Jennifer Cue - CEO Max Schroedl - VP, Finance

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Jones Soda Co. Fourth 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. 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 to turn the call over to Mr. Max Schroedl, Chief Financial Officer. 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 constitutes 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 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 that we make today. I will now turn the call over to Jennifer Cue, Chief Executive Officer of Jones Soda.

Thanks, Max. I am pleased to report double-digit growth and positive EBITDA in 2016. This is the first time in 10 years we have achieved either of those financial results. In 2015, we partnered with 7-Eleven USA in a very large way by introducing a new product lineup that was the first co-branded line for the 7-Eleven USA group as well as Jones. Pretty quickly out of the gate we listened to consumer feedback and began making refinements to the entire lineup. By December of 2016, we began rolling out an entirely new and improved premium and co-branded product line with new labeling but using our traditionally Jones 12-ounce long-neck glass bottle and new flavors that were more familiar to Jones’ fans, we replaced and re-launched the 7-Select by Jones product on four new flavors; Blueberry Lemonade, Orange & Cream, Green Apple and a new flavor from a third partner, Mondelez, which is a Sour Patch Kids Watermelon. All four flavors of this new co-branded lineup are sweetened with cane sugar and three of the four flavors have a small natural caffeine component to them, which is exclusive to the 7-Select by Jones line. As you may have seen, 7-Eleven has given this product line prominent eyelevel shelf space in the majority of 7-Eleven across the United States. Feedback from all the franchisees at the 7-Eleven Experience tradeshow in Las Vegas, Nevada in February was very positive and has further reconfirmed with the reorder and cake rates that we have witnessed for the 7-Select by Jones line. So both Jones and 7-Eleven are extremely excited by the initial results of the re-launch and they both will continue to build upon this lineup in 2017 with plans to introduce new flavored innovations along the way. We have also worked very hard at building our fountain business in 2016. Every day we see more and more opportunity with restaurants looking for a differentiated fountain offering and Jones focused on meeting this need. One highlight of our fountain business in 2016 was becoming the first cane sugar slurpee to be offered at 7-Eleven stores in our traditional Orange & Cream flavor. This product was offered throughout the Pacific Northwest market or 400 7-Eleven stores. Based on the success of the Orange & Cream slurpee, we are planning additional product offerings within slurpee for 2017. Another great milestone for Jones in 2016 was the launch of our new Lemoncocco product. Lemoncocco is a completely new and innovative brand of which I cannot be more proud, a non-carbonated blend of Sicilian lemons and the cream of a coconut is proving to be a hit with many people ages young and old. We launched this product strategically through Italian distributors at a boutique grocery as well as select food service accounts and mostly in the Western part of the United States and some regions of Canada. We are very pleased with the excitement generated in the market by this product and we are excited to see it continue to grow with such recent spin data identifying the Northern California market where we initially launched this brand along with Seattle showing 250% plus growth in its channel accounts. A much wider rollout of Lemoncocco is currently happening both in the United States and Canada based on the success of the initial 2016 launch. We will have a dedicated booth at Expo West in Anaheim, California for Lemoncocco and we’ll look forward to making additional connections with distributors and retailers at this show, which opens tomorrow. Our plan for the company in 2017 includes growing Lemoncocco, building upon our fountain business as well as growing our core lineup of Jones. In addition, we have new innovations up our sleeves that we will be announcing soon. I will now turn the call over to Max Schroedl who will outline the details of the numbers and then I will outline our objectives for 2017.

Thanks, Jennifer. Revenue in the fourth quarter of 2016 increased 12.4% to $3 million from $2.7 million in the fourth quarter of 2015. Promotional allowances decreased $68,000 or 18% to $318,000 for the fourth quarter of 2016 due to variations and timing of the programs. The accounting impact of these promotional allowances is a direct offset to gross revenues. Gross profit margin in the fourth quarter of 2016 increased to 25% from 19% in the fourth quarter of 2015, favorably impacted by operating efficiencies and a gradual shift in product mix. Total operating expenses in the fourth quarter increased to $972,000 from $939,000 in the prior year period. Operating expenses also including non-cash expenses, depreciation, amortization and stock-based compensation totaling $62,000 compared to $85,000 last year. We feel that our variable compensation plan and the administrative structure in place are appropriate in the current stage of the company. Operating expenses as a percentage of revenue decreased 32% for the fourth quarter of 2016 from 35% during the same period in 2015. Loss from operations for the fourth quarter of 2016 was $232,000 compared with a loss from operations of $438,000 in the fourth quarter of 2015, due primarily to 7-Select sales in Q4 '16 which we did not have in 2015. Adjusted EBITDA for the fourth quarter of 2016 was a negative $171,000 compared to negative $380,000 in the fourth quarter of 2015. Net loss for the quarter on December 31, 2016 was $236,000 or $0.01 per share whereas the fourth quarter of 2015, we had a net loss of $545,000 or $0.01 per share primarily a result of growth added to a stabilized operating platform. As Jennifer mentioned, for the full year ended 2016, revenue increased by 15.3% or $2.1 million to approximately $15.7 million. Revenue growth was due largely to our new initiatives which included co-branded products, fountain and Lemoncocco. For the full year ended 2016, promotional allowances increased 21% to $1.8 million from $1.5 million largely due to the launch of 7-Select product line. For the year, gross profit margin increased 26% from 24%, again due mostly to operating efficiencies and the gradual shift in product mix. Operating expenses increased by 1% to $4.2 million from $4 million compared to last and [indiscernible] to the rollout of new initiatives. Operating expenses also included non-cash expenses totaling $222,000 compared to $256,000 last year. Operating expenses as a percentage of revenue improved to 26.7% for the year compared to 29.4% in 2015. Loss from operations for the year ended December 31, 2016 was $85,000 compared to a loss from operations of $756,000 in 2015, an improvement of 89%. Net loss for the year improved 84% to a loss of $183,000 or $0.00 per share compared to a loss of $1.1 million or $0.03 a year ago. Adjusted EBITDA for the full year 2016 was $128,000 compared to a loss of $729,000 during 2015. Management believes that adjusted EBITDA along with our other improving GAAP metrics provide a more complete understanding of our ability to generate cash from operations. Turning now to our balance sheet. As of December 31, 2016, we had working capital of $1.8 million and cash and cash equivalents of approximately $733,000. At this time, we believe that our current cash and cash equivalents combined with our loan facility and anticipated cash from operations will be sufficient to meet our anticipated cash needs through the end of 2017. We may seek alternate forms of planning to fund various initiatives and solid growth. Cash used in operations during the year ended December 31, 2016 was $346,000 compared to $1 million in 2015. During both years, we utilized our asset-based loan facility for working capital needs. At December 31, 2016, our eligible borrowing base was approximately $1.6 million, of which we had drawn down $1.2 million. At December 2016, we renewed our line of credit with CapitalSource. Our maximum aggregate amount available for borrowing under the loan facility remained at $3.2 million while our interest rate decreased to prime plus 0.75% from the prime plus 1. I will now turn the call back over to Jennifer for a final wrap-up.

