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 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, 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 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, 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 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 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 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. 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. 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. 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, 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. 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 Years Ended March 31, 2022 and March 31, 2021 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, 2022 and March 31, 2021 which are included herein: Year Ended Year Ended March 31, 2022 March 31, 2021 Net Revenue $ 60,596,247 $ 46,069,121 Cost of Goods Sold 45,377,275 29,622,361 Gross profit 15,218,972 16,446,760 Net Loss (after operating expenses and other expenses) (39,364,118 ) (16,409,520 ) Revenue and Cost of Goods Sold We had revenue from sales of our product for the year ended March 31, 2022 of $60,596,247 as compared to $46,069,121 for the year ended March 31, 2021, an increase of 32%, 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, 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 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 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. Expenses Our operating expenses for the years ended March 31, 2022 and March 31, 2021 are as follows: Year Ended Year Ended March 31, 2022 March 31, 2021 Sales and marketing expenses $ 32,636,143 $ 16,420,520 General and administrative expenses 21,580,739 15,860,147 Total operating expenses $ 54,216,882 $ 32,280,667 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. 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. Liquidity and Capital Resources Working Capital At March 31, 2022 At March 31, 2021 Current assets $ 21,157,421 $ 23,271,259 Current liabilities 21,920,686 13,244,041 Working capital $ (763,265 ) $ 10,027,218 Current Assets 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, 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. Cash Flow Our cash flows for the years ended March 31, 2022, and March 31, 2021 are as follows: Year Year Ended Ended March 31, March 31, 2022 2021 Net Cash used in operating activities $ (31,819,542 ) $ (14,280,238 ) Net Cash used in investing activities (992,009 ) (585,393 ) Net Cash provided by financing activities 25,211,657 19,434,905 Net increase (decrease) in cash and cash equivalents $ (7,599,894 ) $ (4,569,274 ) Operating Activities 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 increased net operating loss after adjustments to reconcile net income to net cash used in operating activities of approximately $17.9 million. Investing Activities Net cash used in investing activities was $992,009 for the year ended March 31, 2022, as compared to $585,393 used in investing activities for the year ended March 31, 2021. 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, 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, 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 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. 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.