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Item 7. Management’s Discussion and Analysis

2021-07-06 compared with 2020-08-13 · 49 added, 35 removed, 86 unchanged (49% of the section changed)

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Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report on Form 10-K.

Our bottled alkaline water product is presently available in all 50 states and the District of Columbia.

Founded in 2012, The Alkaline Water Company (NASDAQ and CSE:

WTER) is headquartered in Scottsdale, Arizona.

Its flagship product, Alkaline88®, is a leading premier alkaline water brand available in bulk and single-serve sizes along with eco-friendly aluminum packaging options.

With its innovative, state-of-the-art proprietary electrolysis process, Alkaline88® delivers perfect 8.8 pH balanced alkaline drinking water with trace minerals and electrolytes and boasts our trademarked label ‘Clean Beverage.’ Quickly being recognized as a growing lifestyle brand, Alkaline88® launched A88 Infused™ in 2019 to meet consumer demand for flavor-infused products.

A88 Infused™ flavored water is available in six unique all-natural flavors, with new flavors coming soon.

Additionally, in 2020, the Company launched A88 Infused Beverage Division Inc., which includes the Company’s CBD water and flavor-infused water.

For the Company’s topical and ingestible offerings, A88 Infused Products Inc.

includes both the Company’s lab-tested full-spectrum hemp salves, balms, lotions, essential oils, and bath salts, along with broad-spectrum hemp, powder packs, oil tinctures, capsules, and gummies, under the brand name "A88CBD™".

Our hemp-derived CBD products are produced and sold in compliance with the Agriculture Improvement Act of 2018 (also known as the 2018 Farm Bill, Public Law 115-334).

Our bottled alkaline water product is presently available in over 75,000 stores in all 50 states, the District of Columbia, the Caribbean and in Mexico.

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.

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 products directly to retail clients, including convenience stores, natural food products stores, large ethnic markets and national retailers and through Direct Store Distributors in selected markets, including Mahaska, Nevada Beverage, and Hensley, covering Nevada, Arizona, and Midwest region.

Combined, they service over 16,000 customers in five states.

Each one carries our full line of non-CBD waters.

Some examples of retail clients are:

Walmart, CVS, Rite-Aid Family Dollar, Food Lion, Albertson's/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.

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Our principal suppliers are Vav Plastics Inc., Amcor Inc.

and Packaging Corporation of America.

Smurfit, and Goodpac.

A88 Infused Beverage Division, Inc.

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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.

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.

Our first infused waters products were launched in 2019 and consist of A88 Infused's flavored water products, which are now available in Blood Orange, Lemon, Lemon-Lime, Peach Mango, Watermelon and Raspberry.

They are produced in Waco Texas at Waco Bottling.

Currently A88 Infused's flavored water products are on thousands of shelves nationwide in many of the same retailers that carry our flagship brand Alklain88 including, 99 Cent Only, Albertson (Randalls, Safeway), Associated Foods, Associated Wholesale Grocers, B&G Wholesale, Gelson’s Market, HEB, HY-VEE, Ingles, Save A Lot Super Store Industries, Supervalu, Wakefern, and national distributors UNFI and KEHE.

A88 Infused Products, Inc.

In September 2019, we formed A88 Infused Products, Inc., or “A88 Products,” a Nevada corporation and a wholly‑owned subsidiary of our company.

A88 Product's focus is brand extension and product innovations in the CBD infused products category, which include ingestibles and topical products.

For its ingestibles line, the A88™ Infused Beverage Division Inc.

currently produces CBD infused tinctures, gummies, fruit chews and capsules, and will produce CBD infused drinks, beverage shots, and powder packs.

For its topicals line, A88™ Infused Products Inc.

currently produces salves, balms, lotions, bath bombs, essential oils, and bath-salt all made with lab-tested full-spectrum hemp.

We formed A88 Products to meet what we believe is increasing consumer demand for a variety of CBD infused wellness products.

We expect A88 Products to capitalize on this and potential consumer demand with the development and launch of new products focused on growing trends in the space.

On February 20, 2020, A88 Products began selling its line of CBD infused topical products through ecommerce at www.a88cbd.com.

Currently, all of A88 Products’ CBD products are available for purchase on its E-commerce websites, www.a88cbd.com and www.a88hemp.com, various third-party ecommerce sites, and a growing number of brick and mortar retail locations throughout the United States.

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 expect to produce A88CBD water as a low calorie or no calorie, hemp extract-infused water in three flavors and 5 functional formulas (Relax, Revive, Recover etc.).

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.

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.

We have not yet established an ongoing source of revenues sufficient to cover our operating costs, however, we believe cash on hand, plus anticipated warrant exercises, our line of credit, and the Sales Agreement will adequately fund our operations and capital needs for the next 12 months.

Our ability to continue as a going concern 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.

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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.

Walmart, CVS, 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.

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General and administrative expenses

Depreciation expenses

Total operating expenses

During the year ended March 31, 2021, our total operating expenses were $32,280,667 as compared to $27,501,244 for the year ended March 31, 2020.

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

General and administrative expenses increased by approximately $4.6 million primarily resulting from an approximately $1.8 million increase in professional fees, approximately $2.3 million increase in non-cash stock compensation and approximately $0.8 million increase in wage and related expenses.

For the year ended March 31, 2021, the total of approximately $15.8 million of general and administrative expenses consisted primarily of approximately $7.7 million of professional fees, media fees and legal fees, approximately $3.1 million in wage expense and approximately $3.3 million in stock compensation expense, relating to stock option expense and stock expense relating to endorsement.

For the year ended March 31, 2020, the total of approximately $11.1 million 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.

Liquidity and Capital Resources

Working Capital

At March 31, 2020

At March 31, 2019

Current assets

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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.

Current assets as of March 31, 2021 and March 31, 2020 primarily relate to $9,130,956 and $4,561,682 in cash which increased mainly due to the approximately $10 million of net proceeds from a private placement in March 2021;

$8,458,176 and $4,917,081 in accounts receivable due to increased days outstanding due to COVID-19;

and $4,407,720 and $2,919,860 in inventory, resulting from additional inventory relating to support increased sales.

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.

Current liabilities as of March 31, 2021 and March 31, 2020 primarily relate to $7,055,348 and $5,406,541 in accounts payable, revolving financing of $4,324,412 and $7,291,217, and accrued expenses of $1,306,106 and $1,186,516, respectively.

Our cash flows for the years ended March 31, 2021, and March 31, 2020 are as follows:

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Net cash used in operating activities was $14,280,238 for the year ended March 31, 2021, as compared to $13,642,636 used in operating activities for the year ended March 31, 2020.

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.

The increase in net cash used was primarily due to the increase in changes to working capital accounts.

Investing Activities

Net cash used in investing activities was $ 585,393 for the year ended March 31, 2021, as compared to $488,557 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.

The increase in net cash used was due to increase of purchase of fixed assets.

Financing Activities

Net cash provided by financing activities for the year ended March 31, 2021 was $19,434,905, as compared to $7,660,424 for the year ended March 31, 2020.

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.

The increase in net cash provided by financing activities was due to proceeds from the sale of common stock and exercise of warrants.

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.

We believe cash on hand, plus anticipated warrant exercises, our line of credit and the Sales Agreement will adequately fund our current planned operations and capital needs for the next 12 months.

However, if our current plans change or are accelerated or we choose 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis