Max Schroedl - Chief Financial Officer Jennifer Cue - Chief Executive Officer

Welcome to the Jones Soda Company's Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At the time, I would like to turn the conference over to 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 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, and 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-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 that we make today. I'll now turn the call over to Jennifer Cue, Chief Executive Officer of Jones Soda.

Thank you, Max, and good afternoon, everyone, and thank you for joining us. During our second quarter 2017, we had exciting moments forward on our growth and higher-margin initiatives such as Lemoncocco and Fountain. While also dealing with the delisting of our Jones Soda Can business at a national retailer. Revenues were down 9% due to a combination of the delisting, as well as some softness in our glass bottle business regionally, all offset by a small price increase we put into place into the second quarter on Jones Soda glass bottles. In addition, the growth of Lemoncocco Fountain, as well as our 7-Eleven partnership assisted in offsetting some of the revenue declines. Competition for shelf space in the craft soda set has been intensified with the familiar and new entrants into the segment. Craft is a growth area in the declining CSD category, we are original and authentic craft, and believe our 21-year brand has a prominent role to play as a category continues to grow. Our gross profit margin in the second quarter improved due to the increasing percent of sales of our new higher margin initiatives, as well as a price increase on Jones glass bottles. Our Jones 12-ounce Can business has a much lower margin in glass bottle, so the loss of the business will impacting our sales levels will work in our favor in the long run in terms of the gross margin. We are currently evaluating retailers and potentially utilizing e-commerce for our Jones 12-ounce Cans, if the margins makes sense. At mentioned in the second quarter, we made some good headway with our new brand Lemoncocco, as well as Fountain, and I'm excited to announce several new retail listings and accounts for these initiatives after Max goes through the numbers in more detail. Overall, I'm pleased with the continued evolution of our total portfolio and now that we are on track to building a diversified portfolio of craft beverages. Jones and glass bottles are being set up for success in the emerging craft soda industry as we continue to emphasize our classic flavors in conjunction with the emerging trend of craft over mainstream sodas. Just this month, we are launching of a Jones Cane Sugar glass bottle across all Kroger divisions nationally. Kroger grocery has created a solid specialty soda set, Jones single format with an array of up to now 6 flavors is continuing to show double-digit growth of this chain. Our challenge and opportunity is to emphasize our strong classic flavors, as well as our single serve format to all retailers across the country. To ensure we can see the same level of success with our Jones glass bottles as we currently see at Kroger. Despite Jones has announced this past May, just drove of the production line in late July, and we are excited to officially kick off this new innovation in August, with Columbia distributing in the Pacific Northwest. It's first-ever hard soda tastes fantastic, it's less sweet, with 6% ADV, and I think it's going to be a real winner. We have interest in this new innovation from all over and we will be evaluating the possibility of offering to despite Jones to select retailers outside of home market, as it makes sense. I will now let Max to over the numbers and return with some more detail on our growth initiatives and plans for the balance of the year.

