Gina Salters - Interim Controller Jennifer Cue - Chief Executive Officer

Shawn Gordon - Private Investor

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Jones Soda Company's Third Quarter Fiscal 2015 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. 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. I will now turn the call over to Gina Salters, Interim Controller of Jones Soda. Please go ahead.

Thank you and good afternoon ladies and gentlemen. 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 negative 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. Included with me today for call is our Interim Controller, Gina Salters; as well as Eric Chastain, the Company's Chief Operating Officer. Today, we are happy to report continued improvement in our operating results in our third quarter of 2015. While, our revenues decreased to 14% for the quarter, this was due primarily to us not repeating two seasonal lower margin sales programs during the comparable third quarter period. As we were able to post an operating profit despite the decline in volume for the quarter, we believe this position was a better one for the company given our objectives of profitability combined with sales growth. Year-to-date case volume exhibits growth and we are seeing good momentum in our core business. During the quarter, our operating expenses continued to trimmed as we benefited from the effect of being a lower cost headquarter location as well as benefiting from a move into more variable model of compensation to the team here. We continue to see increase in premium sodas for our traditional long neck glass soda bottles as well as our newly launched fountain program and we are looking forward to capitalize on these moving forward. Before I turn over the call to Gina to review the numbers in more detail, I did want to mention that as we announced in our 8-K filing on November 3rd, we entered into a product and supply agreement with 7-Eleven, Inc. for distribution beginning in 2016. We had a long standing relationship with 7-Eleven in Canada over the years and we look forward to the expansion of this relationship into our U.S. business. I will now turn over the call to Gina to go over the numbers in more detail.

Thank you, Jennifer. Revenue in the third quarter decreased 14% to $3.8 million from 4.4 million as compared to third quarter 2014. Case volume decreased 12% compared to the same period last year, primarily due to certain seasonal product offerings not offered in 2015 that were available last year. In addition, revenue was affected by foreign exchange translation loss due to the weaker Canadian dollar impacting our Canadian business. Growth profit margin in the third quarter increased to 25% from 24% in the third quarter of 2014. It’s favorably impacted by reduced cost of goods from shifting more production to Canadian operation given the Canadian, U.S. dollar exchange rate during the quarter, as well not offering seasonal product as we previously discussed. Total operating expenses in the third quarter decreased to 946,000 from 1.2 million in the prior year, primarily due to continued close management of sales, general and administrative expenses most notably related to the move of the headquarters in March of this year. Operating expenses included non-cash expenses, depreciation, amortization and stock based compensation totaled $29,000 compared to $150,000 last year. Operating expenses as a percentage of revenue decreased to 25% for the quarter from 28% in 2014. Operating income for the third quarter was $3,000 compared to a loss from operations of $177,000 in the third quarter of 2014. This was due primarily to lower G&A expenses. The company heard a foreign exchange loss which is included in other expenses. This resulted from the transfer of cash from our Canadian Company to the U.S. company to fund operations. Net loss for the quarter ended September 30th, 2015 improved 73% to a loss of 179,000 or $0.00 per share compared to a loss of 233,000 or $0.01 per share for the same quarter of last year primarily bulging some reduced operating expenses. For the first nine months of 2015, revenue decreased 2% to 10.9 million from a 11.1 million primarily due to the foreign exchange translation loss from Canadian Sales give the continued weakness of the Canadian dollar during the first nine months of 2015 and the large percentage of sales from Canada. Case volume increased 1% compared to the prior year impacted by the increased number of accounts opened in 2015. Promotional allowances decreased 141,000 to 1.1 million for the first nine months of the year, due to continued close management of promotional programming. The accounting impact the deep promotional allowance is a direct offset to growth revenue. Growth profit margin for the period increased to 25% from 24% for the same period 2014, due to the favorable impact of shifting more production to Canadian operations given the Canadian U.S. dollar exchange rate. Operating expenses decreased 17% to 3.1 million from 3.7 million in the prior year consistent with the quarterly and I just discussed due to management of sales, general and administrative expenses most notably related to the move of the headquarters in March 30th. Operating expenses also included non-cash expenses totaling 167,000 compared to 363,000 last year. Operating expenses in the percentage of revenue decreased to 28% from 33% in 2014. Loss from operations for the nine months period of 2015 was 318,000 compared to a loss of operations of 1.1 million for the nine months ended September 30th, 2014. Loss from operations has improved due to an increase in gross profit combined with lower operating expenses. Net loss for the first nine months of this year improved 52% to a loss of 575,000 or $0.00 per share compared to a loss of 1.2 million or $0.03 per share a year ago. This is a result of the increase in gross profit combined with reduced operating expenses as previously mentioned, partially offset by increase in other expense mostly relating to the foreign exchange loss. Turning to our balance sheet, as of September 30th, 2015, we had a working capital of 2.2 million and cash and cash equivalents of approximately 491,000. At this time, we believe that our current cash and cash equivalents combined with our loan facility and expected cash from operation will be sufficient to meet our anticipated working capital needs throughout the next 12 months. Cash used in operations during the nine months ended September 30, 2015 was $711,000 compared to $1.6 million in the prior year, primarily due to our continued tight management of inventory as well as not doing the two seasonal product offering. We have a loan facility available for working capital needs which we used during the year. As of September 30, 2015, our eligible borrowing base was approximately 1.2 million of which we had drawn down 329,000. I’ll now turn the call back to Jennifer to give an update on our sales and marketing highlights for the quarter.

