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Edited Transcript of JSDA earnings conference call or presentation 2-May-19 8:30pm GMT

Q1 2019 Jones Soda Co Earnings Call

SEATTLE May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Jones Soda Co earnings conference call or presentation Thursday, May 2, 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 & Director

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Presentation

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Operator [1]

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Good afternoon, everyone. Thank you for participating in today's conference call to discuss Jones Soda's financial results for the first quarter ending -- ended March 31, 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; the 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. 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 May 9, 2019, starting at 7:30 p.m. Eastern tonight. A webcast replay will 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 & Director [2]

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Thank you, Keeshond, 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 the first quarter of 2019, before moving into the financials and then finally discussing our various initiatives and outlook.

Before diving in, as a reminder, in March, we disclosed that Max Schroedl had resigned from his position as CFO, effective as of April 5, for personal reasons. He will be staying on as a consultant during the transition period while we search for his replacement. Also, Joe Culp, currently an accounting manager with us, will be assisting during this transition period. He has been with Jones since the beginning of this year, previously serving in an audit role at Moss Adams, holding a CPA and a master in accounting. On behalf of the company, I would like to thank Max for his dedication and years of valuable contributions, and we wish him the best in his future endeavors.

And finally, on this call with me today and available during Q&A is Eric Chastain, our COO, and he has been with us for about 18 years.

Since Max will no longer be joining me on these calls, I will go over the financial portion, but before I do, I want to provide a brief overview of the quarter and recent events.

The start of 2019 marked another quarter of progress with our core brands continuing to resonate with consumers and the launch of some new products. During the first quarter, we continued to experience growth in our fountain and Lemoncocco initiatives, resulting in 52% and 13% year-over-year revenue increases, respectively. Building on this momentum, we continued to expand our brand's footprint and made headway with several key accounts. In fact, since the first quarter ended, we announced 2 new strategic retail partners that significantly expanded our brand to new customers.

First, we finalized our agreement with Walmart, the largest retailer in the U.S., launching our most popular 4-pack flavors in over 1,000 locations, which began to roll out in late April 2019. We also entered into a 5-year agreement with Zeeks Pizza, a regional pizza chain here in Washington that replaced all Coca-Cola beverages with several Jones products, including Lemoncocco, in every location. In addition to carrying Jones on fountain, we are also supplying them Jones Soda in cans to support their large pizza delivery business. This is an exciting new channel for both of our brands Jones and Lemoncocco.

Finally, another new development up in Canada in Q2 is the reset for a brand at approximately 700 7-Eleven locations. Jones Soda bottles will be on full shelves at 7-Eleven Canada. And to commemorate their 50th year anniversary in Canada, included in the set will be an exclusive watermelon flavor for 7-Eleven Canada, with photos on it commemorating the 50th anniversary. This will begin to be on shelves by the end of May.

We do remain committed to bolstering the quality of our overall beverage portfolio, replacing certain ingredients in our products with all-natural colors and flavorings wherever possible while reducing sugar content. This initiative began to roll out in January 2019 and is an important step forward for Jones as consumers are more health conscious and aware of product ingredients than ever before.

I will be discussing further updates on our various strategic initiatives and product rollouts in more detail, but first, I'd like to discuss our first quarter financial results.

Total revenue remained flat at $2.8 million compared to the same year ago quarter. This was primarily attributable to a 52% increase in fountain revenue and a 13% increase in Lemoncocco revenue, offset by an 18% decrease in 7-Select revenue. Promotional allowances increased 27% to $321,000 from $259,000 in the first quarter of 2018 due to timing of various promotions. As a reminder, the accounting impact of these promotional allowances is a direct offset to revenues.

Breaking out our revenue further by product line. fountain revenue growth continued, increasing 52% for the first quarter versus the prior year, and it was approximately 8% of our overall business for the first quarter of 2019 as compared to 5% in the prior year period. This growth was primarily the result of the continued expansion efforts and buildout of our independent account network.

Lemoncocco revenue grew 13% from the prior year and remained equal to approximately 3% of our business for the first quarter of 2019. This growth was primarily due to increase in sales at our existing base of accounts as well as the rollout to the northwest Safeway division.

7-Select revenue was down 18% in the first quarter of 2019 as compared to the prior year period; and accounted for 11% of our total business for the quarter, down from 14% in the first quarter of 2018 primarily due to a reduction in limited-time offerings during the first quarter of 2019, which was a strategic decision we made to better focus on 3 core higher-velocity SKUs.

Gross profit as a percentage of sales was 20.1% for the first quarter of 2019 compared to 21.7% during the prior year period. The margin decline was driven primarily by strategic slotting fees and higher promotional activity related to new accounts, along with an increase in raw material costs associated with packaging.

Operating expenses in the first quarter were approximately $1.3 million compared to $1.1 million in the same year ago quarter, an increase due to investments we made to support sales efforts. As we have mentioned on past calls, we intend to prudently manage expenses through our variable cost sale structure, which will keep expenses aligned with growth.

Net loss was $796,000 or $0.02 per share for the first quarter compared to a net loss of $469,000 or $0.01 per share during the prior year period. And adjusted EBITDA in the first quarter was negative $635,000 compared to negative $390,000 in the year ago quarter.

Moving on to the balance sheet. At March 31, 2019, cash and cash equivalents totaled approximately $459,000 compared to $1 million at December 31, 2018. Working capital stood at approximately $1.2 million as of the end of the first quarter 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 a certain borrowing base requirement. Our eligible borrowing base as of March 31, 2019, was approximately $1.8 million, of which we had drawn down $1.0 million, compared to an outstanding balance of $428,000 at December 31, 2018. As a reminder, there are no payments on principal or interests due on our convertible subordinated promissory notes until March 2022, which results in these notes being accounted for as a -- as long-term debt and excluded from the working capital calculation.

