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Edited Transcript of JSDA earnings conference call or presentation 7-Mar-19 9:30pm GMT

Q4 2018 Jones Soda Co Earnings Call

SEATTLE Mar 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Jones Soda Co earnings conference call or presentation Thursday, March 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer L. Cue

Jones Soda Co. - President, CEO & Director

* Max Schroedl

Jones Soda Co. - CFO

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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 fourth quarter and full year ended December 31, 2018. Today's call is being recorded.

At this time, I would like to turn the conference over to Max Schroedl, Chief Financial Officer. Please go ahead.

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Max Schroedl, Jones Soda Co. - CFO [2]

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Thanks, Anne, 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 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 March 14, 2019, starting at 7:30 p.m. 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 website.

Now I'd 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 [3]

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Thank you, Max, 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 fourth quarter and full year 2018, before passing to Max to walk through the financial details. I will then return to discuss various initiatives and our outlook.

2018 was a pivotal year for Jones Soda as we leveraged our strengthened balance sheet to expand our sales team, resulting in strong revenue growth from our fountain initiative and encouraging progress in our glass bottle business and Lemoncocco initiative. We are confident in the opportunities our multiple initiative platform is providing for us.

During the fourth quarter, we continued to expand existing corporate relationships and build out our independent account network for fountain, which helped drive 179% year-over-year revenue growth in that line of business. In Lemoncocco, a significant load-in period in the fourth quarter of 2017 resulted in sales being roughly flat in the fourth quarter of 2018 as compared to the prior year period, but demand has remained with continued interest from independent food service accounts and regional grocery chains.

Moving to 2019. We have experienced a strong start to the year with the introduction of Jones Ginger Beer and the enhancement of our glass bottle portfolio through the addition of 2 new sugar-free flavors and switching to all-natural flavors and colors when possible in our core lineup.

We are seeing a trend that retail buyer preferences have begun to shift in our favor towards craft and premium sodas with fun and exciting flavors and colors. To illustrate this, we will begin rolling our products out to over 1,000 new regional chain accounts over the next few months, comprised mostly of convenience and gas and grocery chains, which include divisions of QuikTrip, Circle K and Safeway-Albertsons to name a few.

On an another exciting note, towards the end of the second quarter of 2019, our fans will be able to purchase 3 Jones Soda flavors in 4 packs, within a new craft soda set at approximately 1,100 Walmart locations. All of these factors support our belief that we are well positioned through our powerful brand recognition and distribution network to capitalize on this craft growth in 2019 and beyond.

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 fourth quarter financial results.

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Max Schroedl, Jones Soda Co. - CFO [4]

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Thank you, Jennifer, and good afternoon, everyone. Total revenue in the fourth quarter of 2018 increased 5% to $2.3 million compared to $2.2 million in the same year-ago quarter. This increase was primarily attributable to 179% increase in fountain revenue and a 5% increase in Jones glass bottle revenue. Promotional allowances increased 16% to $382,000 from $329,000 in the fourth 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 lines. Fountain revenue growth remained robust as it increased 179% for the fourth quarter as compared to the prior year and was approximately 11% of our overall business for the fourth quarter of 2018 as compared to 4% in the prior year period. This growth was primarily the result of period-over-period growth of sales to a large corporate partner and the continued build-out of our independent account network as we focus on expanding our fountain initiative.

Lemoncocco revenue was approximately 3% of our business for the fourth quarter, which was roughly the same as the fourth quarter of 2017. Sales growth remained relatively flat as compared to the prior period, primarily due to significant load-in of Lemoncocco in the fourth quarter of 2017. However, demand has remained with continued interest from various types of accounts.

7-Select revenue was down 18% in the fourth quarter of 2018 and accounted for 16% of our business from the quarter, down from 20% in the fourth quarter of 2017, primarily due to the load-in of Hibiscus Pear LTO and Mango Lemonade SKUs in the fourth quarter of 2017, which resulted in higher revenue during the prior year period. Additionally, we ran promotions during the fourth quarter of 2018 that resulted in lower revenue for the current quarter but that, we believe, will result in an increase in 7-Eleven store count during 2019.