Thanks, Gina. During our third quarter, we continued to build our core Jones Soda. As mentioned, we did not participate in two seasonal in and out programs which did affect our overall case volume and revenue for the quarter. However, as mentioned the deficient in Q3 seasonal items assisted an improvement in our gross margin and are achieving an operating profit to the quarter. We continue to work building our core business with existing and new retail partners. We also benefit from adding on several new convenient chain things that were setup and new for the 2015 year. Come and go as a convenience chain of 250 plus locations located in the Midwest as well as a new division of Circle K. in the Southwest with approximately 200 locations brought our brand into their set in 2015. From a marketing perspective, our Caps for Gear consumer promotion continue to excite our fans as that our third annual Jonesin' for a Fiat contest. This Fiat contest was in the giveaway Fiat 500 to the most creative photo taken drew almost 50,000 entries this year and increased from 20,000 entries last year. We will announce the winner of this contest in December 2015. We also benefited from exciting response to our Back To School contest in September where in over the course of four weeks, we driven over 200,000 entries from our fans just win a case of our Peanut Butter and Jelly soda along with the GoPro 4 Session camera and Jones Soda Backpack and a Beanie. Our fountain business has attract the interest of some large retailers and we are very excited by the opportunities that are presenting themselves to as consumers and independent restaurants chose another alternative and a keen sugar alternative to their fountain beverage offering. We are following up and looking to partner with several larger chains that we net up the most recent national restaurant show in May as well as NACS, the National Association of Convenient Stores in October of this year. And finally just last week, we witnessed the huge exposure for our brand by partnering with the makers of a follow videogames theory as we created a limited edition Nuke Cola Quantum soda for them to sold exclusively at Target on November 10th. The excitement over this videogame launch and the unique merchandise soda offering has exceeded our expectations for the co-branding partnership. I remained very confident and excited with our feature. Our streamlined operations and more variable expenses will allow Jones Soda Co. the benefit of great operating leverage as we look to add on new accounts and new partners with the ultimate goal of increasing sales and profitability. The team here is getting up to entered into 2016 which is the Jones Soda’s 20th birthday year. At our next conference in March, we will be able to update you on many of the sale and marketing initiatives we have in the plans to the special year in Jones brand history. I will now open the call up for questions.

Thank you. [Operator Instructions] And we’ll take our first question from Gary Goetz [ph], who is a private investor.

Yeah. Hi Jennifer, Gina and Eric. And I wanted to congratulate you on the expense control. I think you are doing wonders there. I have a couple of questions. First, can you provide any more clarity on the 7-Eleven deal in terms of when in 2016, the rollout in terms of the number of stores and which products?

Well thank you first of all on the comment on the expenses. Yeah, we have worked hard on this and we’ve focused on the G&A expense which we believe is the right thing to do. In terms of 7-Eleven, again I extremely expecting to all of us at this table to enter into this agreement. We are under confidentiality with 7-Eleven from many of the details of the agreement and we will be able to discuss more closer to the launch which is in the early toward 2016. However, in recognition of this confidentiality agreement, I don’t want to give the details as of yet, but we will be very, very excited to provide all these details in the first couple of months of 2016.

Okay, so we should hear about it by the next conference call?

I believe definitely.

Okay, good. Well, that’s good to hear and again congratulations on 7-Eleven, it’s a major chain with a lot of upside opportunity. Secondly set of questions is or second question relates to new products, is there anything you could tell us about that perhaps even starting Lemoncocco, I know which is related to Jones?

Yeah, we have as you know Gary we’ve in creating and innovating launching new products. We have chosen to do it in a smaller fashion initially. This is completely new brand. There is obviously some lengths to my Italian connection that not where it was originally sort of conceived. However, it sort of in our incubation stage right now in our home market and we’re just sort of testing and determining the - seeing the responses. We like what we’re seeing and we will be looking to - I mean it’s likely take it to new markets and we’ll announce that early in 2016 as well. It’s - we are pretty excited about this new product but that’s how we’ve been launching it just sort of be under the radar initially and then just look out any tweaks about that we needed to and then bring it into a larger market format after that. And yes, we will hear about it in the early 2016 as well. We’ve got a busy 2016.

