Max Schroedl – Vice President-Finance Jennifer Cue – Chief Executive Officer

Greg Rickman – Private Investor Chad Cooper - Wunderlich Securities

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Jones Soda Company Third Quarter 2016 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 is being recorded. I will now turn the call over to Mr. Max Schroedl, Vice President of Finance. Please go ahead, sir.

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 purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements containing words 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 our current reports on Form 8-K. Listeners are cautioned not to place undue reliance upon these forward statements that speak only as to the date of this earnings call. Except as required by law, we do not assume any obligations 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. Today, we are pleased to report positive results for the third quarter of 2016. Our case volume was up 12%, with revenues up 9%, compared to the third quarter last year. As important and significant is that we reported positive net income of $69,000 for the quarter as well achieving year-to-date bottom line profitability of $53,000. If you look back over the years, the fact that we are now showing year-to-date profitability is a fantastic accomplishment, especially for a beverage company of our size and one that is a public company that has the added associated expenses that come along with that. We play in a very competitive industry with a lot of large players, who have substantially more capital and other resources than us. It can be difficult for David to go head to head with goliath and all of those resources. However, we are showing that we can manage this business and build our brands in a profitable way to achieve profitability. We have had to reduce many expenses over the years and focus our spending strategically on areas such as promotions with our retailer and distributor partners. We are seeing the seeds of success with the strategy with several of our retail partners and we’ll look to continue with this strategy moving forward. The CSD, or carbonated soft drink, industry as a whole has been under pressure and we have seen declines in mainstream soda sales. However, I see a lot of opportunities for a brand like Jones, which operates within the specialty soda or premium segment of the industry, which has been showing 30 plus percent growth in the last couple of years. And from what we can see will continue to grow. Jones Soda is a unique, treat and a premium product and we aim to take advantage of our position in this large industry with our specialty brands. As in the craft beer business, there are signs of consumers are now gravitating toward independent authentic brand in the soda industry. We continue to see interesting opportunities as more and more retailers look at smaller independent specialty soda brands like Jones Soda to invigorate their beverage offerings. In addition to our core brand, our expanded portfolio of beverage offerings is allowing for added growth in gross margin expansion, which we believe will help to propel our company’s profitable sales growth into the future. I will now turn the call over to Max Schroedl and then I will return to go through some key aspects of our business.

Thanks, Jennifer. Revenue in the third quarter of 2016 was up 9% at $4.1 million compared to $3.8 million in Q3 2015. Revenue growth was primarily due to 12% case sales growth driven by various Jones initiatives. Promotional allowances remained flat at $454,000 for the third quarter of 2016 compared to the same amount in Q3 2015. The accounting impact of these promotional allowances is the direct offset to gross revenues. Gross profit margin in the third quarter of 2016 increased to 27% from 25.2% in Q3 2015 primarily due to changes in the product mix in the year-over-year comparable quarters. Operating expenses in the third quarter increased to $1,014,000 from $946,000 in the prior year period. Operating expenses include non-cash expenses comprised of depreciation, amortization and stock-based compensation totaling $75,000 compared to $28,000 last year. Operating expenses as a percentage of revenue decreased to 24.8% for the quarter from 25.1% in 2015. For the third quarter of 2016, we had operating income of 87,000 compared to operating income of $3,000 in Q3 2015. Net income for the third quarter ended September 30, 2016 was $69,000 or $0.00 per share compared to a loss of $179,000 or $0.00 per share a year ago. This was a result of adding case volume to our existing platform. And now to the year-to-date results. For the nine months ended September 30, 2016, revenue was up 16% at $12.7 million, compared to $10.9 million in the prior year. Revenue growth was due to 26.7% case sales growth driven largely by our new Seven Select product offering. During the nine months ended September 30, 2016, 20% of our total revenues were generated from Canadian sales compared to 28% in the comparable prior year period. Promotional allowances increased $380,000 to $1.4 million for the nine month period, but the largest driver being related to the launch of Seven Select product. Gross profit margin for the nine months ended September 30, 2016 increased to 26.5% from 25.1% in 2015 due primarily to gradual shifts in product offering and mix year-over-year. Operating expenses for the nine month period ended September 30, 2016, increased to $3,212,000 from $3,061,000 in the prior year representing 25.4% of revenue down from 28% in the comparable period. We believe that our continued discipline around expenditures is the primary reason for relatively small dollar increases associated with revenue growth during the year. Operating expenses included non-cash expenses totaling $160,000 compared to $173,000 last year. For the nine months ended September 30, 2016, we had operating income of $147,000 compared to a loss from operations of $318,000 in the 2015 nine month period and almost $0.5 million swing in operating results. Net income for the nine months ended September 30, 2016 was $53,000, or $0.00 per share, compared to a net loss of $575,000, or $0.01 per share a year ago. Turning now to our balance sheet. As of September 30, 2016, we had working capital of $2.1 million and cash and cash equivalents of approximately $767,000. At this time, we believe our current cash and cash equivalents combined with our loan facility and cash from operations will be sufficient to meet our anticipated cash needs through the third quarter of 2017. 2016 year-to-date cash used in operations was $420,000 compared to $711,000 in the prior primarily due to increased revenue related to case sales growth. We have a loan facility available for working capital needs which allows us to borrow up to $3.2 million depending on our borrowing base. Our eligible borrowing base as of September 30, 2016 was approximately $1.7 million of which we have drawn down $1.3 million compared to a line balance of $908,000 at December 31, 2015. I’ll now turn the call back over to Jennifer to give an update on some key highlights.

