Alkaline Water Company Inc (WTER) 2022 Q2 法說會逐字稿

Greetings, and welcome to the Alkaline Water Company's Second Quarter Fiscal Year 2022 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Wright. Thank you, Jeff. You may begin.

Good afternoon, everyone, and thank you for joining us for the Alkaline Water Company's Second Quarter Fiscal 2022 Earnings Conference Call. Shortly, 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 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 10-Q, which was 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 represent management estimates as of today, November 9, 2021. The company does not undertake to update any forward-looking statements or projections, except as required by applicable laws, including the security laws of United States and Canada. Actual results could differ materially from those 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 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 as the company will provide a summary of the results discussed on today's call.

I will now turn the call over to our CEO, Ricky Wright, who will give you an overview of the company's second quarter fiscal 2020 results. Following Ricky's comments, David Guarino, our Chief Financial Officer, will provide an overview of the company's operating results. Ricky will follow David again, providing closing remarks. We'll then open up the call for Q&A after management's update.

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

Thank you, Jeff, and good afternoon, everyone, and thank you for joining us today. Welcome to the Alkaline Water Company's Second Quarter Fiscal 2022 Conference Call. Our record second quarter results are a tribute to the hard work and excellence of our employees, suppliers, retailers, and the consumers' love for the most deliciously smooth water on the planet. I am pleased to report another outstanding quarter for the Alkaline Water Company. We reported sales of $15.2 million, a 50% increase over last year's comparable quarter. This quarter and our projected fiscal year numbers put us squarely back into the growth rate of 35% to 50% that we were experiencing pre COVID. We expect this kind of growth for the foreseeable future as we activate our first-ever national marketing campaign with Shaq and continue expanding into other important channels. Later in this call, David Guarino, our Chief Financial Officer, will have additional comments on this quarter's results.

I would also like to reiterate our full revenue guidance of $62 million for the fiscal year 2022. We have been very fortunate that over the past 2 years, we've taken action to strengthen and grow our infrastructure and logistical capabilities. These steps paid off for Alkaline88 and our retailers pre, during and post COVID. As a result of our planning and execution, we have been able to fulfill orders when many of our competitors have left the store shelves empty. This achievement required not only excellent performance from our operational team, headed by Nick Salimbene, but also foresight to make sure that our co-packers and raw material suppliers had the availability and capacity to meet demand.

We continue to add capacity, warehousing, redundant suppliers, finished and raw good inventory that should allow us to meet our growth goals in fiscal 2022 and beyond. Our continued growth is most evident when we look at our performance in the Nielsen data, which I'd like to highlight for you here. For the Nielsen Total US Food data for the 52 weeks ending October 9, 2021, we have outpaced the value-added category growth by 17.5% in dollar volume and 25.2% in unit volume. If you look at the more immediate growth, the Nielsen data for the 4-week period ending on the same date, we outpaced the category by 29.7% in dollar and an incredible 47.6% in units.

Our continued growth and outperformance of our peers has propelled us to the seventh largest value-added brand by dollar volume in that period. We worked hard and we're proud to be the leader in the alkaline water category. Just last week, The Beverage Strategist, published by Beverage Marketing Corp, highlighted the category's growth from $95 million in 2015 to over $1 billion in 2021. It's also projected the growth will continue at a compounded rate of 8.8% through 2026, making it a $1.5 billion category. The article recognized that Alkaline88 is one of the 3 brands that kind of "dominate" the category. We believe that we will continue our domination and significantly outpace the category's projected 8.8% compounded annual growth rate with our target range of 35% to 50%.

Based on the momentum we continue to see and the catalyst for growth that we already have in place, management has expectations that our target range of 35% to 50% will be met at a minimum for the rest of this year and fiscal 2023. These catalysts include a number of major factors affecting our brand. First is organic growth. If you look back over the last 18 months, we have consistently experienced 10% and 30% growth organically within many of the largest retailers that we've had for years. This type of enduring organic growth allowed us to be the only major value-added water to grow double digits every comparable monthly period since 2019. Third-party data, including Nielsen, Catalina, and others confirm that our growth is accelerating, and our consumer count is increasing steadily within the same stores.

