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

Gary Getz - Private Investor

Good day. And welcome to the Jones Soda Fourth Quarter 2017 Earnings Call. Today's conference is being recorded. At this 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 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.

Thanks, Max and good afternoon, everyone. Apologies for the delay in earnings this quarter but I am excited to share that just few days ago we closed on a $2.8 million, 6% coupon convertible notes financing transaction with the group of institutional and accredited investors including myself. This is the first outside capital raised by the company in six years and proceeds will allow us to accelerate our Lemoncocco and Fountain initiatives. As the current largest shareholders and an investor in this offering, I am more confident than ever that Jones is set up to grow and return shareholder value by focusing on these high margin and high growth potential initiatives. Further expanding on this transaction, we were able to accomplish this without using an investment bank and incurring the fees associated with it. We have a strong group of existing and connected shareholders that believe in our portfolio and our executive team and came together with us to make this happen. During our fourth quarter of 2017, our revenues were down as a result of the cane delisting that occurred during the second quarter of 2017 and some softness in our Jones bottle business. In addition, the quarter-over-quarter comparison was always going to be difficult due to the fourth quarter 2016 partial pipeline fill up our 7- Select glass bottle. That coupled with some write-down related to Jones Stripped and other inventory led to a challenging quarter on a standalone or comparative basis. Our highlights for 2017 and really the impetus for closing our convertible notes financing were our two initiatives Lemoncocco and Fountain. With Fountain in 2017, we grew almost 200% and more importantly our experience in the transition from our interest from independent account now to small regional, as well as larger national chains which will impact our business more substantially. In addition to increase in QSR interest effective April 2018; we will be expanding our Fountain business with 7-Eleven. We will expand from just the Pacific Northwest region of 400 locations to also add 425 locations in Northern California, as well as 550 locations for the entire country of Canada. All totaled beginning in early May 2018 will be on Fountain with our dairy, lemonade flavor in a total of approximately 1,507 lemon stores. In addition to the Big Gulp Fountain offering at 7-Eleven, we will also be up -- also be offering on Slurpee again in the 400 locations of the Pacific Northwest for May and June. We will be offering our very unique and fun Jones exclusive blue bubble gum flavor there. We will look to other regions and other Slurpee flavors after this unique Pacific Northwest Slurpee for the months of May and June in 2018. The Jones Fountain program is unique in that it offers food service accounts across soda that has great national awareness for its lead sodas. It also offers these food service counts the same, if not higher profitability as the large national brand and all with our better ingredients. We have expanded our Fountain program to also include new products and brands that allows for a broad assortment of carbonated and non-carbonated beverage options for each of their Fountain programs. We launched this program in earnest just several years ago and are very proud to have some great early adopters such as Corporate Cafeterias at Tesla Motors and Microsoft, unique regional independent QSR such as BenjYehuda in Chicago, Great State and Katsu Burger in Seattle, Washington, as well as grocery accounts such as Save on Foods in Canada. We are now seeing a growing number of leads from larger QSR and of course increasingly from large national chains such as 7-Eleven. In addition to Fountain, Lemoncocco as well continued to show promise with growth of almost 40% year-over-year while we pursued growth in the specialty and foodservice channels. In 12 months, Lemoncocco grew from 400 chain doors opened in 2016 to approximately 1,700 chain doors opened by late 2017. These chain doors include both grocery and QSR chains which has been our launch strategy to ensure the right placement of the brand. The proceeds of this financing will allow us to support these chain locations with samplings, demos and promotions, a strategy that has been working on a small scale already with Lemoncocco. And we look forward to translating it to onto a much larger scale. Based on retailer and distributor request, in 2018, we will also add a four pack for Lemoncocco for retailers to sell the product in quantity, create unique in-store displays and allow ourselves entry into more chain stores that demand such a multi-pack. In addition to this, we've been working on opening up the Lemoncocco brand on a larger scale to the Jones Network across the US and look forward to building the brand by leveraging more of our existing network. With the financing as well we will be adding additional sales people to open new accounts in select markets and with a focus on the higher volume spring and summer selling seasons. We continue to have success with our core Jones bottle brand within the Kroger grocery chain which has been a leader in establishing craft soda sets across the U.S. Our new Head of Sales, Steve Gress has been working to set up an effective distributor network for Jones and Lemoncocco that benefit from better coverage of independent accounts. We hired Steve in October 2017 and with his solid independent and brand building experience, I'm happy to say that we will set up by mid-April a completely brand new network of independent distributors approximately six in total for Jones and Lemoncocco that will give us statewide coverage in New York including the city and its boroughs for the first time in over eight years for us. Along with this distribution coverage, you will begin to see our brand in many new retail locations such as Kings, Wegmans and others in the Northeast. As already mentioned, we have continued to expand a relationship with 7-Eleven within the Fountain and Slurpee side of the business. We are proud of the fact that we continues to earn an increased territory coverage for Fountain and potentially Slurpee based on the successful rollout of Jones at Fountain and Slurpee in late 2016 and 2017. 7-Eleven has given us increased opportunity with Fountain based on Jones being the best-selling regional offering in their system. Our co-branded glass bottle offering is currently in four flavors, sour patch, blueberry lemonade, blood orange and mango lemonade. We will be adding a fifth new exciting flavor with a great promotion for the summer of 2018. With our success at 7-Eleven in both private label and Fountain, we are being offered the opportunity to bid on other programs with them. We will look to invest more to support this great partnership over the course of the next several years, and we will also pursue similar opportunities in other retailers and chains across the U.S. Towards the end of 2017, we launched Spiked Jones in our home market and for our 21st birthday. We are currently beta testing this product in independent grocery and on-premise accounts in the Pacific Northwest in the same way that way that we launched Lemoncocco. At this point, it is too early to determine whether there is strong resonance with the consumer for this brand. I will now let Max go over the numbers and return to summarize our 2018 plan.