Thanks, Max. I would like to provide a bit more insight into the execution of several of our initiatives. However, as a reminder, we do not provide guidance or any detailed breakdown of financial results between the initiatives. Our business in the third quarter improved due to a combination of all areas of the business, while our Jones core business had relatively modest growth for comparable quarters, year-over-year, we see some very encouraging signs of growth of our core branding glass bottles at some of our large grocery retailers across the country. The focus on specialty sodas from retailers is becoming more evident to us and with this we see more opportunities opening up for us going forward. Our Jones Fountain business also continues to gain momentum and we continue to strategically grow this dimension of our brand and business through account acquisitions. Our recently announced Jones Cane Sugar Slurpee is a great example of the way we have expanded our fountain business and extended the Jones brand. As announced this week, we just partnered again with 7-11 to launch their first ever cane sugar slurpee. The Jones’ Orange & Cream Slurpee will be available at all 400 7-11 locations in the Pacific Northwest. This will be supported by a fun and impactful billboard campaign as well as some other promotional opportunities that will get the word out about the new Jones Cane Sugar Slurpee. We believe 7-11 recognizes the importance of the specialty soda segment in connection with the evolution of their amazing slurpee brand and we are very proud to be the first ever cane sugar slurpee created for them. We hope to expand our offerings of slurpee to locations once we prove out this program in the Pacific Northwest. In addition to slurpee, we are also working to continue to add new Jones Fountain accounts at independent restaurants, corporate locations, convenience store locations and chain QSRs, who are all interested in offering something unique and premium on fountains for their customers. In early August 2016, Jones Soda was cited by Euromonitor, an international market research firm, as the first to innovate and launch in 2015 a premium soda fountain offering. And with this we are seeing more and more inquiries coming from around the country. During the third quarter, we continue to sell our co-branded product line at 7-11s across the country while at the same time working with 7-11 to improve our program for next year. This product line will see some exciting modifications for 2017 and consumers may see these changes to our co-branded rollout by late December 2016. Our lemon coco brand continues to create consumer excitement and growth for our company. During the quarter, we continue to build our base of distributors, grocery and food service accounts. We also just announced our first national listing for lemon coco with the cost plus world market chain of 278 locations across the U.S. that specializes in unique products offering from all over the world making lemon and coco a perfect fit in this chain. Having just launched lemon coco only earlier this year, we are very pleased to see demand nationally at a brick and mortar store like cost plus world market. We look forward to continuing to build lemon coco nationally in the U.S. and in Canada over the next year. And finally innovation, we are looking at a few new opportunities for 2017 that are unique and interesting and we will be ready to announce these new items some time in 2017. Our newly created mission statement is we create innovative products that celebrate the individuality of our consumers and ourselves in a responsible and profitable way. This mission statement is being lived out by everyone at Jones Soda Co and we look forward to building shareholder value through adherence to this mission statement. Profitable sales growth is our mantra and is unique for smaller players in the beverage industry and one that we are committed to. As the largest shareholder in this company with approximately $700,000 invested in the last couple of years, I am here to create a profitable enterprise that will allow us to take advantage of breakthrough opportunities and achieve sales and profitability growth for our shareholders. I will now open the call up for questions.

Thank you. [Operator Instructions] And we’ll go first to Greg Rickman [Private Investor]. Please go ahead.

Good afternoon. Thanks for the report. Jennifer, you’ve talked previously about multiple synergies with 7-11 and I see – get the slurpee, which is great. Do see any other products either co-braded or just other product participation, which would have a presence in 7-11 into 2017?

Yeah, well, again, we are really pleased with how we’ve been working with 7-11 and yes we do – we’re exploring a number of different ways of doing some different things at 7-11. So I can’t outline any of those right now, but we’re definitely being presented with some interesting opportunities.

All right, thanks.

And we’ll take our next question from [indiscernible]. Please go ahead.

