The Alkaline Water Company Inc. (NASDAQ:WTER) is a leading producer of premium alkaline water and functional beverages. With a focus on delivering high-quality, health-conscious products, the company has established a strong presence in the rapidly growing enhanced water market. As the company navigates the challenges of the current inflationary environment, it is implementing strategic initiatives to enhance margins and position itself for long-term success.

Business Overview

The Alkaline Water Company is the creator of Alkaline88®, a leading premier alkaline water brand available in various sizes, including 500-milliliter, 700-milliliter, 1-liter, 1.5-liter, 2-liter, 3-liter, and 1-gallon sizes. The company's proprietary electrolysis process produces 8.8 pH drinking water without the use of any manmade chemicals. In addition to its flagship Alkaline88® brand, the company also offers a line of Alkaline88® Sports Drinks.

The Alkaline Water Company distributes its products through a diverse network of retailers, including large national distributors, direct-to-retail clients, and e-commerce channels. Some of the company's key retail partners include Walmart, CVS, Sam's Club, Family Dollar, Albertson's/Safeway, Kroger, 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.

Navigating Inflationary Pressures

The Alkaline Water Company has faced significant margin contraction due to inflationary pressures over the past 12 months. To address this challenge, the company has implemented a multi-pronged strategy to increase its margins in the fiscal year ending March 31, 2024.

Firstly, the company has implemented an approximately 9% across-the-board price increase, effective across all of its product lines and sales channels. This price adjustment is designed to offset the rising costs of raw materials, production, and distribution.

Secondly, the company anticipates a potential leveling off or small reduction in freight costs due to the geographic distribution of its new co-packing facilities and suppliers. This optimization of the supply chain is expected to contribute to improved margins.

Thirdly, the company's growing buying power has allowed it to lock in favorable pricing on raw materials over the next 12 months, further enhancing its ability to maintain profitability in the face of inflationary pressures.

Financials

For the fiscal year ended March 31, 2023, The Alkaline Water Company reported annual revenue of $63,777,289, a decrease from the previous year's revenue of $67,202,482. The company's annual net income for the same period was a loss of $27,405,193, compared to a loss of $24,507,398 in the prior year.

The company's annual operating cash flow for the fiscal year ended March 31, 2023, was a negative $10,429,380, while its annual free cash flow was a negative $11,874,021.

Quarterly Performance

In the most recent quarter ended June 30, 2023, The Alkaline Water Company reported revenue of $14,933,785, a decrease of 8% compared to the same quarter in the prior year. The company's cost of goods sold for the quarter was $11,162,216, or 75% of revenue, compared to $13,399,774, or 82% of revenue, in the same quarter of the previous year.

The company's total operating expenses for the quarter ended June 30, 2023, were $6,188,739, a decrease from $9,210,222 in the same quarter of the prior year. This reduction in operating expenses was primarily driven by lower freight costs, reduced advertising and promotion expenses, and lower professional fees.

The Alkaline Water Company reported a net loss of $2,840,938 for the quarter ended June 30, 2023, compared to a net loss of $7,493,408 in the same quarter of the previous year.

Liquidity

As of June 30, 2023, The Alkaline Water Company had $414,648 in cash and $5,059,617 in accounts receivable. The company's current liabilities as of the same date were $23,261,935, which included $12,609,187 in accounts payable, $6,188,332 in revolving financing, and $1,967,661 in short-term notes payable.

The company's working capital as of June 30, 2023, was a negative $9,877,803, compared to a negative $7,392,883 as of March 31, 2023. The company's current ratio was 0.58, and its quick ratio was 0.34, indicating potential liquidity challenges.

Risks and Challenges

The Alkaline Water Company faces several risks and challenges that investors should be aware of. The company operates in a highly competitive enhanced water market, which could impact its ability to maintain market share and pricing power. Additionally, the company's reliance on a limited number of large customers and suppliers presents concentration risks that could affect its financial performance.

The company's ability to continue as a going concern is also a concern, as it has incurred significant accumulated net losses since its inception and its cash position may not be sufficient to support its daily operations. The company's management has stated that it plans to raise additional funds through private or public offerings to address its liquidity needs, but there can be no assurance that it will be successful in doing so.

Outlook

The Alkaline Water Company has not provided specific financial guidance for the upcoming fiscal year. However, the company has stated that it is focused on implementing its cost-reduction and margin-enhancement strategies to improve its profitability in the face of ongoing inflationary pressures.

The company's management has expressed confidence in its ability to navigate the current challenges and position the business for long-term growth. Key initiatives include optimizing its manufacturing and distribution networks, enhancing its product portfolio, and exploring strategic partnerships to expand its reach and diversify its revenue streams.

Conclusion

The Alkaline Water Company is navigating a challenging inflationary environment, but it is taking proactive steps to enhance its margins and position the business for long-term success. While the company faces risks related to competition, customer and supplier concentration, and liquidity concerns, its focus on strategic initiatives and its commitment to delivering high-quality, health-conscious products could position it for future growth. Investors should closely monitor the company's progress in executing its turnaround plan and its ability to address its liquidity challenges.