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Edited Transcript of JSDA earnings conference call or presentation 8-Aug-19 8:30pm GMT

Q2 2019 Jones Soda Co Earnings Call

SEATTLE Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Jones Soda Co earnings conference call or presentation Thursday, August 8, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer L. Cue

Jones Soda Co. - President, CEO, Acting CFO & Director

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for participating in today's conference call to discuss Jones Soda's Financial Results for the second quarter ending June 30, 2019.

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 verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, will, may, continue, projects or targets, any 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 are discussed under the heading of risk factors in our most recently filed reports with the SEC, including our annual report on Form 10-K, our quarterly report on Form 10-Q and our current reports on Form 8-K.

In addition, this call includes discussions 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 August 15, 2019, starting at 7:30 p.m. Eastern tonight. A 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.

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Jennifer L. Cue, Jones Soda Co. - President, CEO, Acting CFO & Director [2]

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Thank you very much, and good afternoon, everyone. It's a pleasure to be joining you. Here today as well from our team is Eric Chastain, our COO; as well as Joe Culp, who heads our Upper Finance team.

I'd like to kick off the call by providing an overview on the second quarter of 2019 before moving into the financials. And then finally, discussing our various initiatives and outlook.

In the second quarter, we experienced a difficult revenue comparison to the prior year period as we did not repeat several limited time offerings in our fountain business. Despite this headwind, we still remain very confident in our fountain segment as we have a strong pipeline of new opportunities with demand for craft soda continuing to grow.

During the quarter, we also made good progress in Canada as we returned to growth in the region, primarily driven by robust demand of 7-Eleven Canada as well as other large national chains in Canada. As many of you are aware, subsequent to the quarter's end, we announced a transformational financing agreement with Heavenly Rx, an SOL Global portfolio company that provided a significant cash infusion and multiple strategic benefits. We started working on several initiatives with their team, including the development of a CBD-infused beverage line and are very pleased with our current working relationship and the direction we are headed.

I will discuss further updates within our current product portfolio and the progress we have made on our strategic initiatives with Heavenly Rx in more detail. But first, I'd like to go -- to discuss our second quarter financial results. Total revenue was $3.5 million compared to $3.9 million in the same year-ago quarter. The decline was primarily attributable to a 54% decrease in fountain revenue, partially offset by a 44% increase in our 7-Select revenue.

Promotional allowances increased 30% to $506,000 from $388,000 in the second quarter of 2018 due to increased line for new chain authorizations in the second quarter of 2019. As a reminder, the accounting impact of these promotional allowances is a direct offset to revenues.

Breaking out our revenue further by product lines. As I mentioned earlier, fountain revenue decreased versus the prior year, and it was approximately 8% of our overall business for the second quarter of 2019 as compared to 15% in the prior year period. This decline was primarily the result of the several limited time offerings for its customer chain in 2018 that were not repeated in 2019. We are confident in our ability to drive growth in this segment for the remainder of the year.

Lemoncocco revenue decreased 37% from the prior period and was 3% of our business for the second quarter of 2019. This decline was primarily due to the production capacity issues resulting in a limited number of inventory and not being able to fulfill purchase orders. In fact, Lemoncocco revenue would have increased had the inventory been available. As of July 31, we have resolved the capacity issue, inventory is back on hand, and we continue to expect growth in this segment. 7-Select revenue increased 44% in the second quarter of 2019 and accounting for 16% of our business, up from 10% in the second quarter of 2018. This was primarily due to an increase in store counts and the introduction of several new SKUs that have performed very well.

Gross profit as a percentage of sales was 22.6% compared to 23.2% last year. The decline was driven primarily by the added logistical cost of rolling out to the Walmart chain and, to a lesser extent, the added cost of transitioning to all-natural flavors and colors.

Operating expenses in the second quarter remained flat at $1.2 million compared to the same year-ago quarter. We remain committed to prudently managing expenses through our variable cost sales structure, which will keep expenses in line with growth.

