Mark Miyata - Vice President of Finance Jennifer Cue - Chief Executive Officer

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Jones Soda Company Third Quarter Fiscal 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions. (Operator Instructions). I would like to remind everyone that this conference call is being recorded. And now I would like to turn the call over to Mark Miyata, Vice President of Finance of Jones Soda. Please go ahead, sir.

Thank you and good afternoon ladies and gentlemen. We apologize for the delay. We had some technical difficulties with the earnings release, but it is up now. Before we begin, let me remind everyone of the company’s Safe Harbor disclaimer. Certain portions of our comments today will concern future expectations, plans and prospects of the company that constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements containing verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, will, may, continue, projects or targets and negatives of these words and similar words or expressions. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. Factors that could affect our actual results include among others those that are discussed under the heading Risk Factors in our most recently filed reports with the SEC, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and current reports on Form 8-K. Listeners are cautioned not to place undue reliance upon these forward-looking statements that speak only as to the date of this earnings call. Except as required by law, we do not assume any obligation to update the forward-looking statements we make today. I will now turn the call over to Jennifer Cue, Chief Executive Officer of Jones Soda.

Good afternoon, everyone, and thank you for joining us today. We are happy to report some good news in our business that has come after a long time of working to turnaround our core business, while at the same time bringing out new innovative products. During the third quarter of 2014, we were able to show growth in our sales through a combination of slight increase in key sales, while at the same time reducing our per case trade spend resulting in an overall 4% revenue growth quarter-over-quarter. In addition, we have continued to bring down operating expenses mostly with a focus on the administrative side of the business as we continued to fine-tune the necessary amount of expenses for this business. Our team has worked well this past quarter with some of our long standing distributor partners that have been successful in rebuilding the Jones brand in there market. Canada is an example of where we saw solid growth due primarily to our partnership with Lassonde Industries and in securing sales to Costco in Eastern Canada as well as the continued build up of our brand across the independent base of accounts, regions and retail chains there. Growth in Canada would have been even more impressive, had we not been faced with the deteriorating Canadian exchange rate. We continue to monitor and plan for the weakening Canadian dollar during this fourth quarter and through 2015. In the United States, we continued to work with our distribution partners and are pleased with the level of passion that these partners have for our brand. As mentioned in our previous quarterly call, we had to make distributor changes during the second quarter which impacted our results for that quarter. Based on the role of our new partners in the U.S., I am very excited with the potential we have with these partners in their respective regions. We have continued to expand the distribution of Jones Stripped, our natural line of sparkling and sodas. During the third quarter, we worked with our new natural food retailers primarily in the U.S. West Coast market to sell down for this wonderful all natural version of Jones. We continue to be encouraged with the feedback we have for this new product line that is focused on the natural food channel in our initial rollout. We have continued our seasonal programs. During our third quarter, we re-launched our unique Halloween cans into target for the second year in a row and also sold them into new retailers such as Cost Plus World Market and several other regional retailers. With new and improved graphics, we again participated in this fun seasonal offering that our consumers love. We are also continuing on our history of innovation. In the third quarter, we initiated the test launch of our new product line Jones Sparkling Water and we are very excited. This product is available in four of Jones core flavors, Green Apples, Berry Lemonades, Strawberry Lime and FuFu Berry and is being test launched with target. The great thing about this product is that it is packaged in convenient 8 ounce cans leveraging off of our Halloween can package but in a way that photos of Jones brand with photos on the can and using a hint of our unique flavors to make water fun. With zero calories and containing only two ingredients, carbonated water and natural flavor, we have created a unique beverage option that appeals to a much younger demographic and their parents who are looking for fun and healthy water alternatives for their kids. I will now turn the call over to Mark to review the third quarter results and then I will follow this with an update on the business and closing remarks.