Thanks, Max. As mentioned, 2016 was a pivotal year with the first double-digit revenue growth in 10 years and the first positive EBITDA in 10 years, the team here is proud. The accomplishments to get here over the last five years were done without a single outside equity financing, rather just my own personal investment of approximately $700,000 along with an increasingly favorable line of credit offering. With the new stability achieved in 2016, we are excited to continue to grow upon our solid foundation in several ways. Our mission statement is, we create innovative products to celebrate the individuality of ourselves and our consumers in a responsible, profitable way. Our strategic plan for our company is threefold and centers around growth upon a stable platform in place. First, Jones; this is our core brand and we see continued opportunity within the premium soda segment of the industry as people move to more premium across sodas. Within Jones, we founded the key initiative that we will continue to build out. Fountain has opened the doors to such opportunities as the 7-Eleven slurpee program as well as some exciting new opportunities on the horizon. We will look to build our core glass business as well as our fountain business through acquisition of new retail customers in North America and abroad. Second, Lemoncocco; our Lemoncocco team is small yet passionate. We tend to build our team here in a larger way. Over the last several months, we have been presenting Lemoncocco to the Jones distributor network as well as to other new distributors. Distribution is still on out [ph] as the brand is taking on by more mainstream accounts. As a reminder, Lemoncocco is a one-skew item and we are educating consumers on this unique brand. Lemoncocco is a versatile beverage. It is refresher or a hydration drink, a treat for kids and as well a wonderful beverage beginning to be used in cocktail offerings. And being 100% natural and only 90 calories for a 12-ounce can, we cover a lot of basis. Innovation is the third area of growth for our company. While we have innovation in our blood, we also believe in execution. We currently have exciting initiatives in front of us already and are evaluating ways that we can roll them out in a much bigger way. In addition, we also see opportunities for brand extensions in certain categories that may make sense, especially if we can align ourselves with the right partner. All of this opportunity has been created by the team we have here at Jones. We are planning to grow our team to accelerate growth of our initiatives. In line with that, today we have announced that Max Schroedl has been appointed to CFO of the company. This is a key role and appointment. Max is more than a strong CFA. He has great business development skills and a great strategic mindset that has been and will be important for us to build this company in the long term. He is a strong ally that is adding firepower to the small team here and I look forward to his continuing strong leadership in building this great company. I will now open the call up for questions.

Thank you. [Operator Instructions]. We’ll take a question from David Hopkins, a private investor.

Hi, Jennifer. This is David Hopkins in Spartanburg, South Carolina. How are you?

I’m pretty good. Thanks. How are you?

I’m great. I was just calling in as first-time caller, congratulations on a great quarter and your work over the last five years. I’ve been with you guys for five years. And my question is, is that now that we’re moving out the Lemoncocco, and I believe we have it over here in the World Market in Greenville, South Carolina. Is there any other company that we’re working with to try to push it out even further?

Sorry, David. I didn’t hear what you said. You said you see it – you don’t see it in your market?

No, we do, I do. I’ve got it at Greenville, South Carolina. I think it’s the World Market --

World Market, yes. Sorry, I couldn’t hear you. That is a national account of ours and yes, we are at this point in time as I mentioned introducing it into more states and more distribution across the nation. We’re selectively rolling out in regions that are closer to our packer really because with shipping cost, however, we would like to get down to your region in a bigger way because of the hot, hot summer as Lemoncocco was a great summer beverage. But we will be there. We’re just strategically looking at the key markets that we think are important to roll this out and leveraging off of our Jones distributor network that we have and where we’re strong.

I got one follow-up question. I’ve just recently went to the Barnes & Noble over here and I noticed that we had Jones Soda in Barnes & Noble. I didn’t know that. Would Barnes & Noble be a good partner to partner up with Lemoncocco?

Yes. It’s a premium café and definitely it would be a good partner to present Lemoncocco. We’re on test in that region in Barnes & Noble as we’re on test with a lot of different retailers around the country. But yes, definitely Jones soda, premium soda and Lemoncocco go hand-in-hand at a lot of premium accounts.

Okay. Thank you very much.

At this time, there are no further questions.

Thank you everyone again for your interest in Jones Soda and again, thank you for the team here at Jones. We had an awesome 2016 and we look forward to continuing to build this company. We will next report our first quarter results in May. We also have a shareholder meeting on May 10. Thank you.

And that will conclude our call. We thank you for your participation.