Jones Soda Co

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 30th, 2021. 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 for 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'd like to remind everyone that this call will be available for replay through November 11th, 2021, starting at 7.30 p.m. Eastern time tonight. 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 president and CEO of Jones Soda, Mark Murray.

Thank you, James, and thank you, everyone, for joining us today. I am pleased to say we had another strong quarter driven by our core bottled soda business. Revenue for the quarter increased 29% to $4.6 million, marking our fifth consecutive quarter of revenue growth. We also are reporting positive income from operations for the second consecutive quarter, something we haven't done since 2006. Our strong results this quarter are evidence that our turnaround strategy, which we put into place at the end of 2020, is working. It's been a team effort, and I want to thank our dedicated employees and stakeholders for all the work they've done as we continue to develop and grow the business. On the call today, I'll provide an update on our sales performance, marketing initiatives, operations, and our planned cannabis initiatives. We will then end with a Q&A session. Before I get into these topics, I'd like to hand the call over to Joe to discuss our strong financial results for the quarter. Joe?

Thank you, Mark, and good afternoon, everyone. Total revenue in the third quarter increased 29%. to $4.6 million compared to $3.5 million in the third quarter of 2020. This increase was primarily due to continued growth in our core bottled soda business. Gross profit as a percentage of revenue increased 600 basis points to 32% compared to 26% in the prior year period. The improvement was a result of the continued shift to a higher margin product mix which includes the recovery of our food service business. Operating expenses in the third quarter were $1.4 million compared to $1.3 million in the same year-ago quarter. This includes a slight uptick in spending related to sales and marketing, along with the general corporate expenses to facilitate growth. Net loss in the third quarter improved to $59,000 or zero cents per share compared to a net loss of $450,000 or negative one cent per share for the prior year period. Adjusted EBITDA in the third quarter improved to positive $72,000 compared to negative $324,000 in the year-ago quarter. These profitability improvements are the result of our efforts to optimize margins and manage costs, both of which are key focus areas as we move forward. Moving on to the balance sheet. On September 30th, 2021, cash and cash equivalents were $5.9 million compared to $4.6 million on December 31st, 2020. Working capital was $7.3 million at December 30th, 2021 compared to $5.8 million at December 31st, 2020. Lastly, the only debt we carry is the outstanding convertible notes issued in 2018 and our recently issued convertible debentures. we continue to evaluate the possibility of securing a new line of credit. I'll now hand the call back over to Mark for his remarks.

