Greetings. Welcome to the Alkaline Water Company's Third Quarter Fiscal 2020 Results Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Sajid Daudi, Director of Investor Relations. Mr. Daudi, you may begin..

Good afternoon, everyone, and thank you for joining us for The Alkaline Water Company's Third Quarter Fiscal 2020 Earnings Conference Call.

During the call, you will hear from Ricky Wright, our President and CEO; and David Guarino, our Chief Financial Officer.During the call, we will be making forward-looking statements within the meaning of the safe harbor provisions of U.S. securities laws and may make additional forward-looking statements during the question-and-answer session.

Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements.

For additional information about factors that may cause actual results to differ materially from expectations and about factors or assumptions applied in making forward-looking statements, please consult the company's Form 10-Q, which is filed today and its other reports filed with the SEC on EDGAR and with Canadian security regulators on SEDAR.In addition, such forward-looking statements and any projections as to the company's future performance represents management's estimates as of today, February 10, 2020.

The company does not undertake to update any forward-looking statements or projections, except as required by applicable laws, including securities, laws in United States and Canada.Actual results could differ materially from these contemplated by any forward-looking statements as a result of certain factors, including, but not limited to, general economic and business conditions, competitive factors, changes in business strategy or development plans, ability to attract or retain qualified professionals as well as changes in legal and regulatory requirements.The company issued a press release announcing its financial results and filed Form 10-Q with the SEC.

So participants on this call, who may not have already done so, may wish to look at those documents as the company will provide a summary of results discussed on today's call. I will now turn the call over to our CEO, Ricky's Wright, who will give an overview of the company's third quarter fiscal 2020 financial results.

Following Ricky's comments, David Guarino, our Chief Financial Officer, will provide an overview of the company's third quarter operating results and the business outlook for fiscal 2020. Ricky will follow David, again, providing closing remarks. We will then open the call for Q&A after management's update.

And now I'd like to turn the call over to Ricky..

ingestibles; topicals; and inhalables. These products are currently being served by dispensaries, pharmacies and the e-commerce channels.The firm projects that the industry is to grow to over $20 billion by 2024, and expects the consumers to be using a very diverse group of trade channels to purchase their products.

Interestingly, according to the research, the largest growth category will be edibles and topicals, presenting a market opportunity of $12.4 billion. The firm also believes that traditional retail channels, like big box, grocery, drug stores and convenience stores, will capture nearly 30% of the market.

The e-commerce channel is expected to remain a large and meaningful segment serving this market, and is projected to grow as large as $3.6 billion with a 5-year CAGR of approximately 44%.

And referring from their research, we concluded that Alkaline88 company will be serving a market that is expected to grow 1.6x faster than the overall projected CBD industry.I would like to reiterate that the company intends to compliant full with all federal, state and local laws, rules and regulations as the company develops its CBD-infused ingestible products.

The company will not pursue the commercial production of sale of CBD-infused ingestibles, until legally permitted. The company is closely watching and responding to all regulatory developments within the FDA and in each individual U.S.

state, and plans to launch its CBD-infused ingestibles products accordingly.Over the past 9 months, we have also focused on driving product innovations and have introduced our sustainable package option through our aluminum bottle line of Alkaline Waters.

This quarter, primarily driven by consumer demand, we introduced our eco-friendly single-serve 500-milligram aluminum bottle of our flagship brand, Alkaline88.

This refillable, resealable, 100% recyclable product is yet another step that the company is taking towards a more renewable future.We remain committed to providing smarter and innovative packaging solutions for the environmentally conscious consumer.

This product will soon be available in stores and will be introduced into our third largest customer in the very near future. The aluminum bottle could be another game changer for our company. It adds a new dimension to our case profile. Chilled, it is the most refreshing drink I personally ever had.

The smoothness and cleanness of this project is accentuated by the reduced temperature found in the aluminum bottle.We're exploring and coupling this product with our flavor infused and flagship product included across the country. We will test market this in the summer of 2020 in Southern California and expand it accordingly.

We have been carefully building our brands on trust and integrity, which is the key tenet of our growth and future success. However, we cannot achieve the success without consistence -- consistant and growing base of loyal customers. We're always looking for opportunities to introduce our brand to new customers and their demographics.

This past month, our flagship brand, Alkaline88, was introduced to the passionate base of dirt track racing fans.Through a leading advocate sport, Wicked Cushion, we will sponsor 2 dirt track racing rising stars, Justin Sanders and Brent Marks as brand ambassadors for the 2020 racing season.

For people unfamiliar with the sport, dirt track racing is the single most common form of auto race in the U.S., with hundreds of local and regional race tracks throughout the nation. In fact, more tickets are sold to dirt track races each year than NASCAR, the NFL, the NBA and the NHL combined.