Yeah, hi, Jennifer. Okay my questions concern the pace of the turnaround. Investors listen to these calls quarter to quarter. The next call probably won’t be for several more months. And first of all are you sort of personally satisfied with the pace of the turnaround to date? And second of all just looking ahead, it looks like we’ll probably have a small loss this year given the seasonality of the product. When do you roughly see sort of a sustained profitability? Are we talking about quarters or we’re talking about years or what?

You know, well, I appreciate the question, Gary. I think, you know, would I like this to go quicker, bigger, faster, absolutely. What I was faced with when I first came back with a company that had been declining revenues with $8 million to $15 million of losses and to bring it to profitability pretty much out of close to bankruptcy is a huge accomplishment. I feel for myself and the rest of the company.

Agree, agree.

Yeah. I think at the end of the day, if we put it all in perspective and I have to sit back and I get you know it’s I want this thing to go bigger, faster, quicker. But when I look back and I see the progression year-over-year of where we come from and where we are now, I have to say wow. It’s like this company was very much on the brink. But now we’ve got a breakeven company and something that we’re going to be building into a profitable growing company and we’ve got a number of different platforms that are going to allow us for some breakthrough opportunities. So I think we have a great setup, right now. And I can’t give guidance because when I did a turnaround at Jones Soda in the early 2000, really at the end of the day was just mailing a couple of big accounts that really started to trigger things in a big way and we are constantly talking with retailers and large opportunities and that will help to propel. But this time around, we have Jones Soda and the glass bottles, we’ve got Jones on fountain and we’ve got lemon coco. So we’ve got a number of different options as well that are we are working at getting breakthrough opportunities with. And I mean you look at any other beverage brand that starts out, it always looks like an overnight success story, but it really is a several years in the making when you launch a brand. So, again, I do – I’m proud of the accomplishment that we have, achieving profitability and do I wanted to go bigger faster; yes, I do. And it could happen at the start of next year. We land one large, another large account. 7-11 has been a great partner for us and continues to be a great partner. And we continue to find some interesting other opportunities along the way.

Okay, okay, thanks for the response. Again the purpose of my – I agree and with what you’ve said and I commend you for – you and everybody at Jones for the turnaround to date. The purpose of my question was not to seek guidance…

Yeah.

Perhaps to sort of align shareholder expectations with internal expectations and – quarters or years that we could look back and say, wow, the Jones is now a really profitable company.

Yeah, I mean…

So anything you could add to that.

Yeah, yeah, I can…

Yeah, go ahead.

I mean I can only – I can go by experience of the turnaround of Jones in 2003 and we were at $0.19 a share and we were – we started the turnaround in 2001 and 2002. And then we landed Starbucks, we landed Premier, we landed the brand started to take off and we became profitable in 2003 or 2004 and we went from $0.19 to than a $1.10 and $2 and then $4. And then all I can look at is previous year turnaround experience and go by that. But when I was in the thickest things way back in that turnaround, it went – it took – it didn’t take longer than I was expecting. But then when I look back on the results the year-over-year and start to see the progression that happened, I think okay. It makes sense. And I am in this not just to plot along. I’m in this for a growth opportunity for my shareholder position as well as all of our shareholder positions. I’m in this to experience what we experienced with Jones Soda in the early days. And that is growth and profitable sales growth. So I don’t know how I can explain it specific – with specifics and timeframes because it’s a new world since 2002 when I did this before. And yeah, but again I am in this for a large growth opportunity.

Okay. I appreciate the comments. I guess, yes, my expectations or yours that – yeah, I am patient. I know it’s taken a while to get to this point and a lot has been achieved until this point. But my expectations are I’m not expect that someday we will see breakthroughs –I’m not expecting huge breakthroughs in 2017 maybe there will be, maybe there will be a positive surprise, but my expectation that based on progress to date is – this is a long-term investment and people should be – people, who are investing, should look at it that way. And that’s how I look at it. And I think you and the company doing a great job, but personally I think it will be years.

Okay, well, I mean, again like I said we don’t like to give the guidance on this just because we don’t know when some large opportunity will land and the impact that will have, but I appreciate what you’re saying.

Okay, thanks so much.

Okay, you’re welcome, Gary.

And we will take our next question from Chad Cooper with Wunderlich Securities.

Hey, Jen. How is it going?

I’m pretty good. How are you, Chad?

Good, thanks. So I wonder if you could add a little color to the product mix in the quarter. You did have a bump up in gross margin. And I wonder if you could just even anecdotally talk about what that shift in product mix just looks like whether its lemon coco contributing it or fountain or just something else going on.

