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

Q3 2019 Jones Soda Co Earnings Call

SEATTLE Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Jones Soda Co earnings conference call or presentation Thursday, November 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, Acting CFO & Director

* Joe Culp

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Conference Call Participants

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* Alexander Smith

* Sean Kelly

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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 in the third quarter ended September 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 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. 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 14, 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 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, operator, and good afternoon, everyone. With me today is Joe Culp, our Controller; and Eric Chastain, our Chief Operating Officer.

Overall, the third quarter ended up being a challenging one operationally for us. We did, however, successfully close on our strategic financing during the third quarter, and this financing partnership is allowing us to set ourselves up for the future with added expertise in sales and marketing as well as the funds to invest into the existing portfolio and then develop additional lines for our portfolio.

During the third quarter, our bottled craft soda business was flat overall with our challenge being mostly faced from our 7-Eleven USA business as we experienced less promotions at store level for the 7-Select line when compared to last year. To a lesser extent, we had difficulty -- difficult comparisons in our fountain business and production issues with Lemoncocco in the early part of the quarter. Despite these headwinds, our organization is energized by a rebound sales and marketing plan supported by our new VP of Marketing, Maisie Antoniello, and our strategic partnership of Heavenly Rx.

Looking to the remainder of this year and into 2020, we have much to be optimistic about. Our Lemoncocco brand is now fully back on store shelves and gaining momentum. We also have an innovative marketing plan to reinvigorate sales and exciting new product developments are underway to enhance our portfolio.

I will discuss further updates with our product portfolio and also progress we have made on our strategic initiatives with Heavenly Rx, and then also introduce some elements of our sales and marketing plan for 2020. But first, Joe Culp, our Controller, will do a review of the numbers.

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Joe Culp, [3]

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Thank you, Jennifer, and good afternoon, everyone. Total revenue in the third quarter was $3 million compared to $3.45 million in the same quarter a year ago, a decrease of 12%. As Jennifer mentioned, the decline was primarily due to a decrease in the 7-Select revenue related to a decline in their promotions in Q3 2019 compared to Q3 2018. Additionally, there was a decrease in fountain revenue due to not repeating certain limited-time offerings at 7-Eleven in 2019 that occurred in 2018.

Promotional allowances on our core soda line increased 37% to $626,000 from $458,000 in the third quarter of 2018. This was due to increased support with promotions for Jones Soda in the U.S. market to assist in offsetting the recent price increase taken in Q1 2019 as well as support listing as new landed in 2019. As a reminder, the accounting impact of these promotional allowances is a direct offset to revenues.

Breaking out our revenues further by product lines. As mentioned earlier, fountain revenues decreased 18% in the third quarter versus the same period a year ago, and it was approximately 11% of our overall business for the third quarter of 2019 as compared to 12% in the prior year period. This revenue decline was primarily the result of several limited-time offerings for a customer chain in 2018 that did not repeat in 2019.

While still a small part of our business at 3% of sales, Lemoncocco revenue decreased 48% from the prior year period due to the production capacity issues from the second quarter that continued in the first half of third quarter. We resolved the capacity issues as of July 31 with full inventory back on hand, and we are confident this segment will return to growth starting in the fourth quarter.

7-Select revenues decreased 48% in the third quarter of 2019 and accounted for 8% of our business, down from 13% in the third quarter of 2018. The revenue decrease was primarily due to a decrease in 7-Eleven store counts along with a decline in promotions on the corporate level compared to 2018. Despite this large decrease in revenues during the current quarter in comparison with the same period a year ago, year-to-date 7-Select revenues are down 10% due to a strong first half of the year.

Gross profit as a percentage of sales was 21.7% compared to 22.8% last year. The decline was driven by an increase in raw material costs for natural ingredients along with increased slotting fees and trade promotions and additional cost of goods related to Lemoncocco from the production issues. These declines were partially offset by increased gross profit and margins from our fountain business in 2019 in comparison to 2018.

Operating expenses in the third quarter decreased to $1 million compared to $1.1 million in the same period 1 year ago. We remain committed to prudently managing expenses through our variable cost sales structure, which will keep expenses aligned with growth.

Net loss was $476,000 or a negative $0.01 per share for the third quarter compared to a net loss of $425,000 or negative $0.01 per share for the same period 1 year ago. And an adjusted EBITDA in the third quarter was negative $352,000 compared to a negative $279,000 in the same quarter 1 year ago.

Now moving on to the balance sheet. At September 30, 2019, cash and cash equivalents totaled approximately $7 million compared to $1 million at December 31, 2018. The significant increase was a result of the strategic financing agreement the company entered into with Heavenly Rx on July 11, 2019. We also utilized a portion of the proceeds from the financing to pay down our line of credit, and we did not have a line of credit balance at the end of the third quarter in 2019 compared to a $428,000 balance at December 31, 2018.

