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

Marc Berger - MKB Associates

Good afternoon, everyone. And thank you for participating in today's conference call to discuss Jones Soda Financial’s Results for the Second Quarter ended June 30, 2018. Today's conference is being recorded. At this time, I would like to turn the call over to Max Schroedl, Chief Financial Officer. Please go ahead, sir.

Thanks, Lisa and good afternoon. 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. In addition, this call includes discussions of certain non-GAAP financial measures. Most directly comparable GAAP measures a reconciliation to the non-GAAP measures are available in our earnings release and other documents posted on the Company's Web site under Investor Relations. I’d like to remind everyone that this call will be available for replay through August 16th, starting at 7:30 PM Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release, as well as on the Company's Web site. I will now turn the call over to CEO of Jones Soda, Jennifer Cue.

Thank you, Max and good afternoon everyone. It’s a pleasure to be joining you. I’d like to kick off the call by providing a quick overview on our second quarter before passing to Max to walk through the financial detail. I will then return to discuss various operational initiatives and our outlook. We began to experience strong growth in revenues from our important Fountain and Lemoncocco initiatives in the second quarter, which were up 359% and 18% respectively compared to the prior year period. Fountain revenue was driven by our launch of Berry Lemonade across Canada, as well as the expansion of a large corporate account across multiple campuses. With Lemoncocco, which is what we believe to be a completely unique and new product in the marketplace, we continue to add new independent accounts in focused markets, as well as food service and grocery chain. We are also building a velocity of accounts that we landed in 2017. Lemoncocco is a natural hydration beverage and it is connecting with consumers. Unique marketing events, sampling and cocktail creations are all part of the marketing for us behind this brand. As expected, our second quarter sales compared to the initial launch of the glass bottle 711 USA. Our second results also reflect the final quarter of a difficult year-over-year comparison due to last year’s de-listing of our 12 ounce cans by a major retailer. Moving into the second half of 2018, we will continue to build upon momentum of both of our new initiatives. In Fountain, several large influential accounts have expressed interest in carrying our product and we continue to perform well in the convenience channel. Earlier in 2018, we quietly adjusted our Lemoncocco label to feature the coconut and lemon image and at the end of May, we introduced a 4-pack, both of which we believe should help further to drive sale in the remainder of the year. Both the Fountain and Lemoncocco initiatives are being supported by our host of our sales team that aggressively pursuing various opportunities to drive additional growth. I look forward to discussing this in more detail, but first I’d like to turn the call over to Max to further discuss our second quarter financial results.

Thank you, Jennifer and good afternoon everyone. Total revenue in the second quarter of 2018 remained flat at $3.9 million compared to the same year ago quarter. As Jennifer mentioned, this reflected growth in our Fountain and Lemoncocco initiatives. We’ve settled in the solid pattern of reorders of 7-Eleven for a co-branded product. However, the comparison with prior period is difficult when looking at the initial pipeline fill that occurred last year and subsequent releases of limited time offerings through their system. It’s worth noting that we reached the one year anniversary of de-listing of Jones cans half way through our second quarter, so this headwind is now behind us for the purposes of prior quarter comparisons. Nevertheless, these factors continue to offset the strong growth in revenue that we have reported in our focus initiatives. Promotional allowanced decreased 8% to $388,000 from $421,000 in the second quarter of 2018 due to timing of programs. As a reminder, the accounting impact of these promotional allowances was a direct offset to revenues. Breaking out our revenue further by our product lines. Due to previously mentioned factors, 7-Select revenue was down 34% in the second quarter compared to the prior year period and accounted for 10% of our revenue, down from 15% in the second quarter of 2017. Fountain revenue increased significantly during the quarter and represented approximately 15% of our overall revenue as compared to 3% in the second quarter of 2017. Please note this Fountain growth was driven by two of our large legacy accounts, which were sold on different pricing structures than we’re currently selling today. This will tie in my gross margin comments momentarily. Lemoncocco was approximately 4% of our total revenue for the second quarter increasing 18% compared to the prior year period and made up about 3% of our revenue. We continue to believe that this brand is well positioned for future significant growth. Gross profit as a percentage of sales was 23.2% compared to 27% last year. The decline was primarily driven by higher freight costs associated with general transportation cost inflation. This was unrelated to the vendor specific issue we navigated last quarter. We will look to combat the cost inflation by continuing to focus on our higher margin growth initiatives in Fountain and Lemoncocco, which we believe will be more accretive as we further scale. Operating expenses in the second quarter increased to $1.2 million compared to $1.1 million in the same year ago quarter. This increase was primarily attributable to our strategic investment in our sales staff during the quarter. Net loss was $363,000 or $0.01 per share compared to a net loss of $55,000 or $0.00 per share last year. These declines were primarily driven by the aforementioned decline in gross profit, as well as non-cash costs such as interest and amortization of beneficial conversion feature and legal costs associated with the convertible note issuance. Adjusted EBITDA, which is a non-GAAP measure, was negative $229,000 in the second quarter compared to $14,000 in a year ago quarter. Moving onto the balance sheet. At June 30, 2018, cash and cash equivalents totaled approximately $1 million compared to $397,000 at December 31, 2017. Working capital stood at $2.9 million compared to $908,000 at year-end 2017. We have a loan facility available for incremental working capital needs, which allows us to borrow up to approximately $3.2 million. Our eligible borrowing base as of June 30, 2018 was approximately $2.1 million, of which we had drawn down $290,000 compared to a wind down of $858,000 at December 31, 2017. There’re no payments on principle interest due on our recently issued convertible subordinated promissory notes until March 2022, which results in these notes being accounted for as long-term debt and excludes from the working capital calculation. We continue to believe that our current cash and cash equivalents combined with the assumption that our loan facility will be renewed in December along anticipated cash from operations will be sufficient and we are anticipating cash needs through the end of 2019. This concludes my prepared remarks. And now I’ll turn the call back over to Jennifer.

