Jennifer Cue - President and CEO Max Schroedl - CFO

Steve Fishman - Big Hawk Group

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

Thanks, Melissa, 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 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 headings 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 discussion of certain non-GAAP financial measures. The most directly comparable GAAP measures and reconciliations for non-GAAP measures are available in the earnings release and other documents posted on the company's website under Investor Relations. I would like to remind everyone that this call will be available for replay through November 15, 2018, starting at 7:30 pm Eastern Time tonight. The webcast replay will also be available via the link provided in today's press release as well as on the company's website. Now I would like to turn the call over to the 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 up the call by providing a quick overview on our third quarter before passing to Max to walk through the financial details. I will then return to discuss various operational initiatives and our outlook. Our third quarter results reflect continued momentum in our highest growth Fountain and Lemoncocco initiatives, primarily offset by a difficult comparison to prior year results due to a limited time offerings of our 7-Select products that ran last year and were not repeated this year. However, we are confident in the 7-Select program as velocity is up year-over-year. Despite slightly lower revenue as a company, we believe that we continued to make progress in several of our key initiatives during the quarter. As expected, our Fountain and Lemoncocco businesses continued to show robust growth. In Fountain, where revenue was up 119%, we continue to build up our independent account base and benefited from strong results at 7-Eleven. We also furthered various conversations with several large accounts that remain interested in our differentiated Fountain offering. In Lemoncocco, revenue increased 38% as we introduced a 4-pack, which has resulted in improved sales velocity as we further our boutique grocery account strategy. In our legacy Jones bottle business, we landed several strong accounts that are embracing the craft soda movement. We believe this shift towards craft soda will help stabilize our legacy Jones business as we transition into 2019. Supporting this momentum will be the introduction of 3 new SKUs: ginger beer and 2 zero sugar offerings in our top-selling Cream Soda and strawberry lime flavors. Given this momentum, along with our other growth initiatives, we are confident heading into 2019. 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 third quarter financial results.

Thank you, Jennifer, and good afternoon, everyone. Total revenue in the third quarter of 2018 was approximately $3.5 million compared to approximately $3.6 million in the same year ago quarter. As Jennifer mentioned, this decrease was primarily attributable to the limited time offerings of our 7-Select products that ran in the third quarter of 2017 and were not repeated this year. We also had lower 12-ounce can sales as we continue to transition away from that offering. This was partially offset by a 119% increase in Fountain revenue and a 38% increase in Lemoncocco revenue. Promotional allowances increased 9% to $458,000 from $420,000 in the third quarter of 2017, due to timing of programs. The accounting impact of these promotional allowances is a direct offset to revenues. Breaking out our revenue further by product lines, 7-Select net revenue was down 35% in the third quarter and accounted for 13% of our business, down from 19% in the third quarter of 2017 due to the difficult prior year comparison just discussed. Fountain net revenue continued to grow significantly as it increased 119% from the prior year and it was approximately 12% of our overall business as compared to 5% in the third quarter of 2017. This Fountain growth is primarily driven by the addition of a large corporate accounts in 2018 and the summer fountain program at 7-Eleven Canada along with continuing to build out our independent account base. Lemoncocco revenue was approximately 5% of our business for the third quarter, increasing 38% from the prior year period when it made up about 4% of our business. This increase was primarily due to the strong success we had rolling out our Lemoncocco 4-pack during the quarter as well as improved sales with our food service accounts. We're constantly looking to find ways to broaden our distribution strategy and geographic areas for Lemoncocco, and we continue to believe that this brand is well positioned for future growth. Gross profit as a percentage of sales was 22.8% compared to 24.6% last year. The decline was primarily driven by higher freight costs associated with the continued general transportation cost inflation. We have mitigated some of this increase by raising prices in Canada and will continue to evaluate other ways to offset this pressure. And of course, we continue to expect the benefit of selling our Fountain and Lemoncocco products to drive margins higher up as they scale. Operating expenses in the third quarter increased slightly to approximately $1.1 million due to investments we made to support sales efforts. We continue to prudently manage expenses with our variable cost structure. Net loss was $425,000 or $0.01 per share compared to a net loss of $211,000 or $0.01 per share last year. Adjusted EBITDA in the third quarter was negative $279,000 compared to negative $136,000 in the year ago quarter. Moving on to the balance sheet. At September 30, 2018, cash and cash equivalents totaled approximately $1.2 million compared to $397,000 at December 31, 2017. Working capital stood at approximately $2.5 million compared to $908,000 at the end of 2017. We have a loan facility available for incremental working capital needs which allows us to borrow up to approximately $3.2 million, subject to certain borrowing base requirements. Our eligible borrowing base as of September 30, 2018, was approximately $1.8 million, of which we had drawn down $432,000 compared to an outstanding balance of $858,000 at December 31, 2017. As a reminder, there are no payments on principal or interest due on our convertible subordinate promissory notes until March 2022, which results in these notes being accounted for as long-term debt and excluded from the working capital calculation. We continue to 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. This concludes my prepared remarks. Now I'll turn the call back over to Jennifer.