Both Justin and Brent's racing cars will be wrapped with Alkaline88 logos throughout the season. The first circuit occurred in late January and A88 brand was predominantly displayed throughout the event.

We couldn't have asked for better coverage and are excited about this new marketing opportunity.As we continue on our journey of evolving from a specialty water beverage company to a lifestyle consumer packaged goods company, we felt now is the time for a brand refresh of our core products.

6 years ago, when we launched the company, no one even knew what alkaline water was and definitely did not associate the term alkaline with water. Our approach to the market was very much educating our consumers and highlighting our superior taste profile.Today, the category is approaching $1 billion worldwide.

And is one of the fastest-growing segments within the bottle water industry. After having sold over $155 million of our Alkaline88 to a large and loyal healthy lifestyle-focused customer base, we believe now is the time to highlight the benefits of our flagship product, Alkaline 88.

Our new label will be etched beautifully on a white background and prominently display how consumers describe our brand, smooth, tasty. Along with our promise of a clean and pure beverage with no buffers or preservatives and ionized to nature's best 8.8 ph.We are excited about the organic opportunities ahead of us in our core markets.

Through our growing line of products, we believe we can further expand our reach into existing trade channels and entering new channels like health and beauty, hospitality, MSOs and dispensaries.

Complementing our brick-and-mortar strategy is our new e-commerce platform, A88CBD, which will help drive and enhance customer experience in the Nansen CBD industry.Our innovations in sustainable packaging and product development help us remain true to our ideology of all-natural, best-in-class and in-demand products to demanding consumers of all ages and demographics have come to expect from us.

Well, I've spent a lot of time talking about our growth initiatives, I also want to emphasize our focus on profitability. We have taken some meaningful expense actions this last fiscal year as we realign our priorities to focus on our brands and our core products.

In addition, as we scale our mix shift to a new line of products that are expected to drive profitability. These actions are expected to drive strong returns, and we are targeting to be cash flow positive by the end of fiscal 2021. It's a great time for the company and the industry.

Our teams are pursuing meaningful growth opportunities, and I see a bright future ahead of us. With that, I would like to now turn the call over to David Guarino, our Chief Financial Officer, who will take you through the third quarter fiscal 2020 financials and our full year guidance.

David?.

approximately $700,000 of professional, media and legal fees; approximately $600,000 of wage and related wage expenses; and approximately $200,000 in noncash stock option compensation expense.Cash used by operations during the 9 months ended December 31, 2019, totaled approximately $8.9 million as compared to approximately $3 million in the prior year 9 months, primarily due to an increase in our net loss and changes in working capital.

Importantly, our cash position as of December 31, 2019, was approximately $4.1 million.

Specifically, we believe that the cash on hand, as of December 31, 2019, and our credit line, we will have sufficient cash to sustain operations at least through December 31, 2020.Next, I'll quickly cover guidance for the remainder of our fiscal year 2020, which ends March 31, 2020, before turning it back to Ricky.

As noted in Ricky's prepared remarks, we are reducing our full year guidance for the fiscal year 2020. We now expect to deliver revenue of approximately $39 million to $41 million, with estimated gross margin of approximately $15.5 million to $16.5 million.

This represents a growth of 21% to 27% for the full year.In addition, we expect our flavor-infused water to contribute $750,000 to $1 million towards our fiscal 2020 revenue goals. And with that, I'll turn it back to Ricky. Thank you..

Thanks, David. Once again, I would like to thank you for participating in our call today. In conclusion, I would like to say that I'm very proud of our team for the hard work and dedication over the last 9 months. As we continue to execute against our business plan, I see tremendous opportunities ahead for our flagship brands and product extensions.

I am excited about fiscal 2021 and look forward to seeing our efforts help drive growth and profitability. I would like to, also, thank our shareholders and the board for their continued support. We are making great strides in making Alkaline88, A88-infused flavors and A88CBD, the most trusted lifestyle brand in America. Thank you. Have a great day..

[Operator Instructions]. Our first question is from Neal Gilmer, Haywood Securities..

Ricky, maybe, if I could ask you to expand a little bit just on the impacts in Q3 there with respect to your comments about the schematic resets.

Can you give us a little bit more color and sort of how that impacted the quarter?.

Yes. As I discussed in the call, the impact is primarily related to timing. It's not only the resets, but new store additions, both with respect to the flavor and the flagship product. On the last call in November, we issued our guidance.

We had intimated that a number of large national retail wins would come in during our third quarter and carry into the fourth quarter. None of those occurred at this time. The good news is and why I'm so bullish on our core brand, is it -- it's just a timing issue. I want to reiterate, no accounts were actually lost.

In fact, with the flavored infused and A88CBD as part of current offering, more large regionals and national retailers are opening up their doors to us.The two national retailers, we did announce that we expected to come in third and fourth quarter, we've already received appeal from one of them. And it's going to put us in a brand-new trade channel.