Second, retail resets are returning to normal. During 2020 and early 2021, retailers forwent adding new SKUs and our new products in much of their beverage sets. With the return to normalcy, we are earning new space with new and existing clients and we'll be part of new retail planograms in the coming quarters. Sam's Club and GNC are 2 recent announcements that highlight our ability to earn new space in the water sets of premium national retailers. We're currently in about 75,000 retail locations across the country. We expect to see a 15% to 20% increase in store count over the next 12 months, many of that coming in the first quarter of fiscal 2023.

Thirdly, sales of our single-serve size is exceeding our expectation. This is being driven by a number of factors, including increased c-store presence, but also inventory turns in our existing retail. This speaks strongly to the consumers' loyalty to Alkaline88. Over the past few months, we shared with the market how various single-serve offerings from our flavored infused to our aluminum bottles to our 1- and 2-liter multipacks have all performed well. Our single-serve growth is over 180% year-to-date. Recent wins like Sam's Club with our 1 liter 12 pack and 2 single-serve sizes that are being added to 9 major airports are only going to accelerate this growth. Most of our SKU expansion with current retailers for the next year is also in single-serve. These factors lead me to believe that our single-serve will account for between 20% and 25% of the company's fiscal year 2023 sales.

Fourth, our expansion to Hospitality and E-Commerce has accelerated as well. They are both $1 billion beverage markets, and we are now positioned with brand recognition and launching of our marketing efforts to take advantage of these markets. We made the decision to bring in 2 new people to head these areas, and their efforts are beginning to bear fruit. We expect to start to see significant growth in fourth quarter fiscal 2022.

Fifth, we are also very pleased with our new direct store distribution model that we rolled out in test markets of Arizona, Nevada and the Upper Midwest through Hensley, Nevada Beverage and Mahaska, respectively. Combined, they have added close to 1,000 new locations at some of the most recognizable convenience stores in their respective territories. These include Maverik, Circle K and QT. Just last week, I saw over 100 bottles of water on display in a QT store in the Phoenix area. We are literally beginning to saturate the c-store market in our own backyard. Nationwide, there are over 125,000 convenience stores that we can attack in a similar fashion over the next few years. This is a major initiative and catalyst for growth with lots of green space still available to our brand and our brand extensions.

Sixth, our expansion into functional beverages beyond superior hydration was recently launched with six A88CBD functional waters powered by Vessl technology. Our timing could not have been better as our new markets for CBD adjustable products, including Texas, New York and California are now open for business. These 3 states alone have over 50 million adults. These new products with their superior delivery system are just our first movers into functional hydration products. We will not only continue to provide the market with ionized Alkaline88 products, our core brand, but we will also add to that base with additional functionality through the Vessl delivery system.

Last, we have an extra boost of confidence that we'll meet our sales objectives over the next several years. As we have just begun to activate our omnichannel marketing asset, featuring our advisory Board member and brand ambassador, Shaquille O'Neal. This is a 3-year deal, and we've barely begun to see the true impact of Shaquille and Authentic Brands Group involvement in driving consumers to our products.

We've been fortunate to have great branding and great products that has allowed retailers to sell over $200 million worth of our deliciously smooth Alkaline88 without the support of traditional marketing. Now we have the best brand ambassador in the world behind Alkaline88, increasing our brand awareness around the country. We expect to share more Shaq-related news over the next 8 to 10 weeks, and we will see more of his presence and impact in Q4 of fiscal 2022.

Frank Chessman, the Executive Director of National Sales, always shares a Ray Kroc quote, "No one of us is as good as all of us together." It's tough to understand how special the Alkaline Water Company is unless you understand what makes us special. The strength of Alkaline88 continues to be our dedicated and experienced employees' abilities to adapt rapidly to the needs of the marketplace and to our customers.

I'd like to share a quick example. Much to the delight and the panic of our company during the second quarter, Sam's asked us to present a number of different products and package sizes for median inclusion in their stores and also requested Alkaline88 to send water for victims of Hurricane Ida. In record time, Alkaline88 team sent 4 truckloads of water to Sam's Club warehouses whose members were affected by the hurricane. To be able to get the water delivered and have it available to customers so quickly was truly an inspirational moment in the company's history for me.

