Alkaline Water Company Inc (WTER) 2020 Q3 法說會逐字稿

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 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.

Thank you, Sajid. Hello, everyone, and welcome to The Alkaline Water Company's Third Quarter Fiscal 2020 Conference Call. We are making great progress towards our stated goal of growing our national footprint and continuing to innovate and rejuvenate the marketplace with new line extensions and exciting in-demand products. During a seasonally slow third fiscal quarter, we delivered revenue of $8.5 million.

We had one of our best third quarters ever and delivered growth still in excess of 20% compared to the first 9 months of 2019. We are off to a great start for our seasonally strong fiscal fourth quarter, and our January numbers are up 30% compared to the year-ago period. Alkaline88 remains the top 10 best-selling brands in the country, and the fifth fastest-growing functional water among the top 20 brands.

According to the Nielsen Scan data, over the 52-week ending December 28, 2019, Alkaline has solid dollar volume growth of approximately 33% compared to 9% for the overall value-added water category. For that same report, the Alkaline Water subcategory accounted for over 50% of the growth of the top 10 value-added water brands. This shows the continued strength in the consumer acceptance of Alkaline Water as a category.

The Nielsen data also revealed that Alkaline88 has grown 33% year-over-year at the retail level, which is over 6x the overall bottled water category's growth. However, based on the timing of a majority of the top 20 traditional retailers' resets, representing approximately 30,000 stores being pushed into the new fiscal year, we are reducing our guidance for the balance of the year. Based on this, our independent research, I expect that we will still see accelerated growth in our flagship brand, Alkaline88 in fiscal year 2021 and beyond.

During fiscal year 2020, we have continued to execute against our business plan that both strengthens our brand and our brand's position in the marketplace. With a much clearer vision of the results of fiscal 2020, including the fruition of a number of 2020 initiatives, I believe fiscal 2021 should be a transformational year for the company. This transformation should include accelerated growth in our flagship product, Alkaline88, as well as significant contributions from our flavored-infused aluminum bottles and CBD. All these new initiatives will help us achieve long-term growth and profitability.

Before I begin discussing the progress we have made on the various organic initiatives underway, I feel compelled to address why we exercised our right to terminate the AQUAhydrate merger. When we extended the time line in October 2019, both parties agreed that if the deal was not consummated on or before January 31, 2020, that either party had the right to terminate the transaction.

On Tuesday, February 4, 2020, after a Board meeting, the company elected to exercise its right to terminate. The Board determined it was the best business interest of Alkaline88 to focus on our core business and the expansion of our emerging product lines, including 88 -- A88 Infused flavors and A88CBD. Up until then, both parties were continuing to work through comments on the S-4 filed with the SEC. I wish AQUAhydrate's team all the success in the future and look forward to seeing them in the marketplace.

As stated in our last 2 calls, one of our leading initiatives this fiscal year has been to significantly increase our presence in the 150,000 convenience stores in the U.S. Based on the hard work of our sales force, help from various brokers and the addition of the second largest distributor in the country, which has the potential to reach into 11,000 c-store customers in the very first quarter of fiscal 2021, we believe by the end of fiscal 2021, we will be in over 20,000 stores nationwide. This would represent approximately 15% of the entire c-store universe.

To further our commitment to the c-store strategy, we recently hired Jim Venia, former Director of National Accounts, West Division at Essentia. Jim will head up our direct-store distribution network and c-store initiatives. Jim will focus not only on the placement of our flagship brand, Alkaline88, but also our flavor-infused aluminum bottle and CBD products. I would be remised not mentioning that the convenience stores have been early adopters of CBD products. This presents a large opportunity for growing our line of A88CBD portfolios of products, and we plan to support it accordingly with point-of-sale displays and innovative products.

With a strong pipeline of commitments from customers, we believe we are well positioned for the spring planogram we set at c-stores. In addition, our new product offering increases our cash margins. The c-store strategy will play a significant role in our push towards cash flow-positive position in fiscal to 2021.

Our core business is also gaining new momentum. In the second quarter call, we indicated that we were expected to expand our Alkaline88 water and up to 11,000 traditional retail stores nationwide prior to the end of our fiscal year. We are proud to announce, we recently received a commitment from 2 large national Fortune 500 retailers. We have already received a purchase order from one and expect the other purchase order very soon. We hope to get permission to announce both retailers shortly. What I can say is that the combined nationwide store count is over 10,000 stores, and we're planogrammed to be in all of them. Equally as important is the larger of the two will be selling our single-service products nationwide. While one is a large retailer in a trade channel we currently service, the other is a national specialty discount retailer, which presents a new growth opportunity for us. As is often the case, we now feel we have an excellent opportunity to expand across this class of trade and hope to be in up to 15,000 new stores by fall.