Thanks, Jennifer. Revenue in the second quarter of 2017 was down 8.6% as $3.9 million compared to $4.3 million in Q2 '16. The decline in revenue was attributable to increased competition in the craft soda segment and groceries and focused by retailers on allocating shelf space to their own private-label offerings. During the second quarter, major reseller de-listed our 12-ounce Can in favor of a private-label products. During the quarter, 25% of our total revenues were generated from Canada sales Promotional allowances decreased $37,000 or 8.1% to $421,000 for the quarter. Due primarily to timing differences in the 2016 comparable period. As a reminder, the accounting impact of these promotional allowances is a direct offset to gross revenues. Gross profit margin in the second quarter of 2017 increased to 27% from 25.2% in Q2 '16. Primarily due to a price increase implemented late in the first quarter of 2017, and a change in product mix in the comparable period. Operating expenses in the second quarter remained flat at $1,096,000 compared to $1,092,000 the prior-year period. Operating expenses included non-cash expenses, depreciation and amortization and stock-based compensation totalling $40,000 compared to $51,000 last year. Operating expenses as a percentage of revenue, increased to 27.9% for the quarter from 25.4% in 2016. Net loss for the quarter ended June 30, 2017, was $55,000, or $0.00 per share compared to a loss of $65,000 or $0.0 per share a year ago. This is a result of increasing margin to operating discipline. Now on to the year-to-date results. For the first 6 months, 2017 revenue was down 12.9% at approximately $7.5 million, compared to approximately $8.6 million in the prior year. Revenue declines were due to the previously mentioned factors. During the first 6 months, 2017, 22% of our total revenues were generated from Canada sales. Promotional allowances decreased $262,000 to $730,000 for the 6-month period, primarily due to a onetime items associated with the 2016 launch of 7-Select, as well as timing differences from other promotional programs. The profit margin in the first 6 months remained relatively flat at 25.6% in 2017 compared to 26.3% in 2016. Factors impacting margins included different year-over-year pricing from the initial launches of 7-Select in 2016, offset by a price increase in our Jones glass midway through the period. Operating expenses for the 6 months ended June 30, 27, decreased to $2,123,000 from $2,198,000 in the prior year. However, they are now 28.4% of revenue up from 25.6% in the comparable period. We believe our core discipline around expenditures is the primary reason for the relative stability in our operating costs. Operating expenses, including non-cash expenses totalling $84,000, compared to $85,000 last year. Net loss for the 6 months ended June 30, 2017, was $252,000 or $0.01 per share compared to a net loss of $16,000 or $0.00 per share a year ago. Turning now to our balance sheet, as of June 30, 2017, we had working capital of $1.7 million, and cash and cash equivalents of approximately $745,000. At this time, we believe that our current cash and cash equivalents, combined with our loan facility and cash from operations, will be sufficient to meet our current anticipated cash needs to the beginning of the 2018. Cash used in operations, during the 6 months ended June 30, 2017, was $282,000, compared to $462,000 in the prior-year period, primarily due to the timing of the payables and the seasonality of the inventory levels. We have a loan facility available for our working capital needs, which allows us to borrow up to approximately $3.2 million. Our eligible borrowing base as of June 30, 2017, was approximately $2.1 million, of which we had drawn on approximately $1.5 million. Compared to a line down of approximately $1.2 million at December 31, 2016. I'll now turn the call back to Jennifer to give an update on our business line.

