ALKALINE WATER Co INC 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report on Form 10-K. Overview Our bottled alkaline water product is presently available in all 50 states and the District of Columbia. We distribute our product through several channels. We sell through large national distributors, including UNFI, KeHE, C&S, and Core-Mark. We also sell our product to retail clients, including convenience stores, natural food products stores, large ethnic markets and national retailers. Examples of our retail clients include Walmart, CVS, Family Dollar, Food Lion, 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. The majority of our sales to retail clients are through brokers and distributors, however, sales to our larger retail clients are often direct to the client's own warehouse distribution network. Our CBD products are presently available for purchase on our E-commerce websites, www.a88cbd.com and www.a88hemp.com, in addition to a growing number of brick and mortar retail locations. Our operating subsidiary, Alkaline 88, LLC, operates primarily as a marketing, distribution, and manufacturing company for our alkaline bottled water products. It has entered into co-packing agreements with eight different bottling companies located in Virginia, Georgia, California, Texas, Nevada and Arizona to act as co-packers for our product. Our current capacity at all plants exceeds approximately $8.3 million per month wholesale. Our component materials are readily available through multiple vendors. Our principal suppliers are Vav Plastics Inc., Amcor Inc. and Packaging Corporation of America. A88 Infused Beverage Division, Inc. In August 2018, we formed A88 Infused Beverage Division, Inc., or "A88 Infused," a Nevada corporation and a wholly-owned subsidiary of our company. A88 Infused's focus is brand extension and product innovations in the wellness water category. We formed A88 Infused to meet what we believe is increasing consumer demand for enhanced and functional (value-added) beverages. We expect A88 Infused to capitalize on this and potential consumer demand with the development and launch of new products focused on growing trends in the beverage space. To prepare for the launch of products by A88 Infused, we have expanded our packaging capabilities. We announced in January, 2019 that Nevada-based Western Group Packing has agreed to produce A88 Infused's flavored Alkaline88 ® water products and its planned hemp extract-infused water product at its 150,000+ square foot facility located in North Las Vegas, NV. We received our first order for our A88 Infused's flavored Alkaline88 ® water products, which are now available in Blood Orange, Lemon, Lemon-Lime, Peach Mango, Watermelon, Cucumber Mint, and Raspberry, in August, 2019. In February, 2020, we announced the receipt of first commitments from over 10,000 stores nationwide to purchase our flavored Alkaline88 ® water products. 23 A88 Infused is also developing and preparing for the initial launch of its planned hemp extract product, which will be marketed under the trademark Soothe™ . The production of A88 Infused's planned hemp extract product is contingent on U.S. Food and Drug Administration, or the FDA, and state laws, regulations, and guidance. While the Agriculture Improvement Act of 2018 removed hemp from Schedule I of the Controlled Substances Act, the law did not change the FDA's authorities with respect to food or drugs. As of the date of this annual report, the FDA has not made a determination that the use of hemp extract in food is safe. The FDA has evaluated Generally Recognized as Safe (GRAS) notices for four hemp seed-derived food ingredients and determined that the agency has no questions that those ingredients are GRAS under their intended conditions of use. In the event the FDA issues appropriate regulations or guidance or determines that it has no questions that hemp extract is GRAS under intended conditions of use that would permit A88 Infused to market hemp extract in water without food additive approval, we expect to produce and sell Soothe™ as still water in bottles. We may also decide to market Soothe™ in any states, districts or territories if applicable laws allow for such sale or if a supplier meets and complies with the FDA's GRAS regulations with respect to a self-certification regarding the safety and GRAS status of the use of hemp extract. We expect to produce Soothe™ as a low calorie or no calorie, hemp extract-infused water in three flavors. We may change the composition of our planned hemp-extract-infused product as necessary to comply with federal, state or local laws, regulations or guidance. Cash Flows Our financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have not yet established an ongoing source of revenues sufficient to cover our operating costs, however, as a result of the gross proceeds of $5,899,998 raised via two private placements of our common stock in April and May, 2020, expected warrant exercises including $258,899 from warrant exercises received since March 31, 2020 to date, and our credit line, we have sufficient cash to sustain operations through at least August 14, 2021. Our ability to continue as a going concern beyond August 14, 2021 is dependent on our company obtaining additional capital to fund operating losses until we become profitable. If we are unable to obtain additional capital, we could be forced to significantly curtail or cease operations. COVID-19 In December 2019, a novel strain of COVID-19 was reported in China. Since then, the COVID-19 has spread globally including across North America and the United States. The spread of COVID-19 from China to other countries has resulted in the World Health Organization (WHO) declaring the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a new disease, on March 11, 2020. Specifically, we caution that our business could be materially and adversely affected by the risks, or the public perception of the risks, related to the outbreak of COVID-19. 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. Results of Operations Years Ended March 31, 2020 and March 31, 2019 The following summary of our results of operations should be read in conjunction with our audited consolidated financial statements for the years ended March 31, 2020 and March 31, 2019 which are included herein: Year Ended Year Ended March 31, 2020 March 31, 2019 Revenue $ 41,142,443 $ 32,199,528 Cost of goods sold 24,302,874 19,252,768 Gross profit 16,839,569 12,946,760 Net Loss (after operating expenses and other expenses) (14,826,821 ) (8,617,565 ) Revenue and Cost of Goods Sold We had revenue from sales of our product for the year ended March 31, 2020 of $41,142,443 as compared to $32,199,528 for the year ended March 31, 2019, an increase of 28%, generated by sales of our alkaline water. 