Thanks Max. I'd like to provide an update on our two important initiatives that has been driving revenue growth in the first half of 2018 Fountain and Lemoncocco. First, our Fountain initiative continues to transition from smaller independent account interest to larger regional and national accounts. We are seeing office communities in four major channels, QSRs, convenience, grocery and corporate campuses. As a reminder, our Jones Fountain program office offers foodservice accounts the same if not higher profitability of the large national brand but with better ingredients like pure cane sugar. We have seen data from our retail partners that show our Fountain sales match if not exceed other national mainstream brands on the same Fountain machine. The response to our having Berry Lemonade on the 7-Eleven Fountain machines all across Canada has been exciting. We had great advertising of our brand on the machines, as well as a few billboards that 7-Eleven Canada placed to promote the new Big Gulp SKU. In addition, our Pacific Northwest market has had both Berry Lemonade on Big Gulp and our Blue Bubble Gum on Slurpee, which has made a statement in our home market. We have performed well in this channel for 7-Eleven and I look forward to expanding our Fountain presence in the convenience channel in North America. Regarding our Lemoncocco initiatives, late in the second quarter, we added a forecast to create unique in-store displays and to offer another option as we continue to present to changed stores throughout 2018 and into 2019. In the second quarter of 2018, we added 105 locations with BevMo in the West, 55 locations with Hero Burger in Toronto, 56 locations with the Kroger banner QSC stores in the specific northwest and a combination of 200 accounts, including chains such as Wegmans and Kings and Independent in the northeast market. In addition to adding new locations, we worked hard at sampling and demo-ing all chain doors we were in, a key component to building trial and terms with the brand. In focus markets, we had our Lemoncocco CS, which has been a help in promoting this brand in these markets. Unified partnered with us in a larger way as well and we are working with the regional Unified teams to assist us in presenting to more chains. Our Executive Vice President of sales Steve Gress has done a great job leveraging our expanding sales team to grow our base of independent accounts, while getting the product known in both grocery and QSR chain. And we look forward to continued growth from this brand. Moving on to our other businesses. While 7-Eleven revenue was down compared to the prior year, as Matt discussed, we believe that we can improve long-term performance and velocity by slowing the pace of limited time offerings and getting back to the basics of strong performing flavors that excite our consumers and partners. We feel strongly about our ever expanding relationship with 7-Eleven as we believe they remain highly committed to co-branded lineup. In addition, we are beginning to work on some promotional plans around the program for later in the year. During the second quarter, we experienced some solid stabilization in the core Jones bottle line up in the United States. Sales in Canada, which historically has been around 25% of our revenue, were off-pace thus far compared to 2017 and our expectation for 2018. We do believe that Canada will contribute more to our revenue in the back half of 2018 as our distributor executes on promotional and marketing programs in that market. Recent Nielsen data of trailing 52 weeks as of June 2018 shows that Jones Soda is the number two craft soda brand across Canada. Our goal is to be the number one craft brand out there, and bring this level of presence and success down into our home U.S. markets. In the United States, our team has shored up our base by focusing on adding new independent accounts for Jones Soda. We have found there are some great synergies of having both the Jones and Lemoncocco brands in our portfolio, each of them benefiting the build-out of the other. As outlined in our previous call, the funding we have in place is the first outside capital we have raised since 2012. We finished our focused investment in our sales force during the second quarter and expect to be aggressive and only offensive. 2018 is a pivotal year preceding our new initiatives and putting us in a position for future sustainable growth in 2019 and beyond. In summary, our strategic plan is well underway and we feel that we are in the early innings of executing our higher margin initiatives of Lemoncocco and Jones Fountain. And we believe our core legacy brand has stabilized. We have a great story to tell on a portfolio of on trend beverages, so we look forward to keeping you apprised of our progress in the quarters to come. In closing, I’d like to comment on the recent additions to our Board of Directors. With Christopher Beach and Ray Silcock, we believe that we've added two great individuals who have great connections in the beverage and the CPG industry. Both Ray and Chris are excited about our company and its brands, and the impact that they will be able to make on building out this great company. These two individuals, along with our current Board and team at Jones, have never been as excited about our future. I will now open the call up for questions.