Secondly, within 45 days of our initial conversation, we worked diligently to launch a brand new 1-liter 12 pack to 587 Sam's Clubs across the country. It's not uncommon for CPG companies to take up to 2 years from the initiation of, hey, that's a good idea, till the result can be seen in the marketplace. Because we're nimble and we're capable. Alkaline88 has consistently been able to bring new packaging and innovative ideas to market in 6 to 9 months. This year's innovation includes Shaq Paq, 2-liter 6 pack; the club warehouse ready 1-liter 12 pack; the 750-milliliter white aluminum bottle; and the A88CBD functional waters powered by Vessl.

During the second quarter, under the guidance of our new Chief Marketing Officer, Tom Hutchison, we launched the biggest initiative in the company's history. The production of our first omnichannel marketing campaign reaching our brand ambassador and advisory Board member, Shaquille O'Neal. Last month, the first of these 30- and 15-second commercials were launched as part of our omnichannel marketing campaign, driving consumers' awareness of our brand.

Apart from the television time, we know that at least 225,000 people have seen Shaq as Al Kaline, the Alkaline88 truck driver, when Shaq posted our big rig commercial on Instagram and received over 200,000 views within hours. Since Shaq joined Alkaline88's team, our social media following has grown approximately 35%. This is a new territory for us. It's only the beginning, and we have over 2.5 years of our contract with Shaq and Authentic Brands Group remaining. The Shaq Paq is now available for sale at SamsClub.com, and we expect to have it into thousands of stores within the next 6 months.

We also celebrated major wins in Hospitality, E-Commerce, c-store and internationally. At the beginning of the second quarter, we were able to hire Gary Bliss, former executive and 6 times sales performer of the Year at Nestle. Gary, with the help of sales team, was already able to land 2 major Hospitality wins with 9 major international airports and 800 gym and fitness centers. He's working hard in building on many of the established relationships in the industry to set the stage for more tremendous success in the hospitality industry. We expect to be able to announce in the fourth quarter of this fiscal year, a major deal with one of the company's largest Hospitality providers. We are ideally postured with our innovative products, including our 750-milliliter white aluminum bottle to have immediate success within this channel.

Chris Pittman, formerly in Essentia, where he led their e-commerce success, joined us in the second quarter as well. He has been able to secure service of several outstanding providers and has completely reworked our E-Commerce strategy. Early ROA can already be seen in our recent announcement to give Alkaline88 2-hour delivery in the 2 largest markets in the country through Ohi.

Nick Salimbene, our Director of Operations, brought this amazing opportunity to the company. He knew that instant commerce continues to grow as a consumer habit. Consumer packaged goods companies are always working to improve delivery time of their products. This partnership with Ohi makes our deliciously smooth water more quickly and widely available to consumers in the biggest metropolitan markets in the country. It improves our distribution, brand awareness, last-mile logistics, and sustainability initiatives, which all contribute to the growth of the Alkaline Water Company and our brand.

As Chris works with our E-Commerce team, our time line for full launch and our aggressive strategies are set for fourth quarter fiscal 2022, and we should see significant revenue impact on fiscal 2023. We're seeing great growth in the c-store channel compared to last year when product reviews and resets were limited. We didn't waste that time though. The work that our Director of National Sales for convenience store and distribution, Jim Venia, did during that time has allowed us to accelerate growth through fiscal 2022 and into this present quarter. We've added numerous premium c-store accounts. And our first DSD agreements, including with the Hensley Beverage Company right here in Arizona, which is contributing significantly to that growth. As the store resets occur in the next 30 days, we expect to share major wins in the c-store channels.

Internationally, just last week, we announced that we've began to enter into the Canadian markets for the first time through a newly announced partnership with R&M Royal Palms Beverage Company. This partnership was made possible by Ryan Chessman, our National Director of CBD, who made the introduction to our Alkaline88 sales team. Teamwork allows us to now introduce our deliciously smooth Alkaline88 to our Canadian neighbors. Royal Palm has a network of thousands of retail locations to which they will market and sell our products. They also reach beyond their established networks to tens of thousands of locations where they will also market our brand. Previous to that, we've been moving Alkaline88 products well into Mexico free trade zone through our relationship with Tiendas Sindicales, which serves millions of customers a month. And with distribution agreements we announced earlier this year for our products to be sold in Puerto Rico and the Caribbean, we're making significant strides towards making Alkaline88 available in this part of the world.