Gross profit as a percentage of sales was 17.9% for the fourth quarter of 2018 compared to 9.5% last year. The margin improvement was largely driven by Jones Stripped natural soda write-offs during the fourth quarter of 2017. This was offset by continued higher freight cost associated with general transportation cost inflation during the year. Going forward, we expect product mix and sales volume to help increase our margins.

Operating expenses in the fourth quarter were approximately $1.2 million compared to $1 million in the same year-ago quarter due to investments we made to support sales efforts. We intend to prudently manage expenses through our variable cost sales structure, which will keep expenses aligned with growth.

Net loss was $822,000 or negative $0.02 per share for the fourth quarter compared to a net loss of $808,000 or negative $0.02 per share last year. As a note, Q4 '18 included $75,000 of noncash cost associated with our convertible debt.

Adjusted EBITDA in the fourth quarter was negative $674,000 compared to negative $720,000 in the year-ago quarter.

Moving now to the balance sheet. At December 31, 2018, cash and cash equivalents totaled approximately $1 million compared to $397,000 at December 31, 2017. Working capital stood at approximately $1.7 million compared to approximately $0.9 million 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 December 31, 2018, was approximately $1.5 million, of which we had drawn down $428,000 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 subordinated promissory notes till March 2022, which results in these notes accounted for as long-term debt and excluded from the working capital calculation.

After improving our balance sheet throughout 2018, 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 my prepared remarks. Now I'll turn the call back over to Jennifer.

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

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Thanks, Max. I'd like to expand upon my opening remarks and make further comments about our various product lines and initiatives. First, I would like to comment on the great job that our sales team has done this year. To reiterate, for the first time in the last 5 years, we invested in expanding our sales organization. Our Head of Sales, Steve Gress, has been instrumental expanding our presence throughout North America, including 1,000 new accounts that we will begin rolling out in the coming months and the 1,100 Walmart stores we will be launching into -- during the second quarter of 2019. We look forward to our sales team building on this effort in 2019.

Moving on to our product lines. In our fountain initiative, we continue to experience robust growth and it remains our fastest-growing line of business. As a reminder, this category is a higher-margin product that we expect to be very accretive to our overall gross margin as it becomes a higher percentage of our sales.

During the fourth quarter, we experienced an increase in fountain orders from the expansion within a current corporate customer during 2018, resulting in higher revenue year-over-year as well as the continued expansion of our independent account network.

Our ever-expanding relationship with 7-Eleven also continues to remain strong, and we are excited about the upcoming launches we have planned with them in 2019. In addition, we continue to make progress with transitioning from smaller independent accounts to generating interest from larger regional and national accounts.

Moving to our Lemoncocco initiative. As Max mentioned earlier, the fourth quarter of 2017 had a significant load-in. We have maintained all of our chain listings from Lemoncocco while seeing velocities increase. We have added more retail chains for 2019 and continue to experience demand from independent food service accounts as this refreshing beverage becomes more recognizable and increases in popularity.

We have also made encouraging progress with our 7-Select products. As we mentioned on the third quarter call, we refocused on 3 core SKUs and continue to see great feedback in the fourth quarter. In 2019, customers began to find 7-Select products also in various Sunoco locations, which 7-Eleven recently acquired. Overall, we remain confident in our partnership with 7-Eleven and anticipate this momentum will continue to accelerate in 2019.

At the beginning of 2019, we announced a brand-new flavor of Jones Soda along with significant enhancements to our glass bottle portfolio. First, we launched Jones Ginger Beer as a result of demand from both Jones' loyal customer base and our distribution partners, all of whom have been asking for Ginger Beer from Jones. This product has a signature Jones packaging and branding, which includes a resealable cap that makes it ideal for food service accounts and can be offered as both a stand-alone drink or for mixing craft cocktails. We've received positive initial feedback from consumers and have generated significant interest from several large accounts. In April 2019, we will be launching Jones Ginger Beer with Kroger nationally.

In addition to the new flavor, we also introduced additional sugar-free flavors and announced our efforts to transition the majority of our full-calorie glass bottle portfolio to include only natural colors and flavorings, when possible, which began in late February 2019. This is a direct result of our dedication to evolve to our customers' needs as consumer demand grows for healthier sodas that contain high-quality ingredients.

As part of our commitment to be on the forefront of innovation and product development, we are moving away from the use of artificial ingredients, whenever possible. However, we will stay true to the bright, fun colors that made the Jones brand so iconic.