[Operator Instructions] Our first question comes from [Greg Craigman], Private Investor.

I just wanted to ask one question to clarify something that you said. Jennifer, did you say you’ve added 200 new distributors during 2Q, or was it 200 new locations distributing either one of both of their core products?

I was talking about several different chains that we added and then adding another 200 independent accounts on top of that, so not…

So point of sale locations, for a lack of a better description, is in excess of 200. Correct?

Yes, definitely. We’re like the overall [Multiple Speakers]…

2,000. So these are 2,000 new points of sales for either one of both products that did not exist at the end of Q1 2018 that exist today. Is that right?

I’ll clarify that. There’s 200 independent accounts, which in sum total, we’re at about 2,000 accounts. We were building up this base of accounts at the -- during the end of 2017 and into 2018.

So just so I’m clear, what would you think the net number of increased would be just for Q2? So at the end of Q1, you probably had X number and now you have added how many? I guess that’s what I’m trying to simmer down to, so I understand.

As a percent, we added approximately, I’d say, 15% to 20% new accounts.

[Operator Instructions] Our next question comes from [Gary Getz], Private Investor.

It looks like you’re moving in the right direction. Very pleased to see the triple digit growth in Fountain, it makes me believe that at 15% of current revenue, triple digit growth on that can have a significant impact in a relatively short amount of time. So congratulations on that. And I had a few -- on Fountain I had a question. Earlier in your press release you had mentioned the impact of transportation on gross margin deterioration. One would think that that would have less of an impact on the Fountain line. Is that correct?

Gary, I don’t think that’s a fair assumption. I think the cost of transportation across all industries has really been impacted. And so whether it’s a full truck or LTL across the country or somewhere, it’s up.

And what we’re doing is we’re shipping in glass bottles -- we’re shipping glass bottles of Fountain. We’re shipping 3 gallon bag in the boxes, so that is our Fountain…

Yes, I understand that. But let’s say for a given serving of soda, you’re shipping a lot -- you’re shipping a lot less material?

Yes, that would be correct.

During the earlier conference call, you’d mentioned Steve Gress, and I hope I have this pronunciation correct. And expansion within the East Coast. How is that proceeding?

It’s proceeding well. Steve is managing all of the United States from the East coast and then we have additional junior sales people out there, and they are building our product back up in the New York, New Jersey market. So it’s proceeding well in those markets.

Good, glad to hear that, that’s a huge market.

Yes it is…

I’m going down there with family this weekend…

Steve, buy some Lemoncocco at the wholefoods in those marketplaces…

Now I may have missed this, but Spiked Jones. What’s going on with that?

Gary, I got that you might ask about that, I know you’re very interested in the Spiked Jones SKU that we launched in 2017. It’s still in this limited test market here in Washington State. And to be honest, we don’t see the resonation -- resonating with consumers like we are seeing with Lemoncocco and Jones Fountain. We’re still continuing to evaluate it, but it’s just not -- the consumer is not as excited of that product as we see with Lemoncocco and Fountain. So we’re just evaluating whether or not it makes sense to roll that out or focus our resources on something that we see excitement with, with Fountain and Lemoncocco.

Okay. Well, I can’t argue with that. It’s good to focus on the exciting brand. So again, congratulations on the progress that you’ve made to-date and looking forward to bright future.

Okay, thank you, Gary. And thank you for your support.

Thank you.

Thank you. And at this time, this concludes our question-and-answer session. I would now like to turn the call back over to Ms. Cue for closing remarks.

Thank you, Lisa. We'd like to thank everyone for listening to today's call. And we look forward to speaking with you when we report our third quarter results in early November. Thank you again for joining us.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your line at this time. And thank you for your participation.