At the very beginning of Q3, we made 2 very significant announcements regarding 2 channels that we have been targeting for revenue growth, Warehouse Club and Specialty Retailers. As I already mentioned earlier, we now have our 1-liter 12 pack in 587 Sam's Clubs nationwide. This is our first foray into Clubs, a major mover of bottled water, and have been very successful so far as we've already received several reorders. In Specialty Retail, we recently announced that Alkaline88 is debuting in 350 premium GNC locations around the country. We look forward to providing a great new water option and earning new loyal customers from among GNC's millions of health-conscious customers.

The future in all our new and existing channels looks bright. Our sales group have targeted over 85,000 new locations where they hope in the next 12 months we will be able to see Alkaline88 on their shelves or in various venues. We are activating more and more the power of our relationship with Shaquille O'Neal and Authentic Brands Group that I believe will help us close a lot of these potential targets.

As I mentioned before, the category buyers also see Shaq as the Alkaline88 brand ambassador on their televisions and digital screens. And believe me, we are getting their attention that we're a serious brand. National awareness is just around the corner with big things planned between now and the Super Bowl.

Finally, all the great initiatives are only possible if we could deliver our deliciously smooth Alkaline water on a timely basis. That can only happen if we are supported by an outstanding operational plan and execution of it. This year, our operational team led by Nick Salimbene has done an outstanding job not only in securing additional production capabilities through the co-packers, raw material suppliers, but also managed to keep our on-time delivery numbers near or at the top of the charts for water companies. Although challenges still exist, every day they amaze me with the resiliency and press severance to fight through supply chain problems and issues that allow the kind of rapid growth we are experiencing. None of us is as good as all of us together.

Now I'd like to turn the call over to David for a brief financial overview. 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.

For the 3 months ended September 30, 2021, we reported a record revenue of approximately $15.3 million, compared with $10.2 million for the 3 months ended September 30, 2020. This represents a 50% increase in sales. Our gross profit for the quarter ended September 30, 2021, was approximately $5.2 million compared to approximately $3.6 million for the quarter ended September 30, 2020. The decrease in our gross margin percentage was attributable to an increase in raw material and freight costs.

Total operating expenses for the 3 months ended September 30, 2021, was approximately $15.4 million compared to the approximately $7.8 million in the prior year quarter. Total operating expenses increased primarily due to higher freight costs to our customers and additional promotional expenses relating to our new brand ambassador.

Net loss for the quarter ended September 30, 2021, was approximately $10.4 million compared to a net loss of $4.4 million in the quarter ended September 30, 2020. Net loss per share in the quarter ended September 30, 2021, was $0.11 per share.

Cash used by operations during the 9 months ended September 30, 2021, totaled approximately $18.7 million as compared to $8.1 million of cash used by operations in the 9 months ended September 30, 2020. The increase in cash used by operations is primarily due to our increased net loss and an increase in cash used to fund our working capital. We believe that cash on hand, which was approximately $10.4 million at September 30, 2021, plus our line of credit and the sales agreement with Roth Capital Partners detailed on our 10-Q, will actually fund our current planned operations and capital needs over the next 12 months.

And with that, I'll turn it back to Ricky. Thank you.

Thank you for all your time today. I've often heard people say that they have prepared their whole life for this moment. I know that over the past 18 months the employees of Alkaline88 have prepared for the significant growth that is upon us.

Going into and coming out of COVID, our brand, Alkaline88, has been the benefactor of their hard work. It really feels like this is our moment. It's now. We are prepared. With the investments we've made in our infrastructure and co-packing network, with our theoretical capacity now over 250 million wholesale, with all the opportunities that are in front of us, we have the ability to grow, support and meet demand. Now that we added Shaquille and the omnichannel marketing program to the mix, I truly believe this next year that the sky is the limit for the Alkaline Water Company.

I appreciate your patience and confidence in me and our management team. We are truly creating something special here that will bring tremendous value in the near future. Thank you again, and have a great rest of your day.

Now I will turn it back to our host for questions.

(Operator Instructions) Our first question is from Aaron Grey with AGP.