Thanks Jennifer. Revenue in the third quarter of 2014 increased by $158,000 or 3.7% to $4.4 million compared to the third quarter of 2013, as a result of increased sales volume combined with reduced promotional allowances. Promotional allowances decreased $175,000 to $468,000 for the quarter due to tighter controls over promotional programming. The accounting impact of these promotional allowances is a direct offset to gross revenues. Gross profit margin in the comparable third quarters remained flat at 24%. Operating expenses in the third quarter of 2014 decreased to $1.2 million from $1.3 million in the prior quarterly period due to an 8% decrease in SG&A expenses. These operating expenses as a percentage of revenue decreased to 28% for the quarter, down from 32% in 2013. Net loss for the quarter ended September 30, 2014 decreased to $233,000 or $0.01 per share compared to a loss of $330,000 or $0.01 per share a year ago. This is a result of increase in revenues combined with reduced operating expenses which also included a decrease in non-cash expenses consisting of depreciation, amortization, and stock-based compensation, totaling $120,000 compared to $158,000 last year. For the nine months of 2014, revenue decreased 4% to $11.1 million from $11.6 million in the prior nine month period. During the nine month of the year, promotional allowances declined $301,000 to $1.2 million for the period. Gross profit margin for the comparable nine month periods decreased to 24% from 26% due to increased cost of production, which was most impacted in the second quarter of this year. Operating expenses decreased to $3.7 million, down from $3.8 million in the prior nine month period. Net loss for the nine months of this year increased to $1.2 million or $0.03 per share from a loss of $824,000 or $0.02 per share a year ago. This included non-cash expenses totaling $412,000 compared to $423,000 last year. Turning to our balance sheet, as of September 30, 2014, we had working capital of $3.3 million and cash and cash equivalents of $577,000. At this time, we believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash need into the first half of 2015. Cash used in operations during the nine months ended September 30, 2014 was $1.6 million compared to $623,000 in the prior year primarily driven by a $1.3 million increase in accounts receivable. We have an asset-based credit facility available for our working capital needs. During the third quarter, we made draws on our credit facility, which was fully paid down as of September 30, 2014. Our eligible borrowing base as of that date was approximately $1.7 million. I’ll now turn the call back to Jennifer to give an update on our sales and marketing highlights for the quarter.

Thanks Mark. Again to reiterate, we are pleased with our third quarter results and feel that we have made great strides in turning around the decline that we have been experiencing due to our numerous, but necessary turnaround efforts. Let’s also not forget we overcame significant hurdles faced in the first six months of this year due to the effects of adverse winter weather in several major markets, distributor changes and increases to cost of production. We are in a challenging industry, but one of great opportunity as well. Our core brand of Jones Soda still has a lot of potential in our North American market as we continue to build back-up our independent basic account, as well as present some new national and regional change. In addition, internationally we have focused our core brand in several select international markets and we are inspired how well received our brand is. And we look forward to events we’re showing how global this Jones brand can be. Building backup and Soda brand after years of heavy losses has been [daunting]. However, I am still very much a firm believer in the power of this brand and the unique based we have within the beverage industry. Our core product line of premium carbonated soda made with pure cane sugar. We see a rising trend of consumers that prefer ingredients such as pure cane sugar over high fructose corn syrup. We will continue to market these differences in our core brand as we build that backup and look to new outlook for this great brand. We are also continuing to focus on growing our other soda lines; our Zero Calorie Jones Zilch and our own natural Jones Stripped. Our innovation machine has been in high gear and I’m pleased with the products and initiatives that we have been able to create and launch in a controlled and disciplined manner. We have a methodical way of launching new products that allows us to test and tweak as we go along. Jones Stripped and Jones Sparkling Water are examples of some product extensions that take the Jones brand into other beverage categories and opportunities. We are always looking for and open to opportunities to create new concepts that the team here develops or which get presented to us. Our marketing remains second to none. We’re doing the things that are necessary to keep our brand core such as Caps for Gear, which have seen a dramatic increase in redemptions and excitement in 2014 especially with the GoPro camera. Our second Jonesin’ for a FIAT Photo Contest has been a success with more than double the number of photo entries year-over-year and providing us with some really created unique photos that were sent into win Fiat 500. And finally, we definitely showed what Jones Soda does that with the launch of our Peanut Butter and Jelly Limited Editions Flavor that coincide with back-to-school this year. This Limited Edition Flavor of Jones tasted fantastic and demonstrated the buzz we get from our unique and fun flavors. I hope that the testament to how I feel about how far we have come in tuning this brand around is shown by my personal investment in the company. In August, I exercised my stock options and paid over a $0.5 million of personal cash funds into this company. I am holding these shares for the long-term. I am a strong believer in this brand, its future and this company and I am willing to put my money where my [mouth] is. I will now open the call up for questions.

(Operator Instructions). And we’ll take our first question from [Gary Gates].

Hi Jen and Mark. First of all, I wanted to congratulate you on hopefully what will be the beginning of an extended turnaround. And Jennifer, I wanted to congratulate you especially on your leadership. I think you believe in the company, you have a strategy; you’ve consistently stuck to the strategy and the message through the recent dips and rises. And I wanted to congratulate you for that and the fact that you’re all in.