Thanks, Max. I'd like to expand upon my opening remarks and make further comments about our various product lines. First, our Fountain initiative is currently our highest growth business line and one that we believe will be able to leverage our Jones brand in a way that is and will be accretive to our gross margins longer term and one in which we continue to see opportunity to help drive growth even higher. Our fountain customers continue to transition from smaller independent accounts to larger regional and national accounts, and this quarter was no different. We are seeing opportunities in 4 major channels: QSRs, convenience, grocery and corporate campuses. During the quarter, we added more business in the convenience channel, primarily with 7-Eleven, and we continued discussions about future programs with them as well as other convenience chains. We also continue to further our conversations with other large accounts and believe that Jones is well positioned in this unique category. As a reminder, our Jones Fountain program offers foodservice accounts the same, if not higher, profitability than the large national brands but with better ingredients like pure cane sugar. To reiterate, we are competitive on Fountain and 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, while offering a unique craft experience. Regarding our Lemoncocco initiative. Late in the second quarter, we added a 4-pack to create unique in-store displays and to offer another option as we continue to present to chain stores throughout 2018 and into 2019. This tactic has served to improve sales velocity as we continue to build out the brand. Similar to our Fountain offering, Lemoncocco is also affording us a chance to pitch large accounts that are searching for a unique beverage option or category. The brand is doing very well in sandwich shops, bakery cafés, gourmet and specialty grocery chains. The brand appears to be sticking and is showing increased velocity with the samplings and demos and in addition of our 4-pack in our focused markets. Going deep and increasing velocity and stickiness of the brand is critical to the adoption of this brand with consumers on a broader scale. In addition to adding new locations, we worked hard at sampling and demoing at the chain doors we were in, a key component to building trial and turns with the brand. In focus markets, we had our Lemoncocco CS and participated in Italian heritage and food inspired events and festivals, which have helped promote the brand in these markets. Of special excitement to us here at Jones and especially me, was catching a photo of Jerry Seinfeld eating an Italian sandwich along with a Lemoncocco in Greenwich Village, New York City in late October. Gold, Jerry, gold. Moving on to our other businesses. While 7-Select revenue was down, we began to take steps to improve the performance of this business by getting back to the basics of strong performing flavors that excite our consumers and partners. In fact, we have refocused on 3 core SKUs and have seen a notable improvement in sales velocity per store that we expect to continue in the fourth quarter. We feel strongly about our ever-expanding relationship with 7-Eleven as they remain highly committed to our co-branded line up. In addition, we have a promotional program in place during the fourth quarter, and we expect to add 1,000 new doors as a result of 7-Eleven's recent acquisition of Sunoco. During the third quarter, we continued to experience solid stabilization in our core Jones line up. This was due to new account wins domestically. In the U.S., our team has shored up our base by adding new independent accounts as we already - as we are already in the market to open up Lemoncocco accounts. We have found there are some great benefits of having both brands in our portfolio, each of them benefiting the build out of the other. We also believe that we are in the beginnings of a turnaround in Canada, which has been off-pace during the first two quarters of 2018 and makes up roughly a quarter of our business. We instituted a modest price increase up there to mitigate margin pressures brought on by heightened transportation cost and currency fluctuations and experienced a bit of a pause as our retailers filtered through the change. However, we have seen since seen a lift in sales as this new reality has set in. As well as a refocus from our number 1 distributor partner, Lassonde Industries, as they embrace what they see in the craft soda movement and their number 1 allied brand, Jones Soda. To build on our momentum, we also have some exciting improvements coming to the Jones product line. In addition to the 3 new SKUs I mentioned, here at Jones, we are known for listening to our consumers and responding to the things they care most about. From reducing sugar to introducing new flavors, our products have always been a reflection of what our fans ask for. And as taste and preference continue to evolve, we continue to evolve with them. As a result of this philosophy, you will start to notice some new improvements to our lineup in 2019. Our products will remain as flavorful and as colorful as they have always been, but whenever possible, we will start to transition away from the use of artificial colors and flavorings. It's just one more example of how, through the strong relationships we have with our fans, Jones will continue to be a treat that we can all feel good about. To summarize, 2018 remains a pivotal year for seeding our new initiatives and help put us in a position for sustainable future growth. The small financing we completed during the first half of the year allowed us to invest in our sales team and provide needed attention to our brands. We are in the early days of the build out of our truly unique Lemoncocco and Jones Fountain offerings, and we believe our core legacy brand has stabilized and presents a solid base on which to grow. With 3 strong initiatives in place, we feel confident heading into 2019 and beyond. We believe that we have a great story to tell and a portfolio of on-trend beverages, so we look forward to updating you on our progress in the quarters to come. I will now open the call up for questions.