Yeah, it is what you just said. Actually as we’ve got some new smaller initiatives such lemon coco and fountain which we would like to go much larger and we’re building them to go much larger. And I’m pretty excited by the improving margin even with those initiatives at a small level because it sort of gives you a hand to where we can go with the gross profit margin in the long-term with new more higher margin initiatives. So, again, it mostly comes from the product mix really.

So how I’m going to ask it. Do you see without giving guidance, I mean is the growth in gross margin something that you expect to continue because it’s coming from growth, new growth products for you?

That is the goal in the plan. Yes. I mean as I’ve described, we created lemon coco in a way that allows for one SKU. It gives us the opportunity for a much higher margin than say a Jones Soda, which has close to 40 different SKUs if we count everything. So, yeah, it is about bringing on new products that have higher margin potential. Yeah. And I will be expecting a higher gross profit margin into the future.

And without putting a timeframe to it, if the core Jones business operates at like 24%, 25% gross margin and you’ve now got some growth products that carry higher gross margins. Where can corporate gross margin get to as these growth endeavors start to commend a larger percentage of the overall business? I mean can this be a 35% gross margin business or can this get up to 50% or again without putting a timetable on it just to get a sense of what this could look like?

Yeah, again – yeah, it’s tough to put that out there in terms of a timetable, but, yeah, I definitely – we have certain – the initiatives that we have definitely have higher – close closer to the 35 plus margin opportunity. And then as the volume builds, it becomes even bigger than that. So, I mean, it’s really hard every quarter is different with different things impacting everything including foreign exchange that we get hit with. So it’s I’d love to say it that it can be a perfect forecast out of X. But the goal is to have products in our portfolio mix that provide much higher than our current gross profit margin. And product initiatives that have been created are definitely on the 35% plus range. And we are, one, projecting to have that higher margin. However each quarter can be impacted by few other things at this point in time. So I’m hesitant to say exactly by when this is. It’s trended on the percentage of sales of each of these items as well as what impacts us each quarter given that we operate in international markets and are impacted by the Canadian dollar and we produce in Canada. So I can’t give specifics, but the goal has been to create new product lines with much higher gross profit margin than the current brand.

Yep. So, I wasn’t there to see it fortunately, but I know that you brought in Starbucks is sort of well customer back in your 1.0 version and look forward to seeing you bring in a couple more big fish for all of us. Thank you.

Yeah, absolutely. That’s what we’re working on.

And we’ll take our next question from [indiscernible]. Please go ahead.

Hey, guys. How are you doing?

Pretty, good, thanks. How are you?

Great, thanks. Thanks for the update. It seems like a pretty good quarter on paper.

Yeah.

Jennifer, I can – kind of like the analogy that David versus Goliath that you threw out in the beginning and then talked about the craft beer market. Though I take at the wrong way, but I actually enjoyed beer a little bit more than soda. And…

Don’t take at the wrong way.

Pretty familiar with that industry and when you talked about kind of the fascination with microbrews, I see and I follow that quite well a lot of consolidation in M&A activity in that industry…

Yeah.

And while labels are kind of keeping their individual are micro names. They’re kind of folding up under larger groups. And I wanted to get your take on what’s going on with the kind of the M&A action in your industry and then the specialty soda or soda industry in general? And then obviously you’re going to know what my follow-up is going to be is what kind of – how do you guys look at that and what kind of ideas you guys have behind that? And I’ll [indiscernible] listen.

Yeah. I mean we’re getting a lot of analogies to what happened in the craft beer industry. You know the craft beer industry was less than 1% of the total beer industry 10, 15 years ago, now it’s 19% of the total beer industry. And right now craft sodas are premium sodas or whatever the industry is calling on. Specialty sodas, they make up less than 1% of the total soda industry. But we are seeing signs that the large soda companies are interested in this category. I mean I was just at a buyer office recently and they definitely gave me every indication that the mainstream soda players want to play in the specialty soda section. So I think there is – and Jones Soda have been in this – we operate as a – we’re nationally known kind of a specialty soda, premium soda. There’s a lot of little ones coming up all over the place regionally just like in craft beer that I wouldn’t be able to name of them, but a lot of similarities that are happening in the soda industry was happened in the craft beer industry. I think I have not heard of any kind of M&A yet, but given that the mainstream players are starting to create and launch their own that are trying to get into this space. Gives me some good confidence about where we’re at right now with our brand. I mean, yeah.

So you’re saying there is a chance.

I am saying there is a chance, yeah.

All right, thanks guys. Keep up the good work.

Okay, thank you.

And at the time, there are no further questions. I’d like to turn the call back to you Miss. Cue for an additional or closing remarks.

Okay, well, again, thank you everybody. Thank you for your patience in our company and we will next speak with you and report on our fourth quarter results in early March 2017.

And thank you. That does conclude with today’s conference. We do appreciate your participation.