Yeah, thank you, Joe. Great financial results. As mentioned before, it has truly been a team effort, and I want to thank all our employees for their hard work in leading us to our fifth consecutive quarter of revenue growth. Let me start with a discussion regarding our sales performance. Our core bottled soda business continues to be a driver of growth across all channels. And we remain focused on working with our partners to ensure our products like our top selling berry lemonade, cream soda, green apple, orange and cream, and root beer sodas, as well as our rotating special release series sodas are promoted and displayed effectively in the retail locations. Additionally, New product innovation within our special release program and variety pack offerings continue to deliver incremental volume and revenue and will remain a key part of our strategy as we move into 2022 and beyond. Our sales team is doing an extraordinary job as we continue to strengthen our relationships across the US and Canada with existing key national and regional accounts like Kroger, Safeway Albertsons, Walmart, Loblaws, and Sobeys. I am also pleased to say that we just announced that Jones is returning to Meijer stores in six Midwest states, including Michigan, one of our largest and strongest markets. Meijer will be stocking a large selection of sodas, including their limited edition special release flavors. Now, to discuss our food service channel. As food service continues to recover from the impacts of the pandemic, we continue to allocate resources to this channel. We consider to be an area of high growth. With strategic overlap between food service and the convenience channels, we recently attended the National Association of Convenience Stores Conference in Chicago to show off our unique and diverse portfolio of innovative products, including packaged beverages, fountain beverages, and frozen dispensed products. Continuing with convenience, we had a great success in this channel this summer with our birthday cake soda Slurpee flavor. The product was sold at hundreds of 7-Eleven locations in the Pacific Northwest, and it exceeded both 7-Eleven and Jones expectations. Being cited as one of the reasons 7-Eleven recently won the 2021 Cold and Frozen Beverages Innovator of the Year Award from Convenience Store News. Staying on frozen drinks, another exciting new relationship for us is our partnership with the Icy Corporation and J&J Snack Foods. Starting in early spring of 2022, consumers will be able to enjoy a New Jones Mango Melon flavored Icy which will be made available to a network of thousands of corporate and independent convenience stores across the United States. As part of this strategic partnership, we will also be selling a new co-branded bottle craft soda product featuring Icy's top two signature flavors, Cherry and Blue Raspberry. The products will be available across our grocery, mass, and convenience store channels and we will also be a featured part of our successful special release program. We are really excited about this partnership and look forward to sharing more details soon. Last quarter, we mentioned that we started distributing Jones products in some alternative channels, including home goods and Dollar Tree stores in Canada. We have continued working on expanding this business to drive sales and improve our brand recognition. And I am pleased to say that we recently increased our distribution to over 240 Cost Plus World Market stores. Lastly, for Lemon Cocoa, we continue to see healthy growth following the restructuring of our distribution network in Canada. We will continue to work with large food service customers in the United States because we know Lemon Cocoa is a unique grab-and-go item. in addition to being a great mixer ingredient. There's still more work to do, but we're pleased with the progress. Now, an update on our marketing activities. Our team has done a tremendous job driving awareness around the Jones brand at the national level. While we've been known for our unique and constantly changing labels on Jones bottles for the last 25 years, The release of our augmented reality program, which we are calling Real Labels, updates that concept, takes our brand to a whole new level of engagement with consumers. We attracted a lot of attention towards the program across the US and in Canada over the summer, including a recent cover story in Packaging World magazine. With over 50 million media impressions around the program so far, And we expect this attention to continue as we release new additional series in the program, beginning with the recent kickoff of Zoltar. On store shelves now, consumers can use their phones to bring Zoltar, the fortune teller, to life on the bottles of Jones, providing fun words of wisdom with a clever Jones twist. Unveiled at the recent National Convenience Store show mentioned earlier, The program received a lot of buzz and attention from attendees who stood in line to experience their own interactions with our bottles, as well as a real-life Zoltar machine. Our engaging and unique labels remain our point of difference, and we are really excited by all the positive feedback we've received. Looking ahead to next year, the series continues in spring of 2022 with fresh new content creators who help further our brand's narrative as the people's craft soda. Be on the lookout for featured content that expands beyond action, sports, and art to also include music and other lifestyle interests that appeal to our consumers. Further, adding to the increased national awareness of the Jones brand is our limited edition run of turkey and gravy soda. The flavor has been our number one most requested fan favorite, and we're pleased by the response to its returns to the store shelves just in time for Canadian Thanksgiving. After more than a decade of consumers asking us to bring it back, we see an overwhelming amount of excitement from consumers and media with over 1 billion impressions and an estimated ad value of $6.5 million. We expect interest will continue to grow as we get closer to Thanksgiving here in the United States. We continue to invest in our digital capabilities, including revamping our website and our e-commerce platform. We've made it a lot more user-friendly and functional, making it easier for customers to submit photos to our ever-growing photo gallery, find our product sheets in our store locator, and order sodas with custom labels from our growing My Jones program. To round out the marketing discussion, I'd like to share that we've hired our first ever chief marketing officer, Bob Blair. Bob is an incredibly accomplished marketing executive, and we are thrilled to have him on board, especially as we enter into the cannabis business. It's going to be very important to have us have one individual that has oversight and is the steward of our brand as we embrace this new market. I am happy to say Bob has already been hard at work actively developing our go-to-market strategy, our brand, and our packaging for the new cannabis business line. Now moving to operations. Operationally, despite industry-wide supply chain and inflation challenges, Our team continues to do an excellent job meeting demand and delivering superior customer service. We are working closely with our supply partners to manage our cause. And so this year has been challenging beyond anybody's expectations. I'm happy to say through these efforts we are on track to exceed our 2021 plan. That being said, as we look ahead to 2022, We expect to see continued cost pressures from rising commodity prices and anticipate that we will be affected by sourcing challenges and elevated costs until at least the middle of next year. We will continue to work with our partners to mitigate these challenges. Lastly, an update on our cannabis initiative. We recently shared that we entered into a definitive arrangement agreement with Pine Star, marking a significant step as we work towards the development of the Jones Plan cannabis business line. Additionally, as we mentioned, we recently hired our first marketing officer, Bob Blair, who will be instrumental in our launch preparation, who is working hard behind the scenes with our team to put together the portfolio and the organization to support the business. We plan to launch with products across formats that combine category opportunity, production capability, and our unique brand positioning. Products such as edibles, fakes, and pre-rolls, in addition to, of course, our beverages. Additionally, we've had several conversations with companies about partnerships and licensing opportunities and expect many more. We anticipate launching our portfolio in the first quarter of 2022, and we look forward to sharing more details upon the close of the deal. Before recapping the call and jumping into Q&A with Joe, I want to echo that the health and safety of our employees, supply chain partners, distributors, and all stakeholders remains our top priority as the world still deals with the effects of COVID. Let me highlight, one, we reported our fifth consecutive quarter of year-over-year revenue growth. We are reporting a gross margin increase of 600 basis points. Additionally, for a second consecutive quarter, we are reporting positive income from operations, something that hasn't been done since 2006. Two, Our core bottled soda business continues to drive our revenue growth, and we've made exciting developments in our food service and alternative channels. Three, on the marketing side, our augmented reality labels and the release of our turkey and gravy soda have helped create increased national awareness of the Jones brand. Four, operationally, we are taking efforts to mitigate the impact of supply chain headwinds and expect to report 2021 results that exceed our internal expectations. Five, we announced our definitive arrangement agreement with TimeStar and are working to build and launch our planned cannabis business line, which we expect will be transformational. We are currently working to build the organization, the product portfolio, and our go-to-market strategy. We are excited to share additional information once we finalize with you. And six, and most importantly, the safety of our employees, supply chain partners, distributors, and all stakeholders remain our number one priority, and we will continue to listen to the advice of the health experts. Overall, I'm very proud of the progress we made in the third quarter. and we remain committed to providing best-in-class products and service for our customers and partners. I thank our team, our partners, and our loyal consumers for their continued support as we execute on our turnaround plan. With that, I'll now turn the call over to Joe for some Q&A sessions.

