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AW

ALKALINE WATER Co INC (WTER)·Q3 2023 Earnings Summary

Executive Summary

  • Q3 FY2023 delivered record third-quarter net revenue of $15.9M (+21% YoY), sequential gross margin improvement to 24.7%, and a 46% YoY reduction in operating expenses; operating loss narrowed to $(3.6)M and net loss to $(4.0)M .
  • Gross margin of 24.7% was below prior guidance of 26–27% for Q3, despite sequential improvement; management expects margin gains to continue with ongoing cost and process optimizations .
  • Leadership transition: Frank Lazaran stepped down as CEO on February 20, 2023 due to medical concerns; Director of Sales & Operations Frank Chessman was appointed CEO and President, maintaining continuity on the Pathway to Profitability strategy .
  • No Q3 earnings call was hosted; the company filed the 10‑Q on February 28, 2023 and furnished the 8‑K press release in lieu of a call .
  • Street consensus from S&P Global was unavailable at the time of request; estimate comparisons are therefore not provided (SPGI request limit exceeded).

What Went Well and What Went Wrong

What Went Well

  • “Best third quarter revenue ever” at ~$15.9M (+21% YoY), outpacing the value‑added water category; Alkaline88’s 1‑gallon ranked #5 by dollar volume in Grocery for the quarter and continued double‑digit unit growth .
  • Sequential gross margin expansion to 24.7% (up >300 bps vs. Q2), with management reiterating ongoing improvements from cost reductions in raw materials, packaging, and copacker optimization: “We anticipate this trend to continue” .
  • Distribution wins: expansion into ~220 BJ’s Wholesale clubs and additional regional partners/DSD coverage (14 states), plus early performance for Alkaline88 Sport at Harris Teeter .

What Went Wrong

  • Gross margin underperformed prior guidance (24.7% actual vs. 26–27% guided for Q3), reflecting inflationary pressure on inputs and the lag until lower‑cost inventory fully cycles through .
  • Ongoing losses despite improvement: operating loss $(3.6)M and net loss $(4.0)M; going concern disclosure reiterates need for additional capital to fund operations .
  • Nasdaq notice for late filing (since remedied by the February 28 filing) created near‑term procedural overhang .

Financial Results

MetricQ1 2023Q2 2023Q3 2023
Revenue ($USD Millions)$16.894 $19.575 $15.875
Gross Profit ($USD Millions)$3.495 $4.626 $3.927
Gross Margin (%)20.7% (derived from filings) 23.6% 24.7%
Total Operating Expenses ($USD Millions)$9.786 $9.696 $7.489
Operating Loss ($USD Millions)$(6.291) $(5.070) $(3.562)
Net Loss ($USD Millions)$(7.493) $(8.397) $(3.986)
Diluted EPS ($USD)$(0.06) $(0.06) $(0.03)

Channel breakdown (Net Revenue):

Sales Channel ($USD)Q1 2023Q2 2023Q3 2023
Retailers$10,955,349 $12,857,303 $10,828,060
Distributors$5,634,443 $6,286,113 $4,904,169
Ecommerce/Other$304,611 $431,537 $142,738
Total$16,894,403 $19,574,953 $15,874,967

Other notable items:

  • Non‑cash other expense related to debt conversion in Q2: $2.406M (net loss impact) .
  • Correction of prior period classification: reclassified certain sales/marketing considerations as revenue reductions (immaterial to operating and net loss) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent Guidance/ActualChange
RevenueFY 2023$70M (reiterated) No update in Q3; no call hosted Maintained (no change disclosed)
Gross MarginQ3 FY 202326–27% 24.7% actual Lower than guidance (miss)
Gross MarginQ4 FY 202329–30% No update in Q3; no call hosted Target maintained (no update)
Inventory ReductionFY 2023 (by year‑end)Reduce inventory by ~$2M vs start of Q2 Progress: inventory decreased from $9.874M (Q2) to $8.738M (Q3) In progress