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 convenience stores, natural food products stores, large ethnic markets and national retailers. Some examples of retail clients are: Walmart, CVS, Family Dollar, Albertson/Safeway, Kroger, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros. Markets, Unified Grocers, Bristol Farms, Vallarta, Superior Foods, Ingles, Shaw's, Raley's, Harris Teeter, Festival Foods, HEB Brookshire's, Publix, Shaw's, Raley's, Food Lion, Harris Teeter, and Festival Foods. 24 Cost of goods sold is comprised of production costs, shipping and handling costs. For the year ended March 31, 2020, we had cost of goods sold of $24,302,874, or 59% of net sales, as compared to cost of goods sold of $19,252,768, or 60% of net sales, for the year ended March 31, 2019. The decrease in cost of goods sold as a percentage of net sales compared to the same period last year was due primarily due to the decreased raw materials costs. Expenses Our operating expenses for the years ended March 31, 2020 and March 31, 2019 are as follows: Year Ended Year Ended March 31, 2020 March 31, 2019 Sales and marketing expenses $ 19,067,642 $ 13,009,384 General and administrative expenses 11,138,749 7,420,078 Depreciation expenses 1,011,241 580,669 Total operating expenses $ 31,217,632 $ 21,010,131 During the year ended March 31, 2020, our total operating expenses were $31,217,632 as compared to $21,010,131 for the year ended March 31, 2019. Sales and marketing expenses increased by approximately $6.1 million primarily as a result of increased marketing spend of approximately $3.1 million due to the 28% increase in revenue and $2.3 million due to convenience store initiative which we undertook in California and Texas. General and administrative expenses increased by $3.7 million primarily resulting from an approximately $1.3 million increase in professional fees, approximately $1.2 million increase in non-cash stock compensation and approximately $0.8 million increase in wage and related expenses. For the year ended March 31, 2020, the total of $11,138,749 of general and administrative expenses consisted primarily of approximately $5.8 million of professional fees, media fees and legal fees, approximately $2.2 million in wage expense and approximately $1.7 million in stock compensation expense, relating to stock option expense and stock expense relating to endorsement. For the year ended March 31, 2019, the total of $7,420,078 of general and administrative expenses consisted primarily of approximately $4.5 million of professional fees, media fees and legal fees, $1.4 million in wage expense and $0.5 million in stock compensation expense, relating to stock option expense and stock expense relating to endorsement Liquidity and Capital Resources Working Capital At March 31, 2020 At March 31, 2019 Current assets $ 14,183,215 $ 16,537,343 Current liabilities 13,983,663 7,125,695 Working capital $ 199,552 $ 9,411,648 Current Assets Current assets as of March 31, 2020 and March 31, 2019 primarily relate to $4,561,682 and $11,032,451 in cash which decreased due to net cash used in operating activities of approximately $13.6 million offset by the net cash provided by financing activities of approximately $7.7 million; $4,917,081 and $3,068,181 in accounts receivable due to increased sales relating to COVID-19 in March 2020; and $2,919,860 and $2,058,012 in inventory, resulting from additional inventory to support increased sales due to COVID-19, respectively. 25 Current Liabilities Current liabilities as of March 31, 2020 and March 31, 2019 primarily relate to $5,406,541 and $2,898,958 in accounts payable which increased due to increased sales relating to COVID-19 in March 2020, revolving financing of $7,291,217 and $3,131,279 increased due to additional financing needed to support increased demand due to COVID-19, and accrued expenses of $1,186,516 and $1,095,458, respectively. Cash Flow Our cash flows for the years ended March 31, 2020 and March 31, 2019 are as follows: Year Year Ended Ended March 31, March 31, 2020 2019 Net Cash used in operating activities $ (13,642,636 ) $ (8,128,613 ) Net Cash used in investing activities (488,557 ) (1,356,299 ) Net Cash provided by financing activities 7,660,424 19,528,458 Net increase (decrease) in cash and cash equivalents $ (6,470,769) $ 10,043,546 Operating Activities Net cash used in operating activities was $13,642,636 for the year ended March 31, 2020, as compared to $8,128,613 used in operating activities for the year ended March 31, 2019. The increase in net cash used was primarily due to the increased net loss after non-cash adjustments of approximately $4.6 million and increase in net working capital accounts of approximately $1 million. Investing Activities Net cash used in investing activities was $488,557 for the year ended March 31, 2020, as compared to $1,356,299 used in investing activities for the year ended March 31, 2019. The decrease in net cash used was due to decrease purchase of fixed assets. Financing Activities Net cash provided by financing activities for the year ended March 31, 2020 was $7,660,424, as compared to $19,528,458 for the year ended March 31, 2019. The decrease in net cash provided by financing activities was due to a decrease of approximately $15.6 million in proceeds from sales of common stock and warrant exercise, offset by an increase in proceeds from the revolver financing of approximately $3.6 million. Cash Requirements We believe that between the net proceeds of $5,899,998 raised via two private placements of our common stock in April and May, 2020 discussed above, expected warrant exercises including $258,899 from warrant exercises received to date, and our credit line, we will have sufficient cash to sustain operations including our cash needs for the above milestones through at least September 30, 2021. If our own financial resources and future cash-flows from operations beyond September 30, 2021 are insufficient to sustain operations, we may seek to sell additional equity or debt securities or obtain additional credit facilities. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.