Net loss was $576,000 or $0.01 per share for the second quarter compared to a net loss of $353,000 or a loss of $0.01 per share last year. The increase was largely attributable to the added noncash interest expense of the convertible note instruments funded in April 2018.

Adjusted EBITDA in the second quarter was negative $357,000 compared to negative $235,000 in the year-ago quarter.

Moving on to the balance sheet. At June 30, 2019, cash and cash equivalents totaled approximately $138,000 compared to $1 million at December 31, 2018.

Working capital stood at approximately $696,000 compared to approximately $1.8 million at the end of 2018. 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 requirement. Our eligible borrowing base as of June 30, 2019, was approximately $2 million, of which we had drawn down $1.2 million compared to an outstanding balance of $428,000 at December 31, 2018.

As a reminder, there are no payments on principal or interest due on our convertible subordinated promissory notes until March 2022, which results in these notes being accounted for as long-term debt and excluded from the working capital calculation.

As a result of the strategic financing with Heavenly Rx that we completed subsequent to the end of the quarter, we received a net $8.8 million and paid down our line credit balance of $809,000, which ultimately increased our net cash position to $8 million. We are confident that our current liquidity will be sufficient to meet our anticipated growth needs.

Now I'd like to expand upon my opening remarks and make further comments about our various product lines and initiatives. For our core soda bottle line, we had a decline in revenue as a result of slightly lower case sales in the United States and an increase in slotting for the new chain authorizations in 2019. However, this was partially offset by the initial load-in with Walmart. Also, as I mentioned, we've returned to growth in Canada with an increase in sales volumes as a result of multiple successful marketing campaigns and growth of several chains there, including 7-Eleven, Loblaws and Safeway.

In addition, we are pleased to report the Ginger Beer launch has gone well, as we have launched it nationally through Kroger in the United States, along with multiple chains in Canada. We also launched several new marketing campaigns throughout the quarter in the U.S. and Canada as we look to increase our brand visibility to new customers.

In Canada, we had strong support from our distribution partner, launching new in-store racks and several Blitz campaigns, which include our sales team going to markets and opening new accounts to our products. In addition, through a partnership with Egale Canada, we launched 6 limited edition cream soda labels for the summer in Canada, celebrating pride across Canada. As well, we launched in 7-Eleven Canada an exclusive watermelon flavor that has seen great response, and we are pleased with the results of all of these campaigns in Canada.

In the U.S., we also launched several limited edition labels celebrating the 50th anniversary of the Apollo Moon landing for our Northwest and Southwest retail accounts, which turned out to be incredibly popular and was an excellent regional success.

Now moving on to our specific product lines, starting with fountain. Despite having a revenue decline in this segment, our gross margins returned to our targeted range as the limited-time offerings from last year were significantly lower margin rollout. I would like to highlight the excellent feedback we've received from several of our large -- several of our regional QSR partners like Zeeks, which is about a 17 location pizza chain here in Seattle that has replaced their Coke fountains with Jones fountain.

With this transition, Zeeks management have been extremely impressed by our customers' response to them having Jones. This account took on our whole portfolio of offerings, leading with our fountain business, but also taking on Jones in cans and Lemoncocco for in-store and delivery businesses.

Growing the fountain segment is still a main focus for our team as we have a strong pipeline of additional independent retail and QSR stores that are looking to move away from a larger mainstream soda brands and include cross beverages with better ingredients that consumers continue to demand.

Turning to Lemoncocco. We continue to experience strong demand across our various accounts, including independent food service and retail chain. As I discussed earlier, we had significant production capacity issues, and we were unable to fulfill demand. This led to a significant outcry from both consumers and our retail partners. However, after seeing such a strong reaction from our loyal customer base and resolving the production issue, we have even more confidence in the demand for Lemoncocco and believe in our ability to further grow the product line into new retail chains and QSRs across the country.

For our 7-Select products, our partnership with 7-Eleven USA remains strong, and we continue to experience strong consumer demand for a unique product collaboration, as evidenced by our 44% year-over-year increase in revenue.