This is Andrew Bond on the line for Aaron Gray. First question is just on California CBD with the California CBD bill now being passed. Can you speak to your path to market? And how you plan to sell your CBD water in more traditional brick-and-mortar, particularly as other large competitors look to do the same?

Yes. That was -- again, going back to -- we prepared for this for a long time. We actually were prepared for the farm bill in 2018. We began that journey clear back in June 2018. If you look at who we sold to, we are now the seventh largest, at least the last 4 weeks data, the seventh largest value-added water in the grocery channel, which is all the traditional channels as we've just spoken to. And those buyers are traditionally the category buyers for our CBD water as well. So those doors are wide open to us. Our brokers know that we are also looking for those opportunities now that the CBD is being taken ingestably in California. And we are ready to take advantage of those relationships. We've already had numerous inquiries and we know that we'll be on the shelves very shortly in California.

We did, in fact, double check our compliance with our attorneys, and we talked to actually the California Liquor Board to make sure that we're in full compliance with even the distribution side. So we're ready to roll. We have a great delivery system in this Vessl. One of the biggest issues is that CBD tends to go bad if it's set out in light and our CBD sits in an air tight container for up to 5 years with little or no degradation. So we think we have a fresher product, fresher ingredient, better tasting, and we think that we have something that the consumer in California and New York and Texas will step up to the plate and buy.

Great. Great. That's really helpful detail. And then how should we think about spring shelf resets at retail, and the opportunities to increase your ACV during the period? Do you feel like retailers have returned to a sense of normalcy in terms of resets?

Yes. It's something that we worked very hard to add. Of course, last year we were disappointed. But I guess when you're growing as well as we did organically, we still did better than, I think, any of our competitors. So that was a good feeling last year because of the organic growth. We absolutely believe that we're getting resets. I mean, the first example of that is obviously Sam's Club. The second example is GNC. If you listened closely, I've indicated there are 85,000 places that we are looking to place additional product this year, either in an SKU increase and/or brand-new customers. And I think in one of my press releases, I gave some guidance on where we expect to go from 75,000. I think it was 90,000 to 100,000. So we do expect a big increase over the next 12 months in store level count.

Our next question comes from Kevin Dede with HCW.

Always happy to see good numbers. So a quick question on Vessl. The CBD is enclosed in that cap. And will that cap only meet with your bottles? Or could someone use it with others? How do you sort of control that? And then how does your customer resell that bottle? I just looked on our web page.

So once it's twisted to the right to open up, that's when it infuses and then it's one and done. But there's no change in behavior, you simply unwind it and twist it off and put the cap down and then you're drinking the beverage. There's no mixing, no shaking. A lot of these activate type of products that you push down and shake up, you get floaties. No floaties. Everything starts as a liquid, into the liquid, 110 pounds of pressure instantly down.

Kevin, you asked a good question on innovation. We are looking to put together a cap that we put it on to the product that will open up. And so in that case you would be able to use it in some other areas, but we're looking to maybe kind of create a different size cap and give you a fully recyclable bottle. So we would again be working towards our sustainability efforts and cutting down the carbon footprint by being able to send -- I think you can send 31 truckloads equivalent of water, and then, of course, to give everybody a coupon for delicious Alkaline88 that they can pick up at their local store. So we're moving in both innovations on that, Kevin. But it's a one and done at the moment.

So you offered great color on introducing CBD in California, but your prepared remarks referenced Texas and New York. So how should we look at timing there?

Texas and New York. Our attorneys got back to us on New York just this week in terms of we just need to make a few tweaks on our labeling. And then Texas, we're preparing that same kind of overall critique just to make sure our labels are compliant. So we've asked the attorneys for that input this week. The big impetus was once the AB45 passed, we just decided to go full bore with the Vessl and full bore into California because it's our backyard and that's where we started. And I would say that we've been in that market for 9 years. We continue to grow at an amazing 20-some percent a year in that market with our Alkaline88 water. And most of those buyers literally love us. We had 1 guy last year say that during COVID we literally saved his ass. Because we're the only guys delivering water, and I apologize for my profanity. But it's a direct quote. I would never talk that way.

