The Alkaline Water Company Inc.

Greetings and welcome to the Alkaline Water Company to discuss fiscal 2021 second quarter results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sajid Dowdy, Director of Investor Relations. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us for the Alpine Water Company's second quarter fiscal 2021 earnings conference call. Shortly, you will hear from Ricky Wright, our President and CEO, and David Garino, our Chief Financial Officer. During the call, we'll be making forward-looking statements within the meaning of the safe harbor provisions of U.S. securities laws, and we 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 material factors or assumptions applied in making forward-looking statements, please consult the company's Form 10Q, which was filed today, and its other reports filed with the Securities and Exchange Commissions on EDGAR and with Canadian security regulators on CEDAR. In addition, such forward-looking statements and any projections as to the company's future performance represent management's estimates as of today, November 16, 2020. The company does not undertake to update any forward-looking statements or projections except as required by applicable laws, including the United States and Canada's security laws. Actual results can differ materially from those contemplated by any forward-looking statements as a result of certain factors included but not limited to general economic and business conditions, competitive factors, changing 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 the 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 that the company will provide a summary of results discussed on today's call. I will now turn the call over to our CEO, Ricky Wright, who will give an overview of the company's second quarter fiscal 2021 results. Following Ricky's comments, David Corrino, our Chief Financial Officer, will provide an overview of the company's operating results. Ricky will follow data to provide closing remarks, and then we will then open up for the call for Q&A. And now, I would like to turn the call over to Ricky.