With an established beachhead and some high-profile retail outlets like Walmart, CVS, Kroger and Albertsons and Safeway, we are excited to see this momentum build around our core products. We expect to expand these relationships in the growing lines of SKUs and to our other portfolio of infused flavored and CBD products. Also, our infused flavored water continues to create excitement and new dialogues among existing and new customers.

Despite the timing of the store schematics resets challenges we experienced this last quarter, our customer engagement related to our flavor-infused water remains extremely high. Our team already has firm commitments for the March quarter, and we expect to deliver pre reset up to $1 million of our flavor-infused product to retailers across the country. Currently, we expect our flavor-infused water to be available in approximately 10,000 retail stores across the country by the end of the first quarter of fiscal 2021.

We continue to receive rave reviews from customers regarding the clean and smooth taste profile of our flavored waters. And I have complete confidence that this category will be a great success as we scale this brand to our network of 60,000 stores nationwide. This product is currently being offered in 6 unique flavors, which are Watermelon; Raspberry; Lemon; Blood Orange; Peach Mango; and my favorite, Lemon Lime.

In last week's KeHE National Summer Selling Show, in New Orleans, Alkaline88 was the third best-selling brand at the show out of over 1,500 brands represented. We received orders for over 10,000 cases of our A88 flavor-infused water.

The success in this product category is important, not only for our growth metrics but also for our path towards profitability. While the gross margins of this product category are in line with our flagship brand, Alkaline88, the gross margin dollars are significantly higher. As this mix shift occurs, we expect our flavor-infused water to be cash margin accretive starting in the second half of 2021 and beyond.

Our A88 Infused product group is now a fully functional CBD-focused business unit within our organization. We have recently added 5 seasoned professionals dedicated to product development and sales for the A88CBD. In my opinion, they are becoming one of the most innovative and knowledgeable cannabinoid teams in the country and were integral in the recent successful launch of A88CBD topicals.

Our sales team has been actively presenting A88CBD to various retailers through in-person meetings and our conference -- and at conferences and trade shows. We have showcased our product to existing channels like drug stores, convenience stores and supermarkets, but we are also getting strong interest from new trades, like health and beauty and B2B online verticals.

It is interesting to note that while many retail buyers acknowledged the need for education on the CBD-product category, they view the CBD space as disruptive and a large opportunity for the industry. We recently met one-on-one with 46 retailers and wholesalers at the ERCM CBD Health and Beauty Expo.

The level of interest in A88CBD was extremely positive. We were told numerous times that we had chosen the proper product mix that is selling to what the consumer wants. In addition to our lip balm, body lotion, muscle salve, bath salts, essential oil and hand and foot lotion, we are adding 4 bath balms to our portfolio, which will be available in the first quarter of 2021. We consistently received high marks on the branding, quality of our product, compliance and product blockchain documentation needed by major retailers.

In addition, they love the overall value of our offerings.

It is becoming more and more apparent that our partnership with Centuria Foods as our CBD provider and one of the nation's largest private label health and beauty manufacturer is a critical element to the acceptance by traditional brick-and-mortar retailers. These best-in-class supply chain partners put each of our product through rigorous lab testing to assure quality and compliance, not only with the FDA but also with the hemp farm bill.

We are quickly becoming known by our buyers as one of the few CBD companies they can trust and one of the few that they will -- they believe will be around tomorrow. Based on this initial strong interest, we think CBD-infused topical category is a meaningful near-term growth opportunity that aligns perfectly with our leading strategic initiatives of growing our national footprint. Our teams are pursuing very strong pipelines of opportunities that we expect to materialize before the end of the current fiscal year.

Based best on the level of interest in our trusted provider status with the retailers, I believe we can become one of the nation's largest CBD providers to the traditional brick-and-mortar channel in the calendar 2020. Our target list is now in excess of 72,000 retail locations. I am so excited, as I speak, our products are being manufactured. Supply chains are in place, quality control and testing is excellent, and we have all the regulatory approvals completed. I am confident that we will have sales from our brick-and-mortar customers within the next 90 days.

Our brick-and-mortar strategy is positioned to be a disruptive force in the CBD industry. Unlike most players in the CBD channel, we are -- who are exclusively e-commerce-focused, Alkaline88 established relationship with traditional retailers, allow us to focus on both channels. As such, we are embarking on our online strategy, which complements our overall aggressive go-to-market approach.