Thank you. [Operator Instructions] And our first question will come from Gary Getz [ph], private investor.

I think you are on the right path and it's good to see, and I wanted to congratulate you for that. A few questions. The 7 elect - 7-Select comparison had a negative effect on Q3. Do you expect that to have much of an impact on Q4? That is, for Q4 last year, did you sell much 7-Select?

I mean, we did - we had transitioned to the glass bottle in Q4. The real introduction of a lot of LTOs, or limited time offerings, were in Q3 2017. So we do not anticipate this same cycling over in Q4.

Okay. That's good to hear. Now on - in comparing Q2 with Q3 for Lemoncocco and the Fountain offerings, I noticed the Lemoncocco - the rate of acceleration increased for Lemoncocco from 18% to 38%, while the rate of acceleration decreased for the Fountain offering from 358% to 119%. I'm just curious, was there an actual drop in Fountain sales in Q3 compared to Q2?

First question on Fountain, no. We continued to grow third quarter over third quarter. The rate of growth - what?

But comparing--

Compared to Q2.

Yes. Q2.

Yes.

I think the best way to look at that is we had a stronger Q3 '17 than we did Q2 '17, so the comparable base is different.

Okay. But in terms of the actual magnitude of sales in Q2 versus - magnitude of Fountain sales?

Oh, absolute dollar values?

Yes. Yes.

I mean, it was probably pretty - probably slightly lower, you're right. Because Q2, we did do the initial load-ins for some pretty significant programs with 7-Eleven Canada and then the Northwestern. So yes. So that's - and then we also - we launched Tesla corporate campuses. And that was really in Q2. So it's just that the initial load-ins of those ones - are make it a little higher. So it will be lumpy as we roll this all out just because we're going to be getting new accounts at various times of the year. So it'll not - it will need explaining for the next few quarters.

Okay. But over the course of a year though, you still see this rapidly accelerating compared to year ago quarters?

Oh, yes. Definitely.

Okay. Good. Now given the growth and the pretty rapid growth of both the Fountain offerings and Lemoncocco, do you expect that to somewhat dampen the seasonality impact? I know Jones' sales have typically been a lot higher in Q2 and Q3 compared to Q4 and Q1. Do you expect some of this seasonality to be dampened by the Fountain and Lemoncocco offering? -

That's a good question. I'm just so used to the Q4 and Q1 being down. But as you build these initiatives, it could change that. But, again, that hot weather is a tough one to come back. So - and Lemoncocco is even more impacted by warm weather than - or by cold weather just because of the lemon component. So I can't really give that outlook. I'd be just guessing.

Okay. Fine. And then sort of a final comment or something. It's good to see the legacy business coming back. And as I look at Jones compared to the industry, I mean, Jones is a small drop in the bucket of the industry. I mean you're talking about $10 million, $15 million, $20 million of sales versus a multibillion-dollar industry. So even though that industry might be slowing, there's a lot of - I think, there's a lot of room for growth through it - a lot of room for growth for Jones by differentiation. And I think you're on the right path and I'd like to encourage that. To not be stymied by the industry sales because you're small compared to the industry.

Thank you, Gary, for that comment. I agree. I mean, I think, we do see the declines in mainstream CSDs. But we do - and there have been sort of this negativity on soda. But as soda becomes not - water becomes much more of an everyday drink 3, drink 8 a day, soda is a treat, and we're right in that sweet spot as a treat.

That's right. No pun intended.

Yeah.

Okay. Thank you so much.

Okay, thank you Gary.

Next we'll take a question from Tom Clark [ph], private investor.

So Jennifer?

Hi Tom.

Hi. Just have a few questions and forgive my ignorance. But the 7-Select program, was that the bottle program at 7-Eleven?

Yes. When I talk - we talk 7-Select, we mean the glass bottle program.

Right. Right. Okay. So the fountain - now at present time, you're in how many 7-Elevens? Because you just returned from California I believe recently.

With our glass bottle you mean? With the co-branded products, 7-Select?

With your Fountains.