Thank you, Sajid. Hello, everyone, and welcome to the Alkaline Water Company's second quarter fiscal 2021 conference call. Our team is doing a great job of executing in a challenging COVID environment. During our second quarter, we continued to outperform our competitors in the value-added water space, It made substantial progress in growing our other A88 lifestyle brand. For the first half of fiscal 2021, our revenue grew by approximately 21% compared to the same period last year. Our quarterly growth was impacted by various distributors reducing deliveries in July and clearing excess inventory that they had built in the prior quarter. Delivery and inventory trends continue to improve throughout the quarter with a record month of sales for October. The pandemic has led to demand spikes and changing consumer supply and buying patterns, which we believe have finally begun to normalize. As I said in my first quarter call, we implemented aggressive promotional spending over the summer, which resulted in us increasing our market share and the value-added water space. We are clearly winning the marketplace and gaining share in the process. According to the total U.S. all-sales channel Nielsen's report dated October 3rd, our flagship brand has been the fastest-growing, non-flavored, value-added water in the top 10 brands over the last 13, 26, and 52-week period. Per Nielsen's over the last 26 weeks, our brand has grown 17.7% compared to the category growth of a negative 0.3%. Over the previous 13 weeks, our retail sales have exceeded our quarterly average and were a robust 23.2%, more than double the category growth. In the last 26 weeks, we have also gained roughly 0.4% market share. This is equivalent to almost $8 million in annual retail sales. During the same period, our top-selling SQU has become one of the top 10 in the value-added water category in the entire country. We remain the only top 10 value-added water that has grown double digits in every four-week period since January. This is a testimony to our brand and our strong partner network and the growing base of our loyal customers. As the Nielsen data clearly shows, our store-level sales have been increasing throughout the last 13 weeks. However, our second quarter gap sales were negatively impacted as retailers worked through the excess inventory purchased during the pandemic period. I'm happy to report that as of last week, inventory levels of our products at our retailers have now normalized, driven by our aggressive summer marketing efforts. I was also pleased to see recently new orders from one of our largest customers in the all-natural channel. We believe this quarter sales number is an outlier as excluding the COVID impact, we saw the second best quarter in terms of POs in the company's history. In fact, the Nielsen data shows continued strength at the retail level in October as Alkaline 88 outperformed all but one brand in the top 10, growing 22% versus the category growth of 13.2%. We have committed to creating the premier alkaline water company in the country. According to the recent Beverage Marketing Corporation report, the U.S. market is estimated to grow 11% to almost $900 million in retail in 2020. Our flagship brand, Alkaline 88, has consistently outperformed the category in both growth and is firmly entrenched as the 10th largest brand in the value-added category. We're now probably the fastest-growing alkaline water company in the country. Think our initiatives over the next 12 to 18 months, we can continue to hold that distinction. Or two years ago to leverage off the access we have to over our 70,000 retail locations in the US to create a national lifestyle brand anchored around Alkaline 88. We have now successfully launched and continue to expand our lifestyle 88 brand, including 88 infused flavored waters, our eco-friendly aluminum bottles, and our innovative and growing line of 88 CBD ingestible and topical products. Each of these brand extensions was chosen because we believe that the category has pent-up demand. Flavored waters, sustainable packaging, and CBD are leading health, wellness, and lifestyle trends. Each of these opportunities represents potential for multibillion-dollar consumer markets. Our proven ability to execute during the pandemic has actually increased our opportunities to accelerate this growth. With the apparent change in the administration in the U.S., we believe that the FDA guidance on CBD will be forthcoming soon. Being a national consumer products goods company, we feel we are positioned very well to take advantage of any changes that would allow us to sell in all the states. Earlier this year, we launched a comprehensive line of CBD infused ingestibles and topical products under the A88 CBD brand name. via our direct-to-consumer e-commerce sites. Our creative digital and data-driven strategies are helping monetize our traffic, our cost of customer acquisition continues to decrease monthly, and our reorders continue to grow. Over this holiday season, we will launch an aggressive online marketing effort designed by our agency Davis Allen and UTEC. This will be the first traditional marketing effort in the company's history. These all-natural products resonate with our current A88 consumers, and many of our existing customers should be A88 CBD customers as well. We are particularly excited about our growing line of in-demand A88 CBD-infused ingestibles. Our ingestibles now include tinctures, capsules, vegan gummies, and our lemon-lined flavored A88-infused water. Prior to the New Year's, we also plan to bring to market sour gummies, powder packs, and fruit chews. These products are incubated in our research labs, leveraging data insights. We believe now we have a fantastic lineup made up of some of the most sought-after items in the CBD ingestible category. Our 88 CBD topical portfolio now includes body lotion, hand and foot cream, lip balm, muscle salve, bath salts, essential oils, and our newly launched deep relief cream and bath bombs. Our deep relief cream became our number one selling item of topicals in the first week of online sales. Early feedback on our entire line of A88 CBD has been overwhelmingly positive. We believe our A88 CBD products are some of the best in the industry, and like all our products, superior distribution, multi-sales channel, and trusted products by our consumers will allow us to continue to gain market share. Our brick and mortar presence continues to grow, and our sales pipeline remains robust with strong interest from traditional retailers and convenience stores as well. According to the Brightfield Group, CBD sales in convenience stores and gas stations are expected to increase 55% in 2021, with ingestibles accounting for 60% of those sales. Based on this report, tincture sales in the channel remain strong and currently 15% of CBD sales. Gummies, capsules, and drinks alone are expected to drive $153 million in the category sales by 2021. Our gummies and CBD infused flavors are some of the best tasting on the market with no bitter aftertaste. Also, by using a truly water soluble CBD, our Soon to be launched powder packs are fully dissolvable. We believe these products will immediately impact our CBD sales over the next two quarters and into fiscal 2022. We are in active discussions with over 9,000 retail locations to take our products in over the next 90 days. The CBD water gummies and our unique powder packs are opening doors both in our traditional channels and our C-Store channels. During the quarter, we added two major DSD and leading national distributed partners in the all-natural channel to accelerate our growth. As a result, we are near final negotiations with one of the fastest-growing convenience store chains in the U.S. This