Thanks Jennifer. For the comparative quarters revenue in the fourth quarter of 2017 was down 25% at $2.2 million compared to $3 million in Q4, 2016. As a reminder, during the second quarter a major retailer de-listed our Jones - 12 cans. Additionally, we began to load the 7 -Select glass bottles during Q4, 2016. During the quarter, 28% of our total revenues were generated from sales in Canada. Promotional allowances increased $11,000 or 3.5% to $329,000. As a reminder, the accounting impact of these promotional allowances is a direct offset to revenues. Gross profit margin for the fourth quarter of 2017 decreased to 9.5% from 24.6% in Q4, 2016, primarily due to a $275,000 non-cash write-down in inventory during the quarter. Excluding the write-down, gross profit margin would have been 24.7% for the quarter. As Jennifer mentioned, this is primarily due to finished goods and raw materials related to our stripped product line, as well as raw materials related to our can program. Operating expenses in the third quarter decreased by $20,000 to $952,000 compared $972,000 in the prior year period. Operating expenses include non-cash expenses, depreciation amortization stock based compensation totaling $69,000 compared to $62,000 last year. Operating expenses as a percentage of revenue increased to 42.7% for the quarter, up from 32.3% in 2016. Net loss for the quarter in December 31st, 2017 was $808,000 or $0.02 per share compared to net loss of $236,000 or $0.01 per share a year ago. Now on to year-to-date results. For the full year ended December 31st, 2017 revenue was down 14.8% at approximately $13.3 million compared to approximately $15.7 million in the prior year. Revenue declines were due to the de-listing of our 12 -ounce can as well as some softness with the Jones bottles and declines in secondary lines like Zilch and the now discontinued Stripped product line. During 2017, 22% of our total revenues were generated from sales in Canada. Promotional allowances decrease $285,000 to approximately $1.5 million for the 12 months period primarily due to one-time item associated with the 2016 launch of 7- Select. I will now breakout revenue by product lines further. 7-Select revenue is up 4.8% in 2017 and was 19% of our total revenue. The improved performance of this product line is significant in comparison to the prior year, which included a higher price point on the PEP bottle and two pipelines fills through the 7-Eleven USA system. Fountain revenue increased 197% during 2017 is now approximately 4% of our overall business. We continue to expand our reach with 7-Eleven are seeing interest from increasingly larger to QSR chains. During the normal course of business, we may go on tests for various opportunities which could result in material future revenues. Lemoncocco was approximately 3% of our business for 2017, up 37% within our specialty DSD Network and select target markets. During Q4, 2017, we began to broaden our distribution strategy and geographic presence. Gross profit margin for the year decreased to 22.7% in 2017 compared to 26.2% in 2016. If you remove the $275,000 write-down, gross margins would have been 24.7% for the year. As a reminder, there are many factors that made comparing the periods difficult including different year-over-year pricing for 7-Select, different packaging for the 7-Select product, multiple large loadings of 7-Select in 2016, all offset by a price increase to our Jones glass bottle midway through the period. Operating expenses for fiscal 2017 decreased to $4,137,000 from $4,184,000 in the prior year. However, they are now 31% of revenue, up from 26.7% in the comparable period. We believe our core discipline around operating expenditures is the primary reason for the relative stability in our operating costs. Operating expenses included non-cash expenses totaling $200,000 compared to $222,000 last year. Net loss for the year in the December 31st, 2017 was $1,271,000 or $0.03 per share compared to a net loss of $183,000 or $0.00 per share a year ago. Turning to our balance sheet. As of December 31st, 2017 we have working capital of $908,000 and cash and cash equivalents of $397,000. Cash used by operations during 2017 was $37,000 compared to $346,000 used by operations in the prior year primarily due to timing of receivables, reduction of inventory levels offset by increased loss. 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 December 31st, 2017 was approximately $1.2 million of which we had drawn down $858,000 compared to a line balance of approximately $1.2 million in December 31st, 2016. On March 23, 2018, we closed an offering of $2.8 million in convertible subordinated notes that were issued to institutional and individual accredited investors including Jennifer Cue. The convertible notes have a four year term from subscription dates and bear interest at 6% per year until maturity. The holders can convert the notes at any time during the term to a number of shares of the company's common stock equal to the principal and interest divided by fixed $0.32 cent per share converting price. 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 2019. I'll now turn the call back to Jennifer to discuss our 2018 plan.