To summarize, 2018 was a pivotal year in setting Jones up for the future. We remain confident that we have laid a good foundation of new products and a bolstered sales team to expand our brands to customers all over North America. We believe our product portfolio resonates with consumers and expect to continue this strong momentum in 2019 as we continue to add customer accounts, both large and small. We look forward to updating you on our progress in the quarters to come.

And lastly, we continue to evaluate CBD beverages and the opportunity it presents for a brand like Jones. We are aware of the potential of this segment, but with the current uncertainty in laws and regulations regarding this area, we believe that there is presently no clear path to material revenues in the short term. We believe that the current environment is one of high risk and low reward. We continue to evaluate product profiles, branding and other attributes while keeping an open mind going forward.

I will now open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from [Gary Getz].

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Unidentified Analyst [2]

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First, I wanted to commend you on both the product and sales initiatives and I have a question related to that. You mentioned about 1,000 or more than 1,000 Walmart stores and also 1,000 new accounts. If all of this is realized -- and I recognize that you're just beginning to get into this, but if all of this is realized, roughly what percentage of an increase in actual stores does this represent, ballpark?

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

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Increase in -- the increase in the number of locations that the Jones Soda product is sold in?

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Unidentified Analyst [4]

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Yes, yes.

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

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Okay. Roughly, without knowing exactly all of the independent accounts across the country, we are approximately in 25,000 to 30,000 locations, we believe. We don't always get access to detailed information. So this would represent an increase, for sure, in that. We -- so what is that, 1,000 to 2,000 -- over 30,000.

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Unidentified Analyst [6]

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Okay. So about -- maybe 10% at max?

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

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Yes, approximately that, yes.

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Unidentified Analyst [8]

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Or would it be more than that? Because 1,000 new accounts, I would imagine each account, especially if it's a chain, would have several locations associated with that.

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Jennifer L. Cue, Jones Soda Co. - President, CEO & Director [9]

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Oh, yes. These 1,000 locations represent a number of doors. Like, we've got regional chains, like, the Circle K Heartland chain has 185 locations. That's incorporated into the 1,000 that we announced.

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Unidentified Analyst [10]

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Got you, okay, okay. And then as you begin to -- this is a sort of constructive feedback. As you begin to recognize or evaluate the effectiveness of sales, just using Q4 as an example, you spent an additional $190,000 on sales and marketing. At an 18% margin, you would need about $1.1 million in additional revenues to justify that increase in sales and marketing and to compare that $1.1 million needed -- excuse me, $111,000 actually achieved. So hopefully, going forward, the effectiveness of the increase of sales and marketing will be much better.

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Jennifer L. Cue, Jones Soda Co. - President, CEO & Director [11]

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Yes. Absolutely, I mean, the fourth quarter definitely has a higher percent in the fourth quarter as a percent of sales. So throughout the year, our gross profit margin is higher. So yes, there is -- yes, we look at the investment in sales and marketing very, very...

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Max Schroedl, Jones Soda Co. - CFO [12]

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Absolutely. (multiple speakers) I think that the seasonality of meetings as well and work that's been done with buyers at the end of third quarter, fourth quarter isn't rolling on our platform until Q2 of '19. So we take -- we're monitoring it closely.

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Jennifer L. Cue, Jones Soda Co. - President, CEO & Director [13]

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Yes.

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Unidentified Analyst [14]

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Okay, well, I'm glad you've [all work hard]. But again, even if the gross margin is in the 20-odd percentage range, you still need close to $1 million in additional revenues to justify that increase in sales and marketing. So...

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Jennifer L. Cue, Jones Soda Co. - President, CEO & Director [15]

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Yes, yes, definitely. I agree with you.

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Unidentified Analyst [16]

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Okay, good. So sales and marketing has to be more effective, and hopefully, going forward, the seeds that were planted now will be recognized so that it is a lot more effective.

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Jennifer L. Cue, Jones Soda Co. - President, CEO & Director [17]

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Yes. Definitely agree.

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Operator [18]

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

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Jennifer L. Cue, Jones Soda Co. - President, CEO & Director [19]

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Thank you, Anne. 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 first quarter results in early May as well as to have our Annual Shareholder Meeting at that time as well. Thank you again for joining us.

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Operator [20]

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