Q2 FY22 Quarterly Activities Report (App 4C)

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EBITDA loss decreased 21% on the last quarter by US$0.4m to US$1.5m, compared to a loss of US$1.9m in Q1 FY2022. The EBITDA improvement was driven by a US$0.4m improvement in gross margin to US$1.3m (Q1 FY2022: US$0.9m).

Due to timing, although EBITDA improved by US$0.4m, cash expenditures for the quarter increased mainly due to a decrease in payables of US$0.3m and an increase in inventory of US$0.4m, among other working capital changes.

Gross margin as a percentage of sales continued to increase pleasingly to 57%, up 9 percentage points on the last quarter (Q1 FY2022: 48%). The increase is mainly attributable to reduced airfreight costs during the quarter and continued sales of new and more profitable products combined with a higher margin customer mix.

The following table summarises change in revenues and gross margins into Q2 FY2022:

Operational overview:

Partnership with prominent North American Actress and brand ambassador, Ms Shay Mitchell commences:

Hydralyte North America began its partnership with North American brand ambassador and equity partner, Shay Mitchell. Ms Mitchell is an accomplished actress, entrepreneur and mother. She has a significant social media presence, boasting an Instagram following three times larger than some of America's most prominent athletes and almost forty times some of Australia's leading influencers.

Ms Mitchell's social media presence continues to grow, particularly following her recent pregnancy and now stretches to 33.9m Instagram followers, 2.9m Twitter followers, 4.21m YouTube subscribers and 7.3m followers on TikToki.

The commencement of the partnership was highlighted through the first of a number of social media posts from Ms Mitchell from her Instagram accountii and interviews with North American news outlets including the New York Postiii, Yahooiv, MSNv and Today's Parentvi.

As part of the ongoing engagement, Ms Mitchell will provide insight into Hydralyte North America's social media strategy to increase brand awareness and underpin potential sales growth. This will be complemented by Ms Mitchell utilising her own social media channels for additional posts featuring Hydralyte North America products, as well as attending two-in person events during 2022.

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Maiden in-person event and marketing activation with Shay Mitchell in Canada:

As part of Hydralyte North America's focus on increasing brand awareness in Canada, the Company advanced plans to host a marketing activation and event in Toronto alongside Shay Mitchell.

Hydralyte North America and Ms Mitchell collaborated on the organisation of the event during the quarter, which was focused on a healthy day with Hydralyte and Shay Mitchell and promoting the use of the Company's product in sport and recreational activities.

The event occurred subsequent to the end of the period on 13 July 2022 and was attended by nearly 50 high profile North American social media influencers. This led to significant coverage across a number of social media platforms, which is expected to broaden the Company's profile amongst its target demographic.

Additional marketing and growth initiatives:

To complement the ongoing engagement with Shay Mitchell and to increase market share in Canada during peak summer months, the Company undertook a number of steps towards the commencement of marketing campaigns in Toronto, Ontario and British Columbia.

The Company launched an out-of-home (OOH) marketing campaign which includes the use of buses and elevators across Toronto. The promotion will run through to the end of August and is expected to increase brand awareness into peak demand season of the northern hemisphere summer.

Hydralyte North America has commenced daily in-store merchandising with major retailers in Ontario and British Columbia. The Company increased its daily store visit rate to ensure product was well positioning and any out of stocks could be immediately addressed at highest volume stores across the region.

New product development and recent launches:

Further product development initiatives and launches remain a focus. The Company successfully launched two new products during the quarter, which included Hydralyte+ Liver Support and Hydralyte+ Stress Relief with Ashwagandha. The new stock keeping units (SKUs) are currently being shipped to retailers in the US.

Hydralyte North America is also progressing 12 new products for launch into the US and Canadian market, with the majority set to coincide with the peak of the North American summer, providing potential increased uptake and enhanced sales. The proposed launches will include new flavours, larger serving sizes for the sport and recreational categories and variety packs which has generated strong eCommerce sales to date.

Comments on Cash Flows:

The Company can report that it is on track to meet its business objectives highlighted in the below use of funds table. The following table represents the use of funds raised in the IPO since the 14 December 2021 IPO date:

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Net cash used in operating activities was US$2.3m, which included US$0.4m of inventory stocking as the Company heads into peak demand season during the northern hemisphere summer.

As at 30 June 2022, Hydralyte North America had cash and cash equivalents of US$6.3m. This provides the Company with the financial flexibility to increase its revenue profile, gross margin and continue to reduce net cash used in operating activities.

Additional Information:

Payments to related parties and their associates for the quarter were $1,734 for IT services, excluding payments to directors for remuneration as disclosed in the remuneration report.

Management commentary:

Hydralyte North America CEO Oliver Baker said: "Hydralyte North American has achieved another consecutive quarter of growth and laid a solid foundation moving into the North American summer months.

"The increase in revenue was underpinned by the ongoing expansion of our traditional retail sales footprint, as well as increasing our product range with existing customers. Ongoing eCommerce sales have also assisted. Pleasingly, gross margin rose 9% on the last quarter, underpinned by a reduction in shipping costs and a mix of higher margin product sales across the board.

"The Company progressed a number of marketing initiatives designed to increase brand awareness in key markets. We have implemented a number of creative marketing campaigns, including events and OOH strategies that have the potential to drive product turnover during the summer months.