store chain will carry our CBD-infused flavor gummies and powder packs in all 400 stores located primarily in the South and Southwest. This will be an exciting win for us and give us a significant beachhead in the region. Our team and our partners are actively engaged in penetrating this space, and you can expect more announcements highlighting significant wins in the coming months. With access to some of the largest retail banners and with the CBD industry expected to grow to over $20 billion by 2025, we are excited about the potential for our growth and demand of our portfolio of A88 CBD ingestibles and topical products. Those closely following our stories know that we entered the market as a bulk water brand, which uniquely positioned us in the grocery and supermarket channel. Our flagship brand has done over $200 million in sales retail and is available in more than 70,000 retail locations nationwide. These represent some of the largest chains and banners in the U.S., including Walmart, Kroger, Albertson, Safeway, Publix. We have introduced several single-skew SQUs in recent years, which include our flavored water, sustainable aluminum bottles, and our newly launched CBD-infused lemon-lined flavored water. We review the single-serve product line as key to our growth as it provides access to new trades and improves our attached rates with existing customers. We're actively pursuing various opportunities in convenience stores, drugstores, specialty retail channels, and have recently announced the hospitality and food service segment. These greenfields areas present tremendous opportunity for our brand, giving us access to multiple billion plus trade markets in these growing markets. Our single serve continues to be significant part of our business and a key driver for our growth. It's apparent to accelerate our growth in this category, we need to have a more sustainable presence in the convenience store channel. Our goal is to have a footprint between 20 and 25,000 locations out of the sea store universe of 155 stores nationwide. We're currently talking to and are in negotiation with a number of major DSDs in some of the country's largest metropolitan areas. We expect to be able to announce this quarter several agreements that will significantly change our penetration in the sea store market. Our single serve offering, which includes our core brand, our flavored waters, and our eco-friendly aluminum bottles are key products in this category. Our flagship brand already has a growing presence, and our sales and partner networks are aggressively pursuing these active pipelines. We have received firm commitments on our flavored line, but timing remains uncertain due to COVID pandemic's impact. We expect both our flavored and our aluminum bottles to do well on this channel. As many C-store customers are reimagining their storefronts and reevaluating their merchandising needs to include healthier items to keep up with the overarching secular industry trends. Another significant growth area that we have identified and are actively pursuing is the hospitality and food service segment. According to a recent Beverage Marketing Corporation report, the U.S. on-premise beverage market is over $14 billion in water alone, and presents a compelling opportunity for our single service and CBD portfolios. They define the channel to include food service venues, vending machines, schools, airports, stadiums, golf courses, et cetera. While we identified these trades as growth segments last year, we only recently started to actively pursue opportunities in this channel. This was severely hampered by the impact of COVID. To date, we have added two major partners to help us gain share in this large segment. We are excited to be working with Dot Foods, the largest redistributor in the U.S. Dot will offer our entire 88 line, including our 88 infused and aluminum bottles, to their 4,300 customers nationwide. 88 infused will be replacing a leading privately held flavor brand that did exceptionally well in their system. At its peak, the competitive brand did over a million cases within the hospitality channel and helped propel its growth in a relatively short timeframe. We hope to mirror that success. We also added IBA Food Services, a national food service broker that will help us accelerate our growth in this large channel. It has many relationships across this channel and has a stellar reputation throughout the country it is a national alliance of food brokers similar to how we began alkaline 88 with the national alliance of water brokers we will provide more details on this partnership in the coming weeks finally with the apparent change in the administration we've begun to prepare for another foray into the international markets During the last quarter, we received FDA approval for exports into a number of different countries from three of our strategically located co-packers. We believe there's a significant opportunity for us to expand our lifestyle brand overseas in the next six months. We've begun the task to identify and re-up previous partnerships and relationships into various markets. Our most logical export opportunities currently are Mexico, China, and Canada. This adds another catalyst for growth. We hope to realize the benefits over fiscal 2022. We would begin strictly exporting our current product based on market demand and demographics, but we would also consider licensing arrangements with respect to our brand and our technology. For Beverage Marketing Corp, over 58 billion gallons of water are sold each year in these three countries, creating a tremendous opportunity for potential sales for our growing water brands. Our revenue mix remains concentrated in the grocery store channel, and we continue to pursue large banners in this segment. I'm thrilled to announce that our sustainable aluminum bottle, one and a half liter and gallons will be available at one of the premier supermarket chains in the Midwest and a top 20 chain in North America starting the new year. I'm proud to say that our flagship brand, Alkaline 88, is available at 48 of the top 75 retailers, according to the supermarket news, top retailers and wholesalers in the United States and Canada. After adding Family Dollar and HomeGoods in the specialty retail channel earlier this year, this is a major win for our core brand and validates that our products are winning channels we serve. This year, we have taken aggressive actions and are confident that our investments will generate strong returns as we continue to position ourselves as a trusted national brand. We believe that we are well positioned to succeed and expected to accelerate our growth in the fourth quarter and into all of fiscal 2022. For the forthcoming year, we are continuing in discussions with chains representing over 46,000 retail locations, some of which are already doing tests, And with others, we have firm commitments. Reminder, our third quarter is traditionally soft due to the holiday season and specialty items being brought in to take away shelf space in the grocery channel. Despite continued COVID-related uncertainties, we are seeing improved business trends that are accelerating into this quarter. As such, we now expect a full year revenue of $48 million to $52 million representing growth of 17 to 27%. Taking the midpoint range of the guidance, our estimated five-year compounded annual growth rate through 2020 will be approximately 48%. This year's strategic actions effectively position us to return to pre-pandemic growth rates in our fiscal 2022 and beyond. Now with that, I now would like to turn the call over to David Garrino, our Chief Financial Officer, who will take you through the second quarter fiscal 2021 financial results. David.