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 FY23)Previous Mentions (Q2 FY23)Current Period (Q3 FY23)Trend
Gross margin trajectoryMargin compression; launched Pathway to Profitability and $15M savings plan Modeled bridge to ~26–27% in Q3 and ~29–30% in Q4; sequential improvement to 23.6% 24.7% actual; sequentially higher but below guided range Improving sequentially, below guide
Supply chain & freightNetwork enhancements, packaging changes, bottle blowing at copackers Freight cost/case down ~20% YoY and ~6% seq; price cuts with carriers Continued production efficiency focus; anticipate trend to continue Efficiency benefits carrying forward
Retail expansion & c‑storeNew doors (e.g., Dollar Tree), CVS and Rite Aid SKU expansion +11,000 new locations YTD; BJ’s launch and rapid scale ~220 BJ’s clubs nationwide; ongoing DSD additions Continued footprint growth
Liquidity/financingEmphasized need to raise capital; going concern disclosure Executed term sheets for $6–7M non‑dilutive financing (anticipated by year‑end) Cash $2.19M; working capital $(0.68)M; going concern persists Funding a continuing focus
LeadershipCEO Lazaran leading Pathway Still under Lazaran CEO transition to Chessman for continuity Continuity with new CEO

Management Commentary

  • “Significant year‑over‑year growth of more than 21% in topline revenue… [and] our gross margin also continued to improve sequentially… more than 24.7%” – Frank Chessman, President & CEO .
  • “We anticipate this trend to continue… reducing expenses by optimizing every aspect of our production process, from raw materials to packaging, to copackers” – Frank Chessman .
  • “We have several initiatives… ramping up to further move us along our Pathway to Profitability as we continue to drive sales” – Frank Chessman .
  • Leadership continuity emphasized by Chairman Aaron Keay with Chessman’s appointment and Lazaran’s continued Board role .

Q&A Highlights

  • No Q3 earnings call was hosted; below are highlights from prior quarter calls that are relevant to Q3 execution and outcome .
  • Gross margin drivers: “Most impactful… raw materials… key raw material is resin/plastic” – CFO David Guarino .
  • Cost outlook: “Resin… slowly coming down as well… forward‑looking projections… show costs coming down a wee bit” – CFO David Guarino .
  • Guidance stance: Revenue guidance ($70M) maintained with potential for review if trend persists – CEO (prior call) .
  • Long‑term margin: Team sees ongoing opportunity via raw material renegotiations and operational efficiencies rather than pricing alone – management .

Estimates Context

  • Attempts to retrieve S&P Global/Capital IQ consensus for Q3 FY2023 EPS and revenue were unsuccessful due to SPGI request limits; consensus comparisons are therefore not provided at this time (SPGI access error). Values retrieved from S&P Global would ordinarily be cited and compared, but were unavailable during this request window.

Key Takeaways for Investors

  • Sequential margin improvement continued, but Q3 gross margin of 24.7% was below prior guidance (26–27%); execution on raw material and packaging savings remains pivotal to hitting Q4 targets .
  • Strong category growth and retail momentum supported revenue (+21% YoY), with notable club and grocery distribution wins; channel mix remains retailer‑heavy with distributors a growing secondary contributor .
  • Expense discipline is visible (OpEx down 46% YoY) and losses narrowed, but going concern and funding needs persist; watch for financing updates and revolver renewal/terms .
  • Leadership change to Chessman provides continuity for Pathway to Profitability; monitor strategic follow‑through on vendor renegotiations and copacker efficiency .
  • Operational KPIs (freight cost/case, DSD expansion) showed material improvement in Q2 and continued focus in Q3; full benefits depend on inventory turnover to newly negotiated input costs .
  • Procedural overhang (Nasdaq late filing notice) was remedied; no Q3 call reduces near‑term qualitative guidance clarity .
  • Prior period revenue correction tightens revenue quality; keep an eye on customer/vendor concentration and internal control remediation (ERP rollout) in subsequent quarters .