During the quarter, we launched into an additional 1,000 locations with the Sunoco banner of 7-Eleven and introduced several new programs, which began in June. One of the new flavors that we introduced was the Airheads Cherry Pineapple Blast, which has received excellent feedback and exceeded everyone's expectations.

Since we first launched the 7-Select sodas in February of 2016, we have developed a successful and mutually beneficial relationship with 7-Eleven. The continual expansion to additional retail locations and the demand for our innovative product collaborations further demonstrates the opportunity for our soda offerings through the 7-Eleven channel.

Now moving on to our strategic equity financing that happened after the quarter closed. On July 11, 2019, we entered into an agreement with Heavenly Rx that we believe will be transformational for Jones Soda. The capital we raised and the financing will provide us the necessary funds to grow and enhance our existing portfolio, while pursuing new extensions to Jones products, including the development and launch of CBD-infused beverages.

In addition to the capital, the Heavenly Rx team brings a vast amount of experience in product innovation, sales and marketing and in a retail industry, and we will leverage these relationships to significantly increase our brand's footprint.

Also, as many of you have seen today, we appointed 2 former Kellogg's Executives, Paul Norman and Clive Sirkin to our Board of Directors as part of the financing agreement. Both Paul and Clive bring a wealth of expertise and knowledge in growing CPG brands, having implemented and executed on various strategies to expand the portfolios and geographical footprints of household brand names. We believe they will be valuable -- invaluable addition to our Board, and we look to accelerate growth within our current portfolio and enter new markets.

Lastly, we have begun working closely with their team on new product innovation, particularly focusing on the development of a CBD-infused beverage line utilizing the unique brand image of Jones. We have also started collaborating and establishing plans to further bolster our sales and marketing efforts, enhance our existing product portfolio and significantly expand our presence in new retail chains and QSRs across the country that Heavenly Rx has deep relationships with.

Although we are still in the early days of this partnership, we are very impressed with their team and believe this positions us to significantly grow our brand, while staying true to the independent brand image that customers have come to love.

In summary, despite facing a tough year-over-year comparison and some production issues with Lemoncocco in the second quarter, we remain confident about our position to grow the Jones portfolio going forward. We have made good progress on our key strategic initiatives to meet the growing consumer demand for craft soda beverages made with natural ingredients.

As we continue to solidify strategic plans with Heavenly Rx and began executing on our plans, we believe we have the necessary team and financing in place to expand our footprint and introduce our unique brands to a significantly larger consumer base. We look forward to providing you with updates on all strategic initiatives as they progress.

I will now turn it back to the operator to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll now take a question from [Janert Longshack], who is a private investor.

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Unidentified Participant, [2]

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Yes. I was just curious, what kind of time frame are you guys looking at to introduce this big (inaudible)? And -- I mean, are we a year out or are we 6 months? What time frame could you also offer?

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Jennifer L. Cue, Jones Soda Co. - President, CEO, Acting CFO & Director [3]

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Well, right now, we -- as we mentioned, we closed our transaction July 11. We have been developing concepts ourselves. We're in the process of merging our ideas with our new partners. And we're going to be as expeditious as possible, and we'll come out and launch when the timing is right as soon as is possible.

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Unidentified Participant, [4]

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And then, have you (inaudible) start talking both where current (inaudible) like 7-Eleven, Walmart about these new -- possible new lines?

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Jennifer L. Cue, Jones Soda Co. - President, CEO, Acting CFO & Director [5]

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Yes. We definitely have been speaking to our current retail partners. And yes, definitely, we have.

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Operator [6]

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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.

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Jennifer L. Cue, Jones Soda Co. - President, CEO, Acting CFO & Director [7]

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Okay. Well, thank you very much. And we'd like to thank everyone for listening to today's call, and we look forward to speaking to you when we report our third quarter results in November. Thanks again for joining us.

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Operator [8]

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