Jones Soda Co

Good afternoon, everyone. Thank you for participating in today's conference call to discuss Jones Soda's financial results for the second quarter ended June 30, 2022. 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 8K. In addition, this call includes discussion of certain non-GAAP financial measures, including adjusted EBITDA. 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 a replay through August 18, 2022, 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 would like to turn the call over to the President and CEO of Jones Soda, Mark Murray.

Thank you, Tom, and thank you, everyone, for joining us today. We recorded another strong quarter here at Jones, marking our eighth consecutive quarter of year-over-year revenue growth in the first time since 2009 that our revenue in the first half of the year exceeded $10 million. Considering the volatile macro environment and uncertainty surrounding consumer spending, I am very proud of the revenue growth we continue to report. To give context, when we first entered our three-year strategic turnaround plan back in 2020, We developed internal revenue projections for each year to keep us on track. It's noteworthy to report that within the first six months of 2022, we exceeded the initial revenue target we set for the entire year of 2020. This is a testament to not only how far we've come in a relatively short period of time, but also our team's ability to execute and our growth strategy. even during unprecedented market conditions. While we did see some margin compression when compared to Q2 of last year, it is important to note that 2021 had a benefit of market tailwinds and an outside portion of high-margin fountain sales to the overall product mix. Despite the slight year-over-year compression, we were in line with our internal margin expectations. Overall, we are incredibly proud of our team's ability to execute upon our transformation strategy throughout the quarter, which I believe will further position Jones for continued success. On the call today, I'm going to do a dive deeper into our sales performance, new and upcoming marketing initiatives, our core operations, an update on our successful cannabis launch, and then wrap up the call by responding to questions submitted by shareholders over the last few weeks. Before I dive into those topics, I'd like to hand the call over to Joe to discuss our strong financial results for the quarter in more detail. Joe?

Thank you, Mark, and good afternoon, everyone. Net revenue in the second quarter increased 35% to $6 million, compared to $4.5 million in the second quarter of 2021. This increase was primarily due to our continued growth in our retail and alternative channels within the core soda business. It's important to note, while we experienced a successful launch of certain cannabis products during the second quarter, all cannabis-related sales were recorded subsequent to the end of the quarter. and we expect to see those results begin to flow through our financials starting next quarter. Gross profit as a percentage of revenue was 28% compared to 31.3% in the prior year period. As Mark mentioned earlier, the year-over-year margin compression was the result of a combination of sales mix and inflationary pressures related to increased material and freight costs. However, our price increases and overall management of our supply chain costs offset a portion of these factors. It's also important to note, as evidenced by our strong revenue growth, our increased prices have not discouraged our customers from purchasing our products. Operating expenses in the second quarter were $2.8 million compared to $1.4 million in the same year-ago quarter. The increase was primarily due to an additional $1.2 million of costs to support our strategic entry into the cannabis sector. Net loss in the second quarter was $1.4 million, or negative two cents per share, compared to a net income of $300,000, or zero cents per share, for the same quarter in 2021. The increase in net loss was primarily driven by the aforementioned startup expenses related to the launch of certain cannabis products during the past quarter, as well as continued investments in our sales and marketing initiatives. Additionally, our results from the second quarter of 2021 included the full forgiveness of our $335,000 loan under the Paycheck Protection Plan recorded as other income. Adjusted EBITDA in the second quarter was negative $1.1 million compared to $0.4 million in the year-ago quarters. Moving to the balance sheet. As of June 30th, 2022, cash and cash equivalents were $9.3 million compared to $4.7 million on December 31st, 2021. Working capital was $13.9 million at June 30th, 2022 compared to $6.0 million on December 31st, 2021. Additionally, As of June 30, 2022, all convertible debentures have been converted and we do not have any substantial debt. I'll now hand the call back over to Mark for his remarks.

Thank you, Joe, for sharing our strong second quarter financial results. We'll start by discussing our sales performance. Our core bottled business continued to outperform our expectations. We saw sales increase mostly as a result of growth in our existing channels, as well as incremental revenue coming from new partnerships. Our three-year strategic plan focused on growth in alternative channels, an optimal product mix best suited for our consumers, and the maximization of return-per-marketing dollar spend continues to be validated by our strong sales results. Overall, our retail segment remains strong. We will continue to work with all our core retail customers like Kroger, Walmart, Safeway Albertsons, Hy-Vee, Loblaws, and Zobeys to make sure we have the right mix of products and the right promotional activity in place. I believe strategic promotions with our key customers will be critical to maintain