Right. Well, people that have [dunkies], they need water. So I get it. So I think the big question, I mean, for me, Ricky, is just how to sort of sift through all the initiatives underway and prioritize them from your operational perspective. And in terms of what you think they'll contribute to growth as -- I mean I know I'm kind of shooting you here and you might give a colorful answer.

I can give you color, though.

You got the Caribbean, Canada, Mexico, CBD; 75,000 to 90,000 doors. Yes.

Yes. I'll give you some color on that, Kevin. And some of it has to do with -- we used to run this business with very, very, very lean staff. I mean I think 2 years ago you talked to us, we were doing 19 people and averaging over $2 million revenue per employee, slightly better than Apple at that time. Now, of course, we're up to, I think, 44 employees total, looking to add to that and staff up. And so some of it just has to do with the fact that I have and the management team has lightened the load with respect to what the top level management has been doing. We've brought in a Director of Operations. We've brought in a Chief Marketing Officer. We've brought in a specialist only in Hospitality and a specialist only in E-commerce. And so all those areas used to kind of fall under the top 2 or 3 guys in the company and now we've got 7 or 8. So I think, first of all, even though it looks like we've got a lot of initiatives, we have staffed up for those initiatives. So that would be the first thing I would say as part of that answer.

Then to give you some color where we think it's going to be over the next 12 months, and particularly the biggest impact next year. It's a crap shooting in one sense, but I think it's easy to look to the extent that Shaq and the Shaq Paq are 2 leaders. We do believe that it'll be our leading sales product next year. We have a ton, a ton, a ton of interest in that. And we see that as a major benefactor, adding several million dollars to our overall top line. We see for the first time in literally 18 months the stores that we have been pounding on the doors, and I can't give you names right now. But let's just say, there's 20-some thousand retail brick-and-mortars or more that we're counting on. We see those opening up.

Candidly, Shaq is helping some of that. He does make us a legitimate brand. It does make us look like a major brand, and we are, by the way. But it gives us some gravitas that we did not have previously with the buyers. And Shaq will work that in for us. He actually does calls, he does Zoom calls for us. He does takes for it. So Shaq is very, very active in that process with us. We see those resets happening in the first quarter, most of them. So we see -- call that another -- we see our normal growth is 20, 25 on our normal, say that I'm going to get 15 from that, say that I'm going to get a couple from Alkaline88 in terms of new product, news SKUs, maybe a tiny bit more.

And then the two wildcards for us this year or really 3 now that AB45 has started. CBD has a great chance of being a great product. I mean we've got plenty of vessels now ordered. They're on the water coming over. We've got a bunch in stock there in the U.S. We're using -- if you didn't notice, then I think this is a huge nuance to show the people listening, is that we're using Alkaline88 as the base water, which avoids a huge thing, Kevin. It avoids us having to go to a hot fill and allows us to produce this in a plant that we're already operating in. Huge, huge change to our supply chain. I would say it's a tremendous fit for us, allows us to go in other functional hydration areas as well.

Obviously, the biggest wildcard is E-Commerce, and we got a guy in from Essentia, who is critical to us because we wanted somebody to run this category. We wanted somebody that had the relationships. We didn't want to start from scratch. So we began with bringing Chris Pittman in and he going down a couple of months. The onboarding for that is about a 12-week period. We'll see the benefits of that beginning first quarter, but if you take somebody like Essentia, I think last year they did over $50 million. I think Hint did $50 million -- $40 million e-commerce. These are records I pulled off the public record. I think Flow did $5 million or $6 million e-commerce. We did nowhere near those numbers. And so that's a big area for growth. I think we can get another 10% there.

And then Hospitality, coming out of that is Gary Bliss is what I would call an elephant hunter. And Gary gives me pause to just look and say, okay, everything that he's looking at and everything he's going after is in the 10,000, 15,000, 20,000 head count in terms of locations. And so we see there being some big answers. I don't know what the impact of that will be, but those 2 are kind of the wildcards for us that could push us and accelerate at least to that 50% growth factor. But we think we're on that trajectory right now.

Okay. That helped a lot. A quick question for David. The expense trajectory has been pretty severe through the first half of this fiscal year. Granted you got some big hitters to help drive the business, I'm just wondering how you think we should look at that line going forward.