Yes. I am glad to hear that. And assuming the launch of successful on the West Coast, there are number of opportunities for a product like that on the East Coast specifically in New York and Manhattan, Bronx and also in north end of Boston.

Yeah, I agree there is a lot of an Italian centric market on the East Coast and that will be part of this land.

Good, glad to hear that, any other new products that we should hear about?

At this point, those are the ones we’re focusing on as well as our core Jones Soda, we’ve got - we’re a small team and we got to make sure we don’t do too much. So we got a lot on our plate and we want to execute extremely well. Next year, we’ve got some great opportunities and we want to rock, we want to shine with these existing opportunities.

Good, I glad to hear and that and again congratulations on the expensing control and hopefully next year, we could start seeing little bit more growth. But - and I think you have this in place for then?

Yeah, yeah, we do.

Okay. Thanks a lot and congratulations to all.

Thank you, Gary.

[Operator Instructions] And we’ll go next to Shawn Gordon, another private investor.

Hi Jennifer. Congrats on a good quarter.

Okay, thank you.

And I have few questions. So just quickly on the 7-Eleven deal, just goggling really quick, I see they have roughly 500 stores in Canada, roughly 8,000 in United States, so it looks like 16 time the potential United States versus a footprint in Canada, I know you see the details confidential to hopefully first quarter but just certainly have called in, it looks obviously very sizable on that, so congrats on the 7-Eleven. Question I had on Lemoncocco, I have ordered the product and tasted it. My question here is since it’s only canned by Jones Soda, will that make it a higher margin product for the company or is that a fair way to look at that?

Yeah, we spend a lot of time in R&D and developing this product to be a good margin product Jones as well as a great package. So we use the lot of examples in the beverage industry that we really respect Arizona a key Redbull obviously and one skewed beverages that really allow you to manage your inventory well and improve your gross profit margin really, but we really also created a premium product too. So we - and we are all pretty excited about what we’ve created and the look and the initial respond.

Yeah, the look is great, the website is great and I’d love to see that sale it quickly as possible. Case lime, are you done with the formula, or you still kind of tweaking the final product?

We are still on that little tweaking the formula a little bit. So year, so we are still and again that’s why we liking launch in this way, get feedback from our consumers and so we’re in the final stage of tweaking it and will be ready to roll it out larger next year after finalizing all tweaking of it.

Okay, and I always thought it’s very smooth to drink, the first step you don’t know but chock into water, you are taking initial confusion a very first step, but drinking is good, that really nice, so I look forward to the - sorry.

That’s great, that’s our tagline, lemon or coconut.

I hope in time there may be other flavor enhancement added to it, whether it be strawberry virgin or something else but just I do, I do like the first one. The other question I have it on your seltzer water roll out, can you give us update on the seltzer water, I know initially they were lay down to can just in general how the traction there, or you going to move to a bigger can or bigger bottom on this seltzer water, huge can is - water by the way?

Yeah, we’ve - we haven’t made the decision to launch or brining out in larger way, we’re still - it’s a new sort of category for us, we’re looking at the margins and thing, if it really make sense, we had a few things in the hopper including like Lemoncocco brand and strip in. Yeah at this point, we are going to focusing a bit more. We are looking at ways to improve at the sparkling water, but at this point we’re going to be focusing on the initiatives that are hand not happens to what we got going with 7-Eleven and Lemoncocco and our strip line. And first of all number one our [indiscernible] so.

Okay and I only ask is that’s sparkling water, source to water, seltzer water is a category right, it’s out stropping pretty much most of other soft drink categories, so it happen in the company I know it’s got ample resource and some limit you have to choose you best carefully and certainly where the margins are great. But obviously it’s a huge category still, I was just curious to where your thoughts?

I hear you Shawn, you are right and we are not completely giving up on it, we’re just going to be having to pick and choose what we focused on initially that we have not given up on that.

Okay. And then just one final question on the two new retail changes you mentioned you click up in 2015, sorry one was coming here, what is another one?

Oh, Circle K. it was - business Circle K. Yeah we are - yeah.

And they’ve on board for fall of 2015 or just they starts in this third quarter up to the –?

All those reset started to happen at the end of the second quarter, so we’re just sort of - it takes a while to get things slowing but yeah those were sort of been the later part of the second quarter.

Okay, so let’s go see the upside obviously the next is going to be how much to compare to behind that, that’s great. That’s all my questions for now. Thank you very much.

Okay, thank you, Shawn.

[Operator Instructions] We don’t have any questions in queue at this time.

Okay, well thank you again for your interest in Jones Soda. And we look forward to speaking with you next when we announce our year-end and fourth quarter in March.

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