Yes. Well, thank you Gary I appreciate that.

Okay. A couple of questions, the first one is cash needs; you’d mentioned that you have sufficient resources through the first half of 2015. Does that exclude drawing down on the credit line or is that include drawing down on the credit lines?

Yes, Gary, again thanks for that question. That does not include us drawing on the line. And the reality is in terms of cash management, I mean it’s something we manage and monitor daily. As part of that this year, we haven’t been taking early payment discounts or volume discounts and we’re really just managing cash tightly. And so we have the line available to us, but that statement going through the first half of 2015 doesn’t factor in us drawing into that.

Okay. That’s great to hear and I want to commend you Mark on your management of the cash. I know your predecessor Kerry did a great job at that and you’re continuing that tradition and congratulations on that. Okay.

Thank you.

The second question, Jennifer you made a comment about the buzz associated with peanut, butter and jelly. Speaking about buzz, there is a growing trend towards the legalization of marijuana that’s occurring in many states including your home base in Washington.

Yes.

When are we going to see a cannabis based version of Jones?

Gary, we talk about this internally all the time and evaluate whether or not make sense for our brands to come out with something like this. There is a lot of reasons, we know that we’ve sort of chosen really not to do this given our demographic of core Jones, we -- again specifically Jones that ties into maybe consider with another brand. But it definitely is on the radar screen; we talk about it. And this point we’ve evaluated that right now we have so many other options of creating fun, unique flavors that might not cause the line that really [can talk] the mothers of our consumer. So, it’s a delicate balance; I hear you’re saying and we will continue to evaluate it.

Okay. Because you could command a premium price on that and it would open up a whole new area for you.

Yes.

I mean we even have a name if that appeals to people, I mean Fufu Berry is a perfect name for stoners?

There you go okay, we’re going to [ready storm] from Gary.

Okay.

Yes. Gary, it’s on the table in terms of I guess that we’re evaluating going forward. I think it’s still early in the stages of legalization but it’s definitely something we’re considering moving into future.

Okay. Well, thanks. And once again, congratulations on the quarter and I hope to see many more of the trend -- hope to see the trend continuing. Thanks a lot.

Yes. Thank you, Gary. And believe me; we are planning on this trend continuing.

(Operator Instructions). And we’ll go next to [Brett Moll with InvestAlready.com].

Jen and Mark, how is it going? Congratulations on the solid quarter. I have a few questions for you. My first is about I know you are expanding Stripped and Zero Calorie what your plans for expansion with the Stripped and Zero Calorie line?

Well, we have focused our launch of Jones Stripped into the natural food category; it is a whole new channel for Jones. Jones Soda does not get into that natural category. So, we have -- as I believe you recall we launched it initially in California, 2014 we tweaked it a bit, called it, changed the name and expanded it through the Pacific Northwest, U.S. Northwest as well as back into California with the new name and new look. We have secured UNFI, which is a distributor to the national food channel, who we are working with, with this products. And we have also launched it into our market in Canada just at the end of the third quarter is when it got into Canada. So we are excited by what we see in the natural food channel, especially in our home market. We’re in the Whole Foods chain up here in the Pacific Northwest. This market knows Jones the best and we’re doing a lot of samplings up here and getting consumer feedback; and we’re pretty excited with the feedback we are getting in the Whole Foods channel up here. So again, it’s calculated into the natural channel right now, but we will be evaluating how we take it to other channels as we move forward.

Okay. And are you considering moving that to Whole Foods across the nation or you just think California for now or what’s the status of that?

Well, we have perfectly presented at various regions, which we think makes sense for the expansion of our brand in certain regions. We’ve seen the success in our home market where everyone knows Jones and the receptivity in the natural channel to it. So, we are working with Whole Foods and sort of selecting various divisions that make sense. So, but yes we are -- we got fragmentations out there to new natural food divisions of Whole Foods, as well as other chain.

Okay. And then WhoopAss, what happened with that? Is that, are you guys no longer focusing on that energy drink or what’s the status of that?

Yes. That has not been a focus for us at all, when I came back we felt that it was or I felt it was necessary to bring out some healthier options in the Jones brand. There were some negative associations with chance with the name and it just was a little bit difficult to take that one forward. I loved WhoopAss brand, however we were only able to do so much and we had to sort to pick and choose and we’re focused on the Jones brand right now.