The increase that we had for the first 2 quarters, we don't expect that for the next 2 quarters. Because, a, one of the main drivers was freight cost that really went up. The freight from our plants to our customers, which is in sales and marketing expense. So that was a significant increase from the first 2 quarters. We're seeing that expense stabilize. And hopefully, by the fourth quarter of our fiscal year, we'll actually start to get back to normal.

And then in the second quarter, we had some significant marketing costs, specifically production costs relating to the Shaquille O'Neal commercials that Ricky talked about. So those expenses will not be in the next 2 quarters, but we will have some traditional marketing expense relating to playing those commercials. But hopefully, that will have an effect with our sales as well. But in the first quarter and second quarter, we did have onetime expenses relating to, first, the Shaquille O'Neal endorsement contract, and then also just the production expenses.

To look at it another way that one of the reasons we pushed so hard to open these plants, we had plenty of water, we were very, very fortunate to bring a lot of our production stateside 2 years ago. So again, we weren't looking at tankers sitting off the coast of California hoping that something got unloaded. We were producing and still are and getting stuff to our customers. But some of that, we've gone from like 3.3% last year in the Southeast in terms of market share.

I just looked at the report before I came in, the last 4 weeks, we were over 5% share. And so all of a sudden, the Southeast just has blown up for us. Thank you, Publix and Whole Foods and Winn-Dixie, et cetera, Food Lion. We didn't anticipate that kind of grow so rapidly. It's a pleasure to have. So a lot of what we had to send, we had to send from our East Coast facilities. Dave and I talked last week and we will save literally hundreds of thousands of dollars next quarter because we've opened up the new plant last month or 1.5 months ago in Southern Cal -- I mean, in North Florida. So those are the kind of things that are going to help us equalize some of those costs as well.

Okay. So if I remember correctly, you were trying to open distribution in the Northeast too. Can you sort of give us a rundown on your plants and distribution centers account, and maybe how that's changed over the past year?

If I told you, that will kill you. No, we're on our way there, Kevin. You're going to have to wait a couple to 4 weeks for those announcements. We never announce anything until we get the PO. So it's never done until the PO comes in, but we have some news there, hopefully, knock on wood, that does occur. We do have some DSD networks that have offered to come in and help us, and we've recently changed brokers there, who as well will help us in some of the major areas of growth. You will also see some pretty big things happening for us in the Northeast on the marketing side as well. So I don't know when those we'll announce, certainly before Thanksgiving. But you'll see some huge announcements, I think, in the Northeast that will continue to drive our traffic.

The Ohi one was brought to us, and that's kind of a cool thing that's at distribution that you get 2-hour delivery for our product that's happening, opening up in LA and in New York. We have the Ricky Wright model where we send full truckloads in. So we're not shipping 52 times to a single -- different places and using all that carbon footprint. We're able to make a profit on it, and then they're delivering within 2 hours. And so that's one of the reasons that we're throwing some marketing dollars into the New York City, is because we're going to have that opportunity to drive traffic there as well. So you're going to see a bunch of good stuff in the Northeast. We're still only about 1% of that market, Kevin. So obviously, if we could get to a 3.5% or 4% share, it'd be another $10 million or $15 million, $20 million of sales just there alone.

I misarticulated my question, Ricky. I meant in your own production plants.

Well, we've got openings already. One opened up 2 weeks ago in Western PA. They are a New York license. So that's good news. Virginia is still operating like a charm. We are looking for an additional location in the Midwest/Mid-Atlantic area. It just depends on where you draw that line, but it's close to borders, but right on major freeways. So we're shoring up the entire East Coast. We just opened a major one in Florida that has tremendous capacity as well. So yes, we've done a really good job, my operations team, in locating, installing. We've entered into an agreement to make sure that we don't lose our machines, that we have exclusivity there now, but I don't know, that is a material event, so we never announced it, but we did lock up our exclusivity with our machine manufacturer for the next 2 years. So we're in pretty good stead across the production lines.

So could you give me a rough count on the number of production sites you have now versus a year ago?