Thanks, Max. To remind everyone on the call, again, our plan for the future is based on 3 key initiatives. Jones, Lemoncocco and innovation, while innovation is inherently in our DNA, and will always be a part of our philosophy, the time for focus and execution on our current portfolio is now. Jones and glass bottles and Jones on fountain. Our Jones Fountain business in the second quarter had a boost with the launch of our Green Apple flavor on Fountain at 7-Eleven's in the Pacific Northwest, as well as launch of the in the same region. In addition, we are seeing more and more smaller regional restaurant chains approaches to switch out there fountain offerings from Coke or Pepsi as word gets out that there is the Jones Fountain offering available. Landing 1 large chain account in the Fountain business can and will be substantial for our overall business. In the meantime, we are responding to the individual and small regional chains that makes sense for us to partner with. Chains that are run by executives chefs that are forward thinking here, and better for you and different fountain program adhere to be our sweet spot. Some great examples of the smaller regional highly influential chains, include urban Street food in Chicago, as well as Great Taste Burger here in Seattle. Benjyehuda Urban Street food in Chicago, the QSR chain of 5 locations suggest this past month has chosen to replace it's Coke Fountain machines with the Jones Fountain machine. Benjyehuda is a very popular and growing QSR chain concentrated right now in downtown Chicago. This chain will be serving Jones and Fountain Lemoncocco and Jones glass bottles by mid-August 2017. We are thrilled that this forward-thinking restaurant chain has chosen all of our brand, including leading with Jones Fountain. Another great up incoming QSR chain in Seattle is Great State Burger, which is grown to its fifth and very busy location, while coding that it's probably serve Jones soda on Fountain. Great State Burger was recently profiled in the top 100 better burger chains in America, in June, 2017. Highlighting their choice for Great State, not only for their amazing burgers, which they do have, but also for neat like their choice of the Jones Soda Fountain machine. We are responding to inquiries daily and setting up our Fountain machines in cities across the U.S. and Canada. Our other growth initiatives Lemoncocco, also continues to expand. I'm very excited to announce that any day now you will find Lemoncocco on shelves that any of the 39 whole foods locations in the New York, New Jersey division. This will be our first whole foods division in their network to sell Lemoncocco and we're very happy to have landed this region. Following the New York, New Jersey division will be specific region, which will kick off Lemoncocco in September, across their 61 locations in Southern California, Arizona, Nevada and Hawaii. Equally, important to us, is the setup of the Mariana's grocery chain in Chicago land. In the month of July, Lemoncocco rolled out in all 40 locations of Mariana's, which we supported with sampling. Mariana's has been high on our target list, as they are a key chain in Chicago land area. They have an obvious Italian heritage and as well our successful division of the Kroger grocery chain. And back to the West Coast. After they are reviewing the data for Northern California with respect to Lemoncocco, the safe way Northern California division approached us to get Lemoncocco into their stores for this summer. As we speak, we're rolling out into the 200-plus safe way locations in Northern California, and are falling this step with sampling of the brand in store. In addition to this, we've also received word that the Raley's chain in Northern California will be bringing Lemoncocco into all 150 of their locations by the end of August. These new chains are all fantastic, but what continues to make me most confident in the future of Lemoncocco is the staying power of our brand in our original retailers and distributors. In 2016, we launched Lemoncocco into some great specialty grocery retailers such as PCC and Haggen, in the Northwest, Fresh Thyme and Heinen in the Midwest, and Bristol Farms, Mollie Stones and in California, just to name a few. We continue to sell well in all original launch chain. We have created a brand that is on trend. It is all natural and only 90 calories. With this you get a great tasting hydration beverage as it contains the cream of the coconut and lemon. Lemoncocco is becoming a multipurpose beverage that is also great for food pairing and a great cocktail mixer. Once people try Lemoncocco, the love it. Finally, our 7-Eleven business continues to strengthen. Our cold branded product line has settled into a nice piece of business and in approximately 7,000 of the 8,000 locations nationally. We're working with 7-Eleven to continually introduce new flavors to the line-up. You will begin to see some new flavors at 7-Eleven's in late Q3, and then another new 1 into the first quarter of 2018. In addition, we will continually take advantage of opportunities in craft soda steps that retailers increasingly create, across both the U.S. and Canada. And finally, we will evaluate the rollout of Jones in third, and fourth quarter with plans to move forward into new markets, once we see pull through and consumer acceptance. Finally, I would like to officially welcome our Board of Directors Mr. Jeff Anderson. Mr. Anderson has over 30 years in consumer products goods of which many were as a CEO and business owner, and has successful track record of building these businesses. In addition, Mr. Anderson has recent experience in CPG distribution through his board position as growing and successful Pacific Northwest distributor. We look forward to having Jeff expertise to assist in building our portfolio beverages and our company. We will continue to evaluate candidates for board, as well as the entire Jones team to ensure we have the right mix of talent, to take the company to the next level. I will now open the call up for questions.

Thank you. [Operator Instructions] And we’ll go to Galileo with HyperChange.

Hi Jennifer, I was wondering if you could give us any hints on the size of Lemoncocco's business in the quarter? Or you've been like a rough estimate of how many locations is within?

That's a tough question. In the second quarter. I mean, the number of chains that I just outlined that we land have all sort of rolled into the third quarter. But yes, in terms of the number of locations in the second quarter, I would say, I mean, I guess, there are numerous distributors. We don't always have the account list. So again, I will just be taking a stab at that. I can work on that and get back to you Galileo.

Yeah, okay. That was it. Thank you.

Okay.

We will go next to [indiscernible]

Hi, Jennifer. Hi, Max. Just wanted to comment on Jones, I guess the 2 larget Apple production space in the U.S. or Washington and New York, and what did encourage you go national as quickly as possible?

Yes, we hear you Gary. As I said, we just finished production in late July, and we are rolling it out, our months, in September in here in Pacific Northwest. But the one thing that we really learned very well from say Lemoncocco was to really focus, make sure that the brand works in one region, and especially, with the alcohol loss around the country. We really want to focus make it work, right here, but definitely, will be entertaining other markets. We have not only New York as the second largest apple growing market. Our friends up in Canada, our distributor up there is by original origin, they are Apple tree farmers. So they are interested as well. But they as well just want to see us grow in the Pacific Northwest, get it up and running. And make it a success here first. Before taking on other states, but we were definitely, tasting it, looking at it, it's going to be something that's going to go national. But we just want to make sure that we've done right.

Okay. That's good to hear, and I wish you the best, and hope to hear great result for next quarter.

Okay. Thank you, Garry.

[Operator Instructions] And we have no further questions at this time.

All right. We'll just end here by saying thank you, again, for your interest in our company. And we will speak to you in early November, when we report our third quarter results.

And that concludes today's conference. We thank you for your participation.