Thanks Max. To summarize, we have a solid strategic plan in place for 2018 and beyond, with a new infusion of capital that we just closed on this past Friday March 23rd with highly connected and motivated investors that believe in our initiatives. We now have the resources to execute on our higher margin initiatives of Lemoncocco and Jones Fountain as well as invest further in our ever-expanding large retail partnerships. We have a great story to tell and a portfolio of on-trend beverages. Our specific use of proceeds will focus on adding sales people in select markets, grassroots marketing, supporting our newly acquired grocery chains with sampling and demos, as well as investing in business development resources for our very promising premium Fountain program. Moving forward, we are also committed to investing time and resources to investor relations and providing insights into our progress. We have operated with a very small team in place today but we'll be adding to this team to execute fully on initiatives that are already proven out on a small scale. With the addition of Max Schroedl as CFO and Steve Gress as EVP of Sales in 2017, and with the strong operational expertise of our COO, Eric Chastain, I believe we now have a complete executive leadership team in place to execute our plan and return value to all shareholders. And finally, I would like to introduce our newest board member Christopher Beach. Mr. Beach has been a large shareholder of the company and became a significantly more invested in this latest financing. I've got to know him over the last two years and I'm honored to have him at the Board as a member of our Board. Mr. Beach has 25 years of small company governance, investment and strategy experience with a concentration in the consumer and business service sectors. I will now open the call up for questions.

[Operator Instructions] We'll take our first question from [Gary Getz], A private Investor.

Hi, Jennifer. Okay, looks like you have a plan and it looks like you'll be spending more on business development related activities. Do you have any metric place for evaluating the business development activities? For example, for every -- this will be an ongoing cost for every -- for example for every dollar that you spend on business development. How soon do you quick -- do you expect to recover that dollar?

Yes. That's a good question. Gary. I think it's different for each of the initiatives. With Lemoncocco, we're building a brand new category and a brand-new brand. So we're investing in area managers in some focus markets. We've got already in place a variable compensation program that's tied to new account. So really it's each of those investments and sales people are going to be -- it's going to be returned as they get increased case sales. With Fountain, we also have in place more of a variable structure as well which is more sort of eat what you kill, and what - really there is a longer selling cycle for business development for these larger QSR chains, but again sorry --

Excuse me that was my dog, buddy.

Okay. So, yes, so we are tracking it very closely. We will be doing it weekly for the Lemoncocco sales people and the junior salespeople that we're bringing on is basically street fighters and this is how every brand is built and how Steve Gress has built every brand in New York City. And then for Fountain with a little bit of longer selling cycle really just making it very incentivizing these people from a bonus perspective on landing large account.

Okay but you'll hold them obviously accountable for recovering their salaries in a relatively short period of time I would assume.

Oh, yes, that's the one thing that we've done extremely well is set up variable compensation program. Our whole entire sales team already is on variable program. And with a difficult 2017 quite frankly, it was difficult for our sales people. We want to be paying our sales people a lot of money in the future based on result. So, yes, if they are held accountable with the compensation program in place as is the whole company.

Okay, good, that's good to hear. Now on Spiked Jones, I guess from the comments thus far it sounds like the response has been a tepid. Could you expand on Spike -- I mean I would love to see Jones have an alcoholic beverage because there's obviously been a lot of growth in the alcoholic beverage. So could you expand on where spiked Jones in?

Yes, for sure. I mean we just launched Spiked Jones in September of 2017. We're using our existing Jones distributor which is a large distributor here in the Pacific Northwest Columbia distributing their main strength is alcohol. They're big. They have a lot of brand. So we're working with them to get focused around Spike Jones. They're excited about it but they've got just this entirely huge portfolio. So we're working with them on open up independent account and presenting to chains but again it's just -- it takes time to get this product into the market. So I don't -- I can't say at this point. I do too. I want to take this brand elsewhere but I want to do something that we really learned well with Lemoncocco. We really focused in on one market made some changes quite frankly to the product line based on consumer response, tweaked it within that market. So that now we're ready and extremely confident with Lemoncocco to take it everywhere. We want the same thing with Spike Jones. If there's something along the way but we just don't have that information at this point of time just because it hasn't gotten enough out into enough account to make a strong assessment.

Okay. But do you see this with the upcoming summer season? I mean it would be ideal for that. Do you think you'd be able to get to that point in the summer, by the summer selling season?

Yes, oh, yes. We have goals to get -- yes, we're not waiting years here. We've got goals to get a significant number of accounts over the next several months.

And it appears there are no further questions. I'll turn the conference back to management for any closing remarks.

Okay. Well, thank you, Don. And thank you everyone again for your interest in Jones Soda. We will next speak with you in early May when we talk to our first quarter results. And I will remind everyone that May 10th is our Annual Shareholder Meeting here in Seattle. Thank you.

This does conclude today's conference. Thank you for your participation. And we now disconnect.