Yes. I think last year we were at 8. I think we're at 12 today. And we have at least 2 more coming on board -- online. So we said 13, 14 mark. And when we look every day, Kevin, that's one of the things that we're headed out every day to make sure that we're in the locations that make the most sense logistically and that we can get the most efficient operations as well. That not just means toll charge, but also based on where we now have redundant suppliers, we now have East Coast, West Coast suppliers. So we want to try to make sure our plants are also close to bringing in the raw materials.

So David, you mentioned fourth quarter sort of returning to normal, and I'm sort of buzzing here trying to figure what normal looks like. The past 3 or 5 quarters have been up and down. So just on the selling and marketing line.

Yes. I thought I used the word hopeful. Hopefully, we will return to normal. And I was specifically talking about the freight costs, which in the past 2 quarters have been dramatically almost double the first quarter and more than double this quarter than the prior year. So I was kind of using that specifically. Hopefully, freight would come back to normal. Maybe that's a little bit too much hope than not. But I mean, we certainly have not seen the increase now as we saw the previous 6 months.

And then Kevin, the other thing that I don't think that we mentioned in this call, but I think it is important for people to understand that we did implement our first ever price increase to our retailers, which is not in full effect across all companies yet. A lot of these guys, we had year long deals with. And so some of those are coming off. And I think on average, it was about 9%, David?

Correct.

So we will get some of the pressure on the margins reduced because we'll have additional margin that the retailers will pick up and pass on to the consumers.

Well, that's a really interesting point, Ricky, given inflation bearing down on consumers. How do you think your price change pits you against the major competitors that you see? And I guess if you could dive in a little bit on convenience versus big box.

Yes. So Kevin, I'll answer both of those. We've done a bunch of elasticity demand studies in the past. We still see -- I can give you empirical data that on our direct-to-warehouse in some of our major brands, with broader stock, let's call it 10% to 15%, I know that retailers say, "hey, our customers go there and they don't have any on their shelf." Well, believe me, it's not because we're not hitting the warehouse, okay? We're hitting the warehouses at some of the best rates in the country, almost 100% online deliveries. And so that's not the issue. So I see there's some elasticity demand that we could actually increase price and not lose any customers. So that's the first answer. And then with respect to our competitors, we still kind of have -- at least in the emerging brands, we don't use the DSD model at all, Kevin, in most of our places. But we still have that DSD margin that we haven't reaped yet. So we're still a great value to the consumer.

And then finally, in terms of c-stores, c-stores was still a long haul for us to get the momentum we now have. And Hensley and Nevada Beverage and Mahaska have really shown us at least at the c-store channels that this is a real opportunity for growth. I think I said in my speech, I walked into Q2, which is a pretty big c-store group here, and saw 100 bottles sitting on the floor, which warmed my heart. And I've been to a number ever since and we've got really good displays. I don't have the numbers yet on all the pull-through, but I know that our DSD partners are reordering at a pretty frequent rate, which bodes well for our future and maybe bodes well for that Northeast model. We've been continuing to try to pound the rock and finally break through on.

There are no further questions at this time. I would like to turn the floor back over to Ricky Wright for any closing comments.

Again, thank you very much for having faith in the team and the management. It's great to be part of the Alkaline88 team here. We've got a great Board. We've got great employees. We've got great new add-ons in the past 12 to 18 months. And we have probably the world's best brand ambassador in Shaquille O'Neal.

We see growth in every place we're looking. We see organic growth. We see growth by new ads, new retailers, new hospitality areas. The Northeast, as Kevin asked, we see the beauty of being in 3 of the largest airports in the world in LaGuardia, JFK and Newark, and having plans to make some noise in New York City over the next year, 1.5 years with our brand ambassador. So we see that as a huge upside for us. We see this company returning to hyper growth, which I've always defined as 35% to 50%. And with our movement in the CBD and in the E-Commerce and the Hospitality, coupled with all the other things we're doing, we could really have a tremendous year next year.

I still believe we're one of the most undervalued stocks on NASDAQ. Our upside is so great. If you look at what just happened with Body Armor. Of course, they're valued at $8 billion. I'd love to have that number. If you look at what's happened to Celsius in the last couple of years, ironically, our U.S. sales is about 2 years behind where their U.S. sales were. So we're looking for that kind of growth and that kind of opportunity.

I want to thank everybody for taking the time to spend this time with us today, and thank you, Mr. host for making this happen as well. Have a great day, everyone.

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