We recently announced the launch of the e-commerce site, A88CBD.com. This end-to-end site complements our brick-and-mortar strategy and provides us with immediate access to a large group and growing channel. We believe our online quarter will be a solid contributor to our growth and profitability in the current calendar year. For this endeavor, we partnered with an industry-leading marketing and development agency, Youtech. The firm will develop, launch and support our unique e-commerce strategy, utilizing SEO authorization, social media promotions and influence our marketing.

This B2C portal will be fully optimized for mobile, and provide a secure platform for our customers to have a simple and seamless shopping experience across all touch points. The site will initially carry our full line of A88CBD-topical products, and we expect it to go live roughly in 10 days on the 20th of February. Following our launch, and once we receive clear guidance from the FDA, we will be introducing our portfolio of adjustables, which will include CBD-infused water, flavored drinks, beverage shots, tinctures, drops, capsules, powder packs and gummies.

A88CBD.com is built around simplicity and ease of use. This B2C commerce platform will guide our users through their entire CBD journey from CBD education through product selection and checkout. In a marketplace flooded with indy players, we believe a large national player with best-in-class supply chain partners can make a meaningful impact on our e-commerce strategy, and it will be targeted to the millennial demographics.

For the recent 2020 ROTH Millennial Survey, 79% of millennials are aware of CBD, a full 24% already use it. And 58% of millennials, who don't already use CBD, are willing to try it. It's very encouraging that we have developed A88CBD products, both topical and ingestibles, that meet the top purchasing criteria of millennial demographics, which include premium quality, best value for money. And the top criteria for CBD-infused beverages include CBD efficacy, taste, safety, best value for money and functional attributes.

As we grow our footprint, our omnichannel approach will allow customers to understand our products and their attributes from the comfort of their home and they'd be able to walk into their favorite retailer to purchase our growing line of A88 Infused products.

The CBD market is a huge opportunity for us. And as a company, we are uniquely positioned to capture share in this large and growing market. BDS Analytics, an industry-leading research firm, projects that the industry will be $4.1 billion in 2019, with an expected 5-year CAGR of approximately 37%.

The firm's research suggests that today's consumers are spending and purchasing CBD products that fall in 3 categories: 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%. Inferring from their research, we conclude 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 ecofriendly 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 -- consistent 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 Sander 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's 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, Alkaline88. 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 enter 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 nascent 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, the 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?

Thank you, Ricky. Before I begin, I'd like to encourage interested listeners to review our 10-Q, that we have filed with the SEC for more detailed explanation on some of the quarterly results I will be highlighting today.

Revenue from sales of our products for the 3 months ended December 31, 2019, was $8.5 million as compared to $7.7 million for the 3 months ended December 31, 2018. This represents an increase of approximately 10%, generated by ourselves with Alkaline Water and our infused water. This double-digit increase is due to the expanded distribution of our products to existing retailers and the addition of new retailers throughout the country.

For the first 3 months ended December 31, 2019, we have cost of goods sold of approximately $5.1 million or 60% of revenue as compared to the cost of goods sold of $4.8 million or 63% of revenue in the prior year quarter.

Total operating expenses for the 3 months ended December 31, 2019, was approximately $6.1 million compared to approximately $6.4 million in the prior year quarter. This decrease in total operating expenses was primarily due to decline in general and administrative expenses, partially offset by higher sales and marketing expenses related to the increase in sales.

Specifically, for the 3 months ended December 31, 2019, sales and marketing expenses was approximately $4.1 million compared to approximately $3.6 million in the prior year quarter. The increase in sales and marketing expenses was a result of higher freight and sales promotional expenses due to increase in sales.

During the same period, general and administrative expenses was approximately $1.8 million compared to approximately $2.7 million in the prior year quarter. G&A expense of approximately $1.8 million, in this fiscal quarter, ended December 31, 2019, consisted primarily of 3 items: 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 to 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 the current offering, more large regionals and national retailers are opening up their doors to us.

The 2 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 Youtech. They're a well known -- I think they have about 800 clients. They either 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 its 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 has sort of the East Coast been ramping up? And I guess, Southern California, does 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 it's become our largest sector. And then the Northeast, we're just starting to gain traction with Shaw's, but some of these announcements 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 Youtech. 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 because we learnt 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 yes, 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 2 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 a 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. I don't 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 state and 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, but 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. Was it $15 million, $16 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's administratively, some additional 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? Normally, I'm 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 vigor and lights than we have now. I think everybody's band together. I think we have the most momentum that 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.