Working capital was approximately $9 million compared to approximately $1.8 million at the end of 2018. We remain confident that our current liquidity position will be sufficient to meet our anticipated growth needs.

Now I'll turn the call back over to Jennifer for additional commentary.

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

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Thanks, Joe. And now I'd like to expand upon on my opening remarks and make further comments about our various product lines and initiatives. Starting with our core soda bottle line. Our revenue in this segment remained relatively flat for both in Canada and the United States markets. In our U.S. business, we instituted price increase across the board in March 2019. And during the summer period, we were executing various TPRs, or temporary trade promotions, to ensure that we maintained our shelf space -- place given the price increase. We believe that we achieved this. In the U.S. we also made good progress in the summer months with continued rollout of our branded and new craft soda set in Walmart U.S.A. And our largest national account in the U.S., which is Kroger, we continue to do well as we rolled our new Ginger Beer SKU to the mix of this chain nationally in the third quarter of 2019.

Within our Canadian market, we continue to experience good demand among consumers across the country and particularly in Western Canada, our original home market. In Canada, we had good success with some of our existing chains, such as Loblaws, Sobeys and 7-Eleven Canada. In the fourth quarter, we will begin to rollout Jones Soda in boxed bottles into the Shoppers Drug Mart chain of 650 locations, a first for a brand at this retailer.

With Canadian Nielsen data just received, we can safely say that we are the #1 bottled craft soda in this country. And with the continued growth expected in the craft soda segment of approximately 4%, we look forward to growth in Canada with our leadership position there.

With respect to our fountain business, despite having a revenue decline in this segment due to the tough comparable period of not having LTOs at a convenience chain, our gross profit and margin increased as the limited-time offerings from last year had much lower margins. In fountain, we continued to experience growth within independent accounts as our value proposition of appealing to the shift and consumer demand for craft products remained strong at food service. In the third quarter, in our home market of the Pacific Northwest, we finalized the rollout of our fountain replacing all Coca-Cola products there at the 17 locations of Zeeks Pizza. Zeeks has been extremely happy with the transition citing an increase in their beverage sales and a great response to the Jones brand from their consumers.

Subsequent to the quarter end, we entered into an agreement with Harlan Fairbanks, a leader in the concession of food service industry, to distribute Jones fountain and frozen slush products across Canada and select markets in the U.S. beginning in early 2020.

Harlan's has a strong presence in Alaska and Washington as well, which are already core markets for Jones bottle and fountain business with a strong consumer following. We are excited by the growth opportunities that this partnership presents across North America. Overall, we remain optimistic about our fountain business as we head into the fourth quarter and 2020.

Turning to Lemoncocco. During the quarter, we were able to sign up 2 new co-packers that are fully capable of fulfilling demand across all of our markets and our production is fully back on track. The industry movement towards cans and away from plastic has caused a strain on the canning co-packing industry, especially the all-natural segment of the business. Again, however, we are confident that we have resolved our production situation with Lemoncocco. We believe consumer demand for this unique product remains high, and we've incorporated Lemoncocco into our full sales and marketing plan for 2020. Part of this plan includes Lemoncocco now receiving a non-GMO status, and we will profile this on the can beginning in 2020. In addition, we have created 2 new flavor extensions for this product line and will launch these when we are ready to do so in the upcoming year.

Going forward, we believe we will continue to see good demand for Lemoncocco and fully expect to return to growth in the fourth quarter and in 2020.

For our 7-Select product, as a reminder, our Jones lineup is placed within the private brands group of 7-Eleven USA, our brands being 7-Select crafted by Jones Soda, and 3 SKUs are on the shelves. During the third quarter, the Private Brands group within 7-Eleven shifted its focus away from craft soda unfortunately and increasing trade promotions elsewhere. However, we do not anticipate this trend to continue as we're already working on several 7-Select promotions for the first quarter of 2020 and anticipate launching new SKUs next year. We have recently signed a 2-year renewal of our agreement with 7-Eleven USA and look forward to a renewed focus back on our program in early 2020.

Now shifting gears to what we expect going forward. I want to provide a high-level overview of 3 important areas of focus within our updated plan for next year. First, we will focus on selling more of our core SKUs in core markets and channels. Our sales team has a plan in place to aggressively pursue further expansion within our core geographic markets with our highest selling SKUs at our most popular channels that have the best sales velocities for our brand.

Second, we are in the final stages of development of a comprehensive plan to increase awareness and consumption of Jones Soda through unique and innovative marketing campaigns geared towards Millennials and Gen Z. We are focused on building partnerships in a range of cultural platforms including music, video gaming, sports and the arts and will announce these once we have finalized. We believe these marketing activities are necessary to capture the younger generations' attention and consumption.