Thank you, Ricky. Before I begin, I'd like to encourage interested listeners to review the 10-Q that we filed with the SEC for a more detailed explanation on some of the quarterly results I will be highlighting today. As Ricky mentioned, our growth during the quarter was negatively impacted by the reduced orders at a large distributor driven by the COVID-19 pandemic. For the three months ended September 30th, 2020, we reported revenue approximately $10.8 million, which increased 3% year over year. For the first six months of our fiscal year, we delivered growth over 21% compared to the same period last year. Our end market demand remains healthy, and we saw improving trends throughout the quarter. Our gross profit from sales in the quarter ended September 30th, 2020 was approximately $4.43 million versus gross profits of $4.49 million in the quarter ended September 30, 2019. Our gross margin percentage of 41% declined compared to the prior year quarter, primarily due to higher cost of goods sold driven by raw material costs. Total operating expenses for the three months ended September 30th, 2020 was approximately $8.7 million compared to approximately $7.3 million in the prior year quarter. This increase in total operating expenses was primarily due to an increase in general administrative expenses. Specifically for the three months ended September 30th, 2020, sales and marketing expenses were approximately $5 million compared to the approximately $4.8 million in the prior year quarter. The increase in sales and marketing expenses resulted from higher freight and promotional expenses due to the increased sales. During the same period, general administrative expenses were approximately $3.5 million compared to approximately $2.2 million in the prior year quarter. G&A expense of approximately $3.5 million in this fiscal quarter ended September 30, 2020, consisted primarily of three items. approximately $1.6 million of professional media and legal fees, approximately $800,000 of non-cash stock option expense, and approximately $700,000 of wage and wage-related expenses. Net loss per share in the quarter ended September 30, 2020 was approximately $0.06 per share, improving approximately 14% from the quarter ended September 30, 2019. The net loss per share was negatively impacted by roughly $3.8 million in non-cash items, including $1.86 million in prepaid expenses. This resulted in a negative 3 cents impact on our bottom line. Cash used by operations during the three months ended September 30, 2020 was approximately $8.1 million, as compared to approximately $2.7 million in the prior year quarters. primarily due to the increased inventory related to our A88 CBD line, the increase in net loss, and the increase in accounts payable. Importantly, our cash position as of September 30, 2020, was approximately $3.7 million. Specifically, we believe the cash on hand as of September 30, 2020, our expected conversion of outstanding warrants and Availability for our credit line, we will have sufficient cash to sustain operations at least through September 30th, 2021. Next, I'll quickly cover guidance for the remainder of our fiscal year ending March 31st, 2021 before turning it back to Ricky. As noted in Ricky's prepared remarks, we are introducing full-year guidance for our fiscal year 2021. We now expect to deliver revenue of approximately 48 to 52 million dollars with an estimated gross profit of approximately 19 to 21 million dollars. This represents growth of approximately 17 to 27% for the full year. We expect all of our lifestyle brands to help drive the top line with strong contributions from our 888 CBD line in the fourth quarter. And with that, I'll turn it back to Ricky. Thank you.