Right. And then honestly I’ve been an investor since ‘08, I have been keeping buying as it drops hoping for a profit one day soon. And I constantly check your guys status and one thing I haven’t said about is that whenever I go to website, which I go to be honest just weekly, just to check what’s going on. Often as we click there, I see a lot of out of stock products, can you explain that, I don’t understand. Typically I don’t think you sell most online, I can’t understand how half the [past-in] be out of stock?

Yes. That I agree with you. That was -- that is not -- I hear you Gary, there was some technical difficulty of showing out of stock, we definitely have it an on in-stock and we are working -- we had worked on that technical difficulty. And I will be on that because that is unacceptable.

All right, great. And then my last question, thank you for letting me ask those questions. Limited Addition Flavor, I love the idea, how much did you (inaudible) I think it’s a great idea. Do you have any ideas of other Limited Addition Flavors in the future, I know you can do it for a while; it’s something you’re going to continuously do, because I think the Press and new variety of the flavors, I think gets a lot of attention that can ultimately drive sales, so I think it’s great.

No, absolutely we’ve got a whole inventory of flavors. We were really excited with Peanut Butter and Jelly because not only our consumers loved it, our distributors, our independent distributors really embraced it this year, this unique flavor and really let us know that it just created so much more excitement and it could open up more account. So, there is no question we will be doing it again.

Great. And then my last comment was at the Sparkling Water, I’m sure you’ve hear of Sparkling Ice, it was a company, it’s pretty small beverage company in 2009 at $2.7 million in revenue and then nine months through this year they have $237 million in revenue. So, hopefully we can grow the Sparkling Water line something close to that?

Well, we have a lot of respect for Sparkling Ice and what they’ve done there. They are neighbor ours and to see what they’ve done is they’ve been in the business since lot much longer than we have and we were thrilled to see what they’ve done. So yes, we are looking forward to doing that.

All right, Jen and Mark, I hope that we get some sort of a profit soon. Thank you so much.

Yes, okay. Thank you.

Thank you.

And we’ll take our next question from [Alan Zakon with The Ez Company].

Hello Jennifer and Mark. I just have a one quick question for you two. So, I am looking at the last year’s financials and I see that there was a quite a big dip in revenue in Q4 of 2013. I was just -- two parts I guess, first part is ask you to just refresh our memory as to what exactly caused that dip; whether it’s seasonal trend or something of that sort? And number two, what we’re going to do in Q4 this year to kind of offset that dip and hopefully continue the positive growth in revenue?

Yes. Well, definitely, we are a seasonal business and all cold beverages are seasonal. Q2 and Q3 are the higher months, so, we’re definitely going to have a decrease in Q4 and Q1 from Q2 and Q3. However, last year’s Q4 was a definite stronger drop than usual that had to do with a number of things including some of our distributors going out of business and certain product lines, and it was an unusual quarter, as I did mention when I reported on it. However, we got the momentum; we’re working with our new distributor partners; we feel confident that we’re going into the fourth quarter much stronger than last year. However again, I will reiterate that the winter months are slower months for cold beverage.

Of course. Now, so you mentioned distributors going out of business, have you seen any of those issues in recent months that you could -- that could cause similar issues in Q4 or have the distributor relationships been quite strong this year; what’s the status of those?

Yes, we’re not anything out of the norm; we’re monitoring our receivables very tightly. And we’ve got some very strong distributors that we brought on-board this year. And I mentioned in previous call Republic National Distributing is a very strong distributor that now has four states for us. So we feel comfortable there. The distributor that went out of business, last year was one up in Canada that was historical distributor for us that was (inaudible). However, we had our partner Lassonde Industry takes over that market for us. And Lassonde is the power house too. So we’ve got a network of strong distributors and we have smaller distributors too. I mean we love our small distributors, because they are the ones that are at the independent account and doing what we need with our core brand. So, it’s a balance having a great small ones and monitoring and making sure that they pay their bills and they’re solid and as well as having some strong ones that can build the brand and picks as we want to go to.

Great. That’s all. Thank you, Jennifer.

Okay. Thank you.

And at this time, there are no further questions in the queue. And I would like to turn the call back over to our speakers for comments and closing remarks.

Yes. I just want to finish up by thanking everyone again for your interest in Jones Soda call. We will speak with you next when we report our fourth quarter results in March of 2015. Thank you.

And this does conclude today’s conference. We thank you all for your participation.