Oh, with our Fountains. So we did - yes, we talked about that early in the year when we announced we are in the Pacific Northwest, which is about 400 doors. We entered into northern California with another 400 doors for our Fountain product. And then we added, in 2018, about 600 doors up in Canada with a Fountain product, the Big Gulp product.

Right, great. And then there's how many 7-Elevens? What like 8000, 11,000, something like that?

There are about 8000 in the United States and another - yes, Canada's a part of that number. So 8000 in North America. As I recall.

Okay. But slowly, hopefully that the growth will continue. Just one other question and this is just a question being a businessman. I noticed that there was $0.4 million in cash and now $1.2 million. Was that borrowed money or is that money - just, what happened there?

So yes, we did the financing of $2.9 million in the first half of the year. And so the $1.2 million is remaining funds that we're using for working capital from that. We also have a line of credit that we use for short term. Does that address your question?

Yes, it does. Yes, it does. I won't keep you any longer. I've had your stock for many years, and I will continue to stay with you. I think you're doing a good job. It has taken a long time and - but that's the way the world is. But anyway, congratulations, and I'll stay with you.

Okay. Thank you Tom thank you a lot. Operator

Take care. Bye-bye.

Bye.

Our next question will come from Greg Rikeman [ph] a private investor.

Good afternoon Jennifer and crew. I've been looking at the CBD in Canada's industry, the infused drinks business. And from my perspective, probably the best opportunity for a small-cap, microcap nimble beverage company to create significant shareholder value quickly by entering this space. Maybe you're uniquely positioned right next to Canada. Canada has already legalized recreational cannabis. You've got Jeff Sessions now with a different employer, potentially not working for U.S. the government any more as of yesterday. We've got a President who is cannabis friendly, wants to see it legalized throughout the country. And some Democratic momentum here. So for me, we've been looking for a needle mover for a long, long time. And this is right in front of us, right there. And you've got Lassonde in the Canada, you're already deeply entrenched. So my question simply is, are you looking at this? And have you devoted any resources to determining how to enter this space?

Yes. Greg, definitely it's on the top of everyone's minds right now, and we're definitely doing our due diligence and trying to understand the - this category right now. We are in the throes of executing our 3 other initiatives. And we will - but we are definitely evaluating and we will continue to research. But still focusing our current resources as much as we can on executing our existing initiatives.

If you find that your due diligence produces enthusiasm that, that space is a significant space that could create significant shareholder value quickly and efficiently, are you willing to gear up for it, is what I'm saying? I recognize you're not going to abandon everything you're doing. But if you look at the microcap beverage companies that are focusing on this space, some of which haven't created shareholder value for many years, all of a sudden, they are.

Yes. Yes. I mean, we are looking at this area of the business, Gary. But it's too soon - we're just trying to evaluate all of the information and determine what the regulations are unfolding and learning about CBD from him or is it CBD from this? And understanding the Canadian market too, it's - we're definitely looking at it and evaluating it.

Okay. Great. It's good to know that that's happening because it certainly has - I think, you're almost ground floor, not quite. But some of the larger companies not nimble enough to take advantage of it. You're right there, all you got to do is grab it.

Right. I hear you, Gary - for sure, Greg. I hear you, Greg.

Okay. Thank you.

Thank you.

[Operator Instructions] Our next question will come from Steve Fishman with Big Hawk Group.

Good afternoon everyone. As I was sitting here trying to frame my question, the prior questioner answered it so eloquently. I'm very impressed. So I would just like to - reiterate what the prior person said. And I think you have a tremendous opportunity given the sort of style of your brand, to both look at the cannabis industry, not only from the THC point of view but the CBD kind of drink, the health benefits, the positive energy. But I think, you have some legacy brands that couldn't be more of a fit with what's going to be and what is scaring the major alcohol beverage companies. So don't count yourselves short. My group is investing in your company, hoping that, that comes to fruition. It's kind of a little bit out of our wheelhouse. But we do have several positions in cannabis companies, and we think that your brand has incredible potential. And I've tried to call you personally just to tell you that, to see if you guys have an interest in looking, and you may have heard my voice before. But Jones.

Yes. No I get you. I understand the Jones brand. We definitely - we've played a lot - and in various flavors and various aspects of it. I get it. We - yes. We understand. We've got a lot of assets that - but again

Let's put it this way. Constellation Brands just put $4 billion into a company that does $7 million in revenue.

Right. Yes, I know, I read that. I read that, Steve. I understand that. I understand that.

So the holy grail of drinks is going to be something involving cannabis. And as 2 callers ago, the person that called you guys a drop in the bucket, well, the big buckets, those multibillion-dollar brands, Coke and Pepsi, are not going to go CBD in cannabis. It would conflict with their branding, obviously.