Thanks, David. Once again, I would like to thank you all for participating in our call today. We've done an excellent job navigating through an uncertain and unpredictable macro environment. Despite the challenges, we have made significant progress towards our strategic goals, and our shareholder value creation actions positions us for long-term success. We remain focused on execution with our sites into some large growth opportunities and access to the various sales channels. I am very proud of our performance during this fiscal year. Our team has received multiple accolades, and we have been awarded for our ability to deliver during this unprecedented times. The goodwill created bodes well for our brand extensions, and we believe will pay significant dividends in the years to come. We're excited about our future and our track record and the consistency of our delivery of our best-in-class products. It has made us a favorite amongst both retailers and the consumers. We continue to scale, All the elements for success are present. We have sufficient capital, a great management team, a great business model, superior products with all natural ingredients, great channels to distribute to, great taste profiles, and an increasing market-driven consumer demands for each of our respected lifestyle products. Our fully executed e-commerce platforms, our channel expansion to hospitality, convenience, specialty retail, combined with organic and new store growth and total U.S. food channel, should resolve in substantial growth over the foreseeable future. I would like to thank our shareholders and our board for their continued support. We are making great strides in making 8888 Infused and 88 CBD the most trusted lifestyle brand in America.

At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Your first question comes from the line of Luke Hannon with Canaccord Genuity. Please proceed with your question.

Yeah, thanks. Good afternoon, guys. First question I had, just on the cash position to end the quarter, you guys talked about between that and the expected warrant exercises you expect to be able to operate over the course of the year. I'm just curious on the warrant exercises. Are those callable at any point? Are they callable, or is it solely at the holder's discretion whether those warrants get exercised?

At this time, they're not legally callable, but we've had discussions with the warrant holders, and we believe that they will be exercised if not in this quarter by the end of this fiscal year.

Okay. The second question I had, is on the guidance, specifically the gross margin guidance. I know, Ricky, I think, correct me if I'm wrong, but when you've spoken in the past about the CBD opportunity, I believe CBD products in general are higher margin than the gross margins associated with your traditional alkaline water products. So included in that guidance, what should we be factoring in as far as revenue mix, I guess? Is it the guidance would imply that it would be less CBD than expected. Is that the right way to think about it?

Luke, the guidance includes some CBD, but probably about two-thirds of what was the expectation level. The resets are a little slow, but the good news is, candidly, that two weeks ago, as you talked to me about who was going to take in ingestibles this year, I would have told you probably primarily the CBD specialty stores, but as of two weeks ago, we've begun to get tremendous activity from more standard retail locations. They seem to be going state by state, following our pattern of using a dietary supplement and selling in states in which they're allowed to sell. Pretty exciting in terms of our sales group relative to the adjustables for the remainder of the year.

Okay. That's it for me. Thanks.

Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. One moment, please, while we pull for more questions. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Richard Wright for closing remarks.

Thank you. Thank you all for attending today's conference. Again, I can't stress enough how proud I am of the company and the way that we perform during the COVID environment. It is literally the toughest business environment I've been through in 43 years, and yet somehow we have managed to expand, not only in our current customer base, but also in our lifestyle brand, which is very tough to do when you don't know who's going to be open and who's not. We've done a really, really great job in getting it done and getting after it. And I see nothing but blue skies in the future. I want to thank you all for your patience today.

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