Finally, we do also plan on expanding the size of our sales and marketing team to focus on building out our base of independent accounts as this has traditionally been where our brands have the highest velocities. We will also target the food service channel for all brands and formats, bottles and fountain and with a real focus on Lemoncocco in this channel due to its current success there. We will also begin to utilize outside brokers to add incremental business in channels that we don't currently have a presence such as drug and mass. Overall, we are confident in the plan that we have developed, and we are taking action to strengthen our sales team to execute on these opportunities and grow our business.

Lastly, I want to give some high-level updates on the development of a CBD-infused craft beverage with our partners at Heavenly Rx. Although we are waiting for guidance from the FDA before we introduce any products to the market, we are very excited of the progress we have made on this front. We have retained one of the top product development firms in the U.S., who is working closely with our team to create a completely unique Jones-branded CBD-infused beverage. We are very excited with the early development on this initiative and look forward to updating the market on our progress.

In summary, despite various headwinds in the third quarter, we remain confident about our current position in the market with -- and with great brands such as Jones and Lemoncocco that both resonate with consumers. We are eager to capitalize on the growth opportunities in front of us with our newly developed go-to-market strategy for 2020, our new strategic partner, and we look forward to updating you all on our 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) We can take our first question from Sean Kelly, who is a private investor.

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Sean Kelly, [2]

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All these initiatives sound very exciting. I mean they are exciting, but given your track record of failure, are you really the person to lead the company through this transition? And have you given any thought to stepping down and letting someone else take control of the company?

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

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Yes. I appreciate your comments, Sean. Definitely, we've just closed this partnership with Heavenly Rx, and we're bringing in the expertise from there from both Paul Norman and Clive Sirkin, and currently balancing small company expertise with theirs and I'm confident that we're going to create the best plan moving forward with the team that we have right now.

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Operator [4]

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We can move to our next question from Alexander Smith, who is also a private investor.

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Alexander Smith, [5]

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So I'm a bit of a newer investor into Jones Soda, but I've been following it for a little while. And in terms of marketing and strategy, the one thing that I've always had a little bit of an issue with is, it seems like there's 2 disparate ideas going on that I wonder sort of how you reconcile. So you hold yourself out as a premium craft beverage, which I appreciate and which I think is true, and -- but then I see you selling in 7-Eleven, Walmart and now you have a distribution agreement with the company who distributes nacho cheese dispensers, hotdogs, slushes. Not that there's anything wrong with that, but it feels like there's 2 disparate ideas going on, and I'm curious how you reconcile that. And in terms of strategy moving forward, is this the right approach? I mean, I know you've decided yes, but how you reconcile these 2 disparate ideas that I said?

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Jennifer L. Cue, Jones Soda Co. - President, CEO, Acting CFO & Director [6]

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Well, I mean -- I think our brand has been around for about 23 years. So I -- we believe that we have the permission to put our brand in a lot of places, for sure. And we look at all channels, and we've got this one group that we just recently signed on with, with Harlan Fairbanks is taking our brand into new channels, and they have a whole host of independent accounts, where Jones Soda on fountain and our slush program does very well. So it's a balance. It's going after these channels that provide us with some volume as well as being in our independent accounts, which should have a more elevated and premium image. So that helps to reconcile it.

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Alexander Smith, [7]

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Okay. Can I just ask, like, have you considered ever -- certainly, they're bringing volume. Have you ever considered following a strategy leaving that to the side and just focusing on just the premium market?

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Jennifer L. Cue, Jones Soda Co. - President, CEO, Acting CFO & Director [8]

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Meaning more sort of an independent...

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Alexander Smith, [9]

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Well, yes. Well, maybe not independent. I guess when I think -- like, when I think of Lemoncocco, I think of San Pellegrino. I think of that as sort of maybe an apples-to-apples competitor. But I wouldn't necessarily see San Pellegrino being in 7-Eleven or -- like that's not where I would necessarily buy San Pellegrino or think about that. For me, as a consumer, which I would be attracted to, like Lemoncocco, San Pellegrino, I would necessarily go to these channels. I -- so I'm not sure if it would be independent places.

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Jennifer L. Cue, Jones Soda Co. - President, CEO, Acting CFO & Director [10]

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Yes. I hear what you're saying. I think -- I mean there's different strategies for both Jones and Lemoncocco. Jones being a 23-year-old brand and sort of like a nationally known craft soda brand. Lemoncocco is definitely more elevated, and it wouldn't be placed in the 7-Eleven, for sure. It is -- Lemoncocco's placement strategy is really food service and boutique grocery at this point. So that is how there's a different placement strategy with the 2 different brands.

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Operator [11]

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(Operator Instructions) And it appears we have no further questions. So I'll hand the call back to you for any closing remarks.

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Jennifer L. Cue, Jones Soda Co. - President, CEO, Acting CFO & Director [12]

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Okay. Thank you very much, 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 and full year results early next year.

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Operator [13]

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This concludes today's call. Thank you all for your participation. You may now disconnect.