Right.

I would give it some serious thought. It's - there's companies already willing to - Constellation's willing to partner, there's all sorts of opportunities. So I wish you guys the best of luck. But I would say highly consider it because it's going to be the holy grail of drinks.

Yes. As I said, we are

No. I understand. But even if from the standpoint of health things, people that are turning away from the beers and so forth that are less healthy. Having a calming drink and not gaining weight or becoming a little dumb is the holy grail. I hope you look into it. Plus it's legal in your state, it's completely legal in Canada. At least it's legal in all your markets. Or your main markets, California, so forth.

Yes. So I hear you, Steve, I hear you. And we are evaluating it.

Our next question will now come from Ron Bollap, private investor.

Hi Jennifer, how are you doing?

Good thanks how are you?

I'm doing great. Question. Congratulations on saving the brand for so many years. But my question is that, it been not growing the sale over so many years, you guys have been stuck at $4 million, $5 million, so how are you going to consider to grow the business?

Yes. I mean, we've put in - I hear myself echoing here, so I'm going to try to change something here. But we have worked to transform our portfolio, to be less dependent on the Jones soda brand glass bottles over the last several years. We want to leverage that brand and that's why we created the Fountain initiative. And we are very excited with what we see there in terms of the opportunity, to still - to try to leverage that brand name that's been around for 22 years, in a category that has ultimately higher gross profit margin. In addition, we launched a new brand in a new category, just in a much more healthier category that we wanted to take a new shot with the new brand because we understand what can happen with new beverage brands after many years of building it. So we brought Lemoncocco, a new brand, a new product category. We've got Jones offered on fountain now and we've got stabilization happening with the glass bottle, and we look forward to growing that business again. So we've got 3 initiatives right on hand, right now. Potentially other things down the pipeline. But right now, we have 3 different initiatives that we are executing upon to get growth beyond what we have had in the past.

Are you guys promoting in different states - part of United States on this side? Because I see the product in California. But I'm just wondering if you are promoting it in other parts of the states?

I mean, we have sales of the Jones glass bottles in most states, it's much more deeper penetrated in certain areas of the country. Lemoncocco is a brand-new brand where we're focusing on some key focus regions to start. Because you need a few more resources behind a new brand to sort of promote trial and sampling.

Okay. Another personal question, are you the still the shareholder?

Am I still a shareholder?

I know you are the [Indiscernible] an old shareholder.

Yes. I am still a shareholder. I haven't sold one share since I came on board.

Our next question will come from Holden Pittman [ph], private investor.

Hi Jennifer, thanks for taking the call. I did want to say, I read an article recently that Coca-Cola is looking at cannabis-infused drink. So I think Coke and Pepsi are actually interested after all. But that's not the reason for my call or my question. My question is, I ran into your product, the bottles, the three different bottles, grape, strawberry and the third one I can't remember. But in Kroger in two places in the U.S., I haven't heard that being mentioned before. So what's been the progress there and what' the strategy going forward? Because that's the largest grocery store chain in the country.

Yes. I apologize this if you didn't know. We Kroger is - pretty much our largest customer. We are in most, I'd say, pretty much 90% of all Krogers across the country. Kroger has been one of the leaders in creating a craft soda set. So we've sort of been with them all along that way. We've got five SKUs, five different flavors in most of their stores. It depends on whether or not they have a premium soda set or not. And we enjoy a very good relationship with Kroger nationally.

So how long has that been in place? With the bottles?

I mean, we have been in Kroger for many years. They transformed their premium soda sets about three years ago to make it all single-serve, away from 4-pack, and we were - we did that transition with them. And they're having good success with transitioning the premium or craft soda set into a set like the craft beer set. So we've actually increased our presence with them on the glass bottles over the last three - two, three years.

Okay. Good. Thanks. So one last question. I noticed in watching the video of your presentation in - at the investor conference in California, recently. And your comment was, as you believe breakeven point was somewhere around $17 million mark in revenue. Is that - did I here that correctly?

I mean, as we were - as we've been operating the company, that is - we've been - that is a good target for our breakeven. Yes.

And when will you target getting to that point?

I mean, we do not give future guidance. We are - we've gotten numerous deals on the go. And personally, I'd like to be there sooner than later. So - but I can't say for sure at this point. That would not be responsible because we need to line everything up.

Okay. Fair enough. Thank you.

Thank you.

At this time, this concludes our question-and-answer session. I would now like to turn the conference back over to Ms. Cue for closing remarks.

Thank you, Melissa. And we'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our fourth quarter results in early March, 2019. Thanks, again, for joining us.

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