The other one is a large drug storage chain with a strong presence on both coast. Beyond these 10,000 stores, now expected -- we now expect an additional 20,000-plus stores in the next 12 months. I believe that the growth experience, we're still one of the fastest-growing water companies in the country.

And we really had no major national brands added since 2018. So I really, really, really feel good about the 2021. And from the last 2 quarters, this quarter and the last quarter, it's really just a timing difference for us..

Okay. That is helpful. Yes, I know you covered a number of different things in your prepared remarks. I guess, maybe 2 things. On the topical, sort of, it sounds like you're expecting some revenue to be booked into Q4 from that.

But I know you sort of walked through everything but where do you sort of see your confidence level as far as that builds into your fiscal '21? Sort of how do you, sort, of internalize what your expectations are from this far? I know what the overall broader opportunity is but any sort of comments on where you could consider a success as far as overall either penetration rates and so forth? Like how are you looking about, sort of, expand out that -- basically launched that particular channel?.

Thanks, Neal. Good question. We're launching that on a co basis. I can't give any specific numbers. Initially, we'll be giving guidance, and we'll probably segment that in our next call. We're doing this in a two-pronged approach. We have now seen, I think, the last tally, 65 different retailers representing 72,000 stores.

We think on the brick-and-mortar front, we will receive our first order, brick-and-mortar, within the next 60 days. So that's very, very encouraging. I also firmly believe that within the next 12 months, we may well be the #1 brick-and-mortar CBD-topical company in the country. So it's going to be in the millions. That's all I can say.

In terms of tying it down, obviously, just like the news for this quarter, it just depends on when we get in and actually on the shelves.On the CBD e-commerce strategy, we hired Utech. They're a well known, I think they have about 800 clients. They do core beer and some other very, very large international accounts.

We have complete buy-in from that company. And they -- we believe that we can compete with the likes of some of the other Pürcan and some of the other majors by the -- probably, within the next 18 months. Obviously, some of this will be driven by how quickly we can adopt into our ingestibles as well.

But certainly, we think that the topicals, even though it's in a longer sales cycle and the usage is in -- is quick turnover, we believe and we found out in our shows that we've had apparently the 6 or 7 top sellers already out in the marketplace. So we feel very good about that, and it's being developed very professionally.

February 20, you guys can all go on and take a look at our new website. We're focusing on the millennials. So we have a little different look than we have on our standard Alkaline88 website. It's A88CBD.com..

Okay, great. And maybe one last one, if I can. Just if you have any sort of comments on sort of a geographic basis? How is the East Coast been ramping up? And I guess, Southern California, is that still sort of remain strong for you? Any sort of geographic comments you can provide..

Yes. I think it's interesting. Southern Cal still stays strong. I just looked at our overall Kroger numbers actually before the call just so I had some view on that. We're still outperforming the category by about 2x. So I think slightly more than 2x, which Southern Cal is our largest unit there. So maybe, kind of excited.

We have actually overtaken the Southern -- Southeastern United States. It has actually become our largest region with publics. And we've got some Whole-Foods down there. We have Winn-Dixie and Food Lion and Harris Teeter, and has become our largest sector.

And then the Northeast, we're just starting to gain traction with Shaw's but some of these announcements that are coming up in the next, hopefully, 10 days. We're actually just waiting for a legal on one of their -- these are both Fortune 500, so on one of their legal reviews.

We're just waiting for legal to release it.Otherwise, we would have had it out before today. Those are mainly at least headquartered in the east. And they have the highest concentration in the east. So we're very excited about that as well..

Our next question is from Raveel Afzaal, Canaccord..

So a few questions. First, in terms of your strategy. It's great to see that you guys are thinking about going cash flow positive in fiscal '21.

But I'm wondering, is that the right strategy for the company? Or should the focus be to invest more money into the business, try to grow the top line as much as you can and that may position you guys for a potential take out down the road.

What's the right strategy? How are you thinking about it?.

So good question, again, as always. Thank you. We spent a lot of money last year. And I think the number, if you look total on special projects was between, I think, it will tally up between $4 million and $7 million by the time this year is over. And we learned from all of that. We know exactly where we want ahead and why we want to get there.

We actually don't think this is going to slow us down. We've added some personnel. Our next number, we will report, I think, 27 people in the company. And I think our last reporting was 17. We've set up a CBD division. So we're full speed ahead on the growth.

We're just -- we just think we're going to be smarter at it in terms of -- we brought in 2 sales guys. We brought in Utech. And so we're still pushing on the growth of 100%. We're not slowing that down.We've just taken out some of the special projects.

I remember -- if everybody remembers the last couple of quarters, we've always said, we had this kind of ability to speed up special spending or take special spending back. We're taking special spending back but we're still focused on overall sales growth. So we're getting rid of some of the projects that we learn from them.

