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Item 7. Management’s Discussion and Analysis

2022-07-14 compared with 2021-07-06 · 41 added, 51 removed, 84 unchanged (52% of the section changed)

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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.

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, we launched A88 Infused Beverage Division Inc., which includes our CBD water and Alkaline88® Sports Drinks.

Our hemp-derived CBD water 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 and Canada.

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 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.

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 Columbia Distributing, Mahaska, Nevada Beverage, and Hensley, covering Nevada, Arizona, Pacific Northwest and Midwest region.

Combined, they service over 25,000 customers in eight 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.

Walmart, CVS, Rite-Aid, Family Dollar, Food Lion, Albertson's/Safeway, Kroger companies, Sam's Club, 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 full line of Alkaline88® bottled water products and sports drinks are presently available for purchase at www.alkaline88.com and www.thealkalinewaterco.com.

Our CBD water products are presently available for purchase on our CBD E-commerce website, www.a88cbd.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.

It has entered into co-packing agreements with nine different bottling companies located in Virginia, Georgia, California, Texas, Wisconsin, Nevada and Arizona to act as co-packers for our product.

Our current capacity at all plants exceeds approximately $14.0 million per month wholesale.

Our component materials are readily available through multiple vendors.

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

Smurfit, and Goodpac.

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.

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.

Our principal suppliers are Vav Plastics Inc., Amcor Inc., Smurfit, and Goodpac.

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.

A88 Product's focus is brand extension and product innovations in the CBD infused products category.

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

During our fiscal year 2022, A88 Products began selling its line of Alkaline88®CBD infused bottled water through ecommerce at www.a88cbd.com.

Currently, A88 Products' Alkaline88®CBD infused bottled water products are available for purchase on its E-commerce website, www.a88cbd.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 A88CBD water 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 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 currently produce Alkaline88® CBD infused bottled water as a low calorie hemp extract-infused water in five flavors and 5 functional formulas (Resistance, Rest, Relax, Refresh, and Reenergize).

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, 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.

We have not yet established an ongoing source of revenues sufficient to cover our operating costs, however, the Company has initiated a cost-reduction strategy along with its cash on hand, plus anticipated warrant exercises and debt settlements, our line of credit and the Sales Agreement is planned to fund our current planned operations and capital needs.

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.

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.

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.

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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

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Some examples of retail clients are:

Walmart, CVS, Family Dollar, Albertson/Safeway, Kroger companies, Schnucks, Smart & Final, Jewel-Osco, Sprouts, Bashas', Stater Bros.

Walmart, CVS, 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.

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For the year ended March 31, 2022, we had cost of goods sold of $45,377,275, or 75% of net sales, as compared to cost of goods sold of $29,622,361, or 64% of net sales, for the year ended March 31, 2021.

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.

The increase in cost of goods sold as a percentage of net sales compared to the same period last year was due primarily due to the increased raw materials costs and freight costs.

Our operating expenses for the years ended March 31, 2022 and March 31, 2021 are as follows:

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During the year ended March 31, 2022, our total operating expenses were $54,216,882 as compared to $32,280,667 for the year ended March 31, 2021.

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.

Sales and marketing expenses increased by approximately $16.2 million primarily resulting from a $6.4 million out-bound freight costs, $4.2 million in marketing professional and endorsement fees and $2.2 million in non-cash expense relating to our endorsement agreement.

General and administrative expenses increased by approximately $5.6 million primarily resulting from an approximately $2.9 million increase in non-cash stock compensation and approximately $2.3 million increase in wage and related expenses.

For the year ended March 31, 2022, the total of approximately $32.5 million of selling and marketing expenses consisted primarily of approximately $13.8 million of out-bound freight costs, $5.1 million in marketing professional fees and $2.2 in non-cash expenses relating to our endorsement agreement.

For the year ended March 31, 2022, the total of approximately $21.5 million of general and administrative expenses consisted primarily of approximately $7.3 million of professional fees, media fees and legal fees, approximately $5.3 million in wage expense and approximately $6.0 million in stock compensation expense, relating to stock option expense and stock expense relating to endorsement.

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Current Assets

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 assets as of March 31, 2022 and March 31, 2021 primarily relate to $1,531,062 and $9,130,956 in cash which decreased due to the Company's net loss;

$7,927,065 and $8,458,176 in accounts receivable;

and $8,853,664 and $4,407,720 in inventory, which increased due to additional inventory relating to supporting increased sales.

Current Liabilities

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.

Current liabilities as of March 31, 2022 and March 31, 2021 primarily relate to $10,441,879 and $7,055,348 in accounts payable which increased due to higher raw material and freight costs, revolving financing of $7,043,870 and $4,324,412, and accrued expenses of $2,036,739 and $1,306,106, respectively.

Our cash flows for the years ended March 31, 2022, and March 31, 2021 are as follows:

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Net cash used in operating activities was $31,819,542 for the year ended March 31, 2022, as compared to $14,280,238 used in operating activities for the year ended March 31, 2021.

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

The increase in net cash used was primarily due to the increased net operating loss after adjustments to reconcile net income to net cash used in operating activities of approximately $17.9 million.

Investing Activities

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Net cash provided by financing activities for the year ended March 31, 2022 was $25,211,657, as compared to $19,434,905 for the year ended March 31, 2021.

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

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

Financing Activities Subsequent to March 31, 2022

Subsequent to March 31, 2022, we sold a total of 750,240 shares of our common stock for aggregate gross proceeds of $631,203 through the Agent under the Sales Agreement.

On May 9, 2022, we completed an underwritten public offering of 8,333,334 shares of our common stock.

The shares were issued at a public offering price of $0.60 per share, for total gross proceeds to our company of $5,000,000.40, before deducting underwriting discounts, commissions and offering expenses payable by our company.

Cash Requirements

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 Company’s ability to operating as a going concern is dependent on obtaining adequate capital to fund operating losses until the Company becomes profitable.

The Company has initiated a cost-reduction strategy along with its cash on hand, plus anticipated warrant exercises and debt settlements, our line of credit and the Sales Agreement 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.

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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