Our balance sheet was in line with seasonal expectations for the first quarter. And 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 growth needs.

This concludes the prepared remarks for the financial section. Now I'd like to expand upon my opening remarks and make further comments about our various product lines and initiatives.

I wanted to provide an update on the various store rollouts that we announced on our last earnings call in early March.

A majority of these new accounts have store resets scheduled for April and May. As a result, we are just starting to begin rollout of our products to approximately 2,000 new stores, which include the previously announced new regional chain and Walmart locations that will begin carrying various products from the Jones beverage portfolio. We are excited about introducing our unique brand to even more to customers.

For our core soda bottle line, we had flat revenue in the U.S., while Canada showed a small decline in the first quarter. However, as we begin rolling out into new accounts that I just mentioned, we expect to return to revenue growth in Canada as well as the U.S.

Moving on to other product lines, starting with fountain. We continued seeing strong growth and it remains our fastest-growing line of business in a high-margin category. During the quarter, we continued to experience an increase in orders from our current corporate customers while expanding our independent account network.

Looking at Lemoncocco. We continued to see increased customer adoption of this unique product resulting in strong demand from various accounts, including independent food service and retail chains. Our growth in the Lemoncocco brand comes mainly from continued increased sales velocity at existing accounts, and we look forward to additional new chain rollouts in the warmer months of this year.

For our 7-Select products, we experienced a decline in revenue during the first quarter due to a reduction in the limited-time offerings during the first quarter of 2019 compared to the first quarter of 2018. That being said, we intend to add to the core with one new flavor planned for summer 2019 as we roll out Airheads cherry pineapple blast.

Last summer of -- in 2018, we launched a small rollout of Airheads mystery flavor, which fans loved as we sold out immediately. As a result of this success, we have a larger program planned for this summer. And as we mentioned in our last call, customers began seeing 7-Select products in various Sunoco locations, and we anticipated the rollout would continue. Unfortunately, it was delayed slightly, resulting in lower revenue than expected for these locations. However, as of late April, the rollout is back on track and we expect Jones 7-Select products to be in all Sunoco locations sometimes in -- sometime in May 2019.

Despite these factors, we still remain confident in our relationship with 7-Eleven as we have recently renewed our contract with them for the next 2 years in order to continue carrying 7-Select premium sodas at all 7-Eleven locations. 7-Eleven continues to provide us an opportunity to introduce Jones to new customers, especially with the Sunoco expansion, and we look forward to continuing our collaboration and mutually beneficial relationship with them.

At the start of the quarter, we introduced a new product to our glass bottle portfolio, Jones Ginger Beer, which will begin rollout to Kroger stores on a national scale in May 2019. While it is still early and has not impacted our results yet, we have received positive feedback from consumers, especially in Canada. We are very pleased with the initial reaction to the product and the ability for it to expand our brand's reach to a different set of customers, as it can be used as both a stand-alone drink or for making -- mixing with craft cocktails.

I also wanted to highlight 2 events that happened subsequent to the quarter. As I previously mentioned, we began rolling out our most popular 4 packs to over 1,000 Walmart locations across the United States. This was a significant step forward for Jones to be offered at the largest retailer in the United States. We believe this partnership further validates the shift in consumer preferences, and we feel other large national accounts will follow suit.

We also entered into a supply agreement with Zeeks Pizza, a growing pizza chain known for its commitment to high-quality local ingredients that celebrate Northwest culture, with 16 locations across Western Washington. Zeeks will offer Jones Cane Sugar fountain soda and Jones Cane Sugar soda in 12-ounce cans and Lemoncocco, which will be replacing all Coca-Cola beverages in every location. This is a noteworthy accomplishment for Jones, to have our products replace those of an industry giant, and we believe this trend will continue to pick up on a national scale as more restaurants and retail chains look to enhance their offerings with craft beverages.

Just as more customers prefer unique craft beverage offerings, consumer preferences also continue to evolve and gravitate towards healthier products with high-quality and natural ingredients. As part of our commitment to evolving with our customer, we are transitioning our portfolio to all-natural ingredients and coloring wherever possible. For our approach to this transition, we have segregated our portfolio into 2 distinct lines, classic and exclusive. For the classic lineup, which includes flavors such as root beer, orange and cream soda and cream soda, we have made it a goal to have this entire lineup contain only natural flavors and colors by 2020. The exclusive lineup contains our more unique and fun flavors like berry lemonade and green apple, which will -- we also will transition to as many natural flavors and colors as possible. We also plan on reducing sugar content across-the-board in both the classic and exclusive lineups. We have received great feedback for the sugar-free products we launched, along with the flavors that we have already transitioned to natural ingredients, and we believe this will further bolster our brand's popularity.

In summary, we have experienced a strong start to 2019 supported by continued progress in many of our growth initiatives. As we begin to see more of our rollouts come to fruition, starting in the second quarter, along with more consumers being introduced to our unique brand through expanded distribution and new beverage offerings, we anticipate this will start to reflect positively in our results.

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

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Operator [3]

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(Operator Instructions) And that concludes the conference. Thank you for your participation.

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Jennifer L. Cue, Jones Soda Co. - President, CEO & Director [4]

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I'm not sure if people can still hear me. I apologize if there's no questions there, but we'd like to thank everyone for listening to today's call and look forward to speaking with when we report our second quarter results or earlier. We are having our Annual Shareholder Meeting at 2:00 p.m. on May 9.

So thank you again.