And we know what works and what doesn't, and we're taking that knowledge and we're applying it through our standard business practice, which is nothing happens without a sale. And we've upped our sales functions substantially in the last 12 months..

And just sticking with that point, then, yes, I mean, you are launching so many interesting products at this time. But when I look at your G&A spend, it's still very much in check.

So is it safe to assume that it will stay at these levels, like in Q4 and going into fiscal '21? Or do you see some ramp-up in the G&A expense? Sales and marketing is understandable but the G&A expense as you get these new products to the market..

Yes. This is David. We expect that the G&A expense will pretty much 100% basis stick with our revenue growth. Again, Ricky has mentioned, that we have hired some additional personnel. But some of the G&A and sales and marketing expense we do have, we really tried to structure it on a percentage basis. So as our sales increase, those costs will increase.

But I don't expect them to increase more than the increase in sales..

Got it. So what percentage are you targeting of revenues for G&A for fiscal '21? Or whatever you can share..

About 5%, I think, is what we've historically have done. And that's picking out of the one thing that's somewhat uncontrollable is the noncash G&A from the stock compensation expense. So our real cash G&A..

Got it. And just to further clarify on Neal's point. So basically in the quarter then, you were expecting two new national retailers to have you guys in the stores. And one just started giving you PO orders right now, and the other one you're expecting in the near term.

That's primarily what drove EBITDA revenues below your expectations, right?.

Yes that and the flavors we had, they came on slower than we expected as well. Although we now have commitments for actually 107,000 cases and up to 10,000 stores.

So I'm feeling really good about 2021 setting up very well for us because we also got into a major program with Core-Mark in terms of their Smartstock program, which is an exclusive program, which candidly is very cool because it includes all our SKUs within that program. And they actually do -- go and do store level checks and resets.

So it's a pretty cool program for a company to be in, especially company our size. We're very, very thankful for that..

And that shouldn't increase your selling and marketing as a percentage of revenues? Or do you think that will be more capital-intensive, relatively speaking?.

It will be a little bit of both. But again, the -- we expect to have a little bit more sales and marketing and at least initially with the e-commerce strategy. So I think that will offset any decline you might see in that other area..

Perfect.

And just finally, can you guys just remind us or give us some broad overview of the ingestibles regulations in the U.S.? Where do we sit today?.

More action has occurred on the local side than it has on the federal side. The federal still is, I think, it's February 20 or 28, where they still have some guidance to give -- 22nd. I was just told 22nd. So I missed it 2/22/20, they're supposed to give some additional guidance on where they're headed.

We also see some abilities to, maybe, go back to our state and local strategy. We really have to work through console but we have been working diligently on that. The good news is that we got clearance from both the TSX and the NASDAQ to do our topicals within the states that allow it. So there's no huge federal movement.

But certainly, California Proposition 228, looks like it's got plenty of legs. And most of the major states are moving towards allowing CBD and ingestibles..

Our next question is from Kevin Dede, Rodman & Renshaw..

It's Kevin Dede, H.C. Wainwright. First one, housekeeping, David. You mentioned in your gross margin guidance, and I didn't get the numbers. I apologize. Is it $15 million, $50 million, $15.5 million? I missed it..

Yes. We said $15.5 million to $16.5 million, based upon the numbers of $39 million to $41 million in revenue..

Right. Okay. Got it. If you want to -- a lot of store numbers, I guess, predicated on where you hope to be by the end of the year, pretty much by vertical.

Is that something that you'll be able to give us more color on as the year goes by?.

Yes. We've talked about that internally. We certainly hope to have enough volume in each segment to begin some segment reporting. Now obviously, there's some GAAP issues there as well, Kevin, that administratively, some additional initial administrative hours put in.

But yes, we do hope that we can get some breakout on the line items, flavored, CBD topicals as well as our core product..

But it'd be too much you expect that this year, right, for fiscal '20?.

Yes. I don't think that there are going to be significant enough, as David indicated. We think now that we'll have $750,000 to $1 million of flavors, recorded this current year. I think our original goal was $3 million to $4 million. And on the CBD side, I'm not going to end up, whatever this is, I only am over here, Kevin.

I do think that we will get 100 or more on the CBD topicals from e-commerce but it's not going to be significant for this fiscal year..

We have reached the end of the question-and-answer session. I will now turn the call back over to Ricky Wright for closing remarks..

Thank you, everyone. I don't think there's anybody in this organization that has viewed this company with more bigger and lights than we have now. I think everybody's band together. I think we have the most momentum we've ever had. We have more cash in the bank. We have more initiatives.

We have more projects, and we have more tailwind with very few headwinds in front of us. So I want to thank everybody for their support. We sincerely appreciate it, and we look forward to a great next year. Thanks..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..