expenses. General and administrative expenses decreased as a result of lower professional fees, media fees and legal fees.
Liquidity and Capital Resources
Working Capital
| | At September 30, 2022 | | | At March 31, 2022 | |
Current assets | $ | 22,187,026 | | $ | 21,157,421 | |
Current liabilities | | 20,964,922 | | | 21,920,686 | |
Working capital | $ | 1,222,104 | | $ | (763,265 | ) |
Current Assets
Current assets as of September 30, 2022 and March 31, 2022 primarily relate to $2,257,502 and $1,531,062 in cash, $7,464,009 and $7,927,065 in accounts receivable and $9,873,998 and $8,853,664 in inventory, respectively.
Current Liabilities
Current liabilities as of September 30, 2022 and March 31, 2022 primarily relate to $10,902,488 and $10,441,879 in accounts payable, revolving financing of $7,531,935 and $7,043,870, and accrued expenses of $2,326,094 and $2,036,739, respectively.
Cash Flows
Our cash flows for the six months ended September 30, 2022 and September 30, 2021 are as follows:
| | For the six | | | For the six | |
| | months ended | | | months ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | |
Net Cash used in operating activities | $ | (9,450,507 | ) | $ | (18,730,426 | ) |
Net Cash used in investing activities | | (1,233,254 | ) | | (315,408 | ) |
Net Cash provided by financing activities | | 11,410,201 | | | 20,333,943 | |
Net (decrease) in cash and cash equivalents | $ | 726,440 | | $ | 1,288,109 | |
Operating Activities
Net cash used in operating activities was $9,450,507 for the six months ended September 30, 2022, as compared to $18,730,426 used in operating activities for the six months ended September 30, 2021. The decrease in net cash used in operating activities was primarily due to the decreased net loss after adjusting for non-cash activity of approximately $5.0 million.
Investing Activities
Net cash used in investing activities was $1,233,254 for the six months ended September 30, 2022, as compared to $315,408 used in investing activities for the six months ended September 30, 2021. The increase in net cash used in investing activities was from an increase in purchases of fixed assets.
Financing Activities
Net cash provided by financing activities for the six months ended September 30, 2022 was $11,410,201, as compared to $20,333,943 for the six months ended September 30, 2021. The decrease in net cash provided by financing activities is primarily due to a decrease in the proceeds from the exercise of warrants of approximately $6.9 million.
Cash Requirements
Our ability to continue operating as a going concern is dependent on obtaining adequate capital to fund operating losses until we become profitable. We announced on July 9, 2022 that we have begun implementing a combination of cost-reduction measures and margin enhancements. The cost reduction measures include a) organizational restructuring; b) reductions in professional services; and c) reductions in marketing and promotional expenses and the margin enhancements will include a) packaging changes; b) improved manufacturing efficiencies; c) pricing and promotional optimization; and d) decreases in freight costs due to an enhanced distribution network.
Our cash on hand, plus the implementation of our cost-reduction and margin enhancement strategy, anticipated warrant exercises, our line of credit and the ATM sales agreement with Roth Capital Partners, LLC is planned to fund our current planned operations and capital needs. However, if our current plans change or are accelerated or we choose to increase our production capacity, we may seek to sell additional equity or debt securities or obtain additional credit facilities, including seeking investments from strategic investors. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.