Thanks, Mark. Yeah, so before wrapping up the call, Mark and I would like to address some of the questions we received from investors via email over the last few weeks. We have selected what we believe to be the most important and relevant questions to answer. And starting with the first question, question number one, could you discuss why you switched auditors during the quarter? And I'll actually take this one, Mark. You know, as we plan to enter the cannabis market, We believe our former audit firm is not in a position to support businesses associated with the cannabis industry. So that audit relationship ended, and we are very excited about bringing our new auditor, Armonino LLP, on board after evaluating multiple proposals from other firms. There were no disagreements with our prior audit firm, and we appreciate all of the support they've provided to us over the years. Question number two. The Farmer's Almanac is predicting this winter to be one of the coldest and longest winters. Do sales drop as temperatures drop, and can you discuss the seasonality of your business?

Yeah, I got this, Joe. So there certainly is seasonality in our business. Our strongest quarters are Q2 and Q3, and then the business falls off a bit in the colder quarters. When we talk about our three-year strategic plan, we mentioned how we are focused on food service, club, and alternative channels. And they obviously are there to help increase the revenue, but there's also there to help offset the seasonality in traditional retail. We also talk about product innovation with variety packs and mixer packs. This will be the first season for our mixer packs in that we believe are going to be a great item for the holidays. Our holiday business is also strong with our customized My Jones programs and limited-time offerings such as turkey and gravy that help us maintain relevancy during the off-season. We will always have seasonality in this business, but it's our job to work hard to help flatten the curve, and I believe through alternative channels and product innovation, we can get there.

All right. And question number three, as you launch the cannabis line, are you targeting a single geographic market?

Well, we're not just targeting a single market. We are much more ambitious than that. So we have taken a really disciplined approach and have mapped out targeted geographies as part of our go-to-market strategy, and we look forward to sharing those at a later date.

All right, question four. How are you handling and preparing for the regulations around cannabis?

So as a reminder, part of the attraction of this deal is partnering with people who are in the space and can help by providing an experienced and knowledgeable team that can help us navigate regulations. So we are making sure we are tapping the necessary resources to help us as we go to market.

All right, and that's the last of the questions that I have. 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 and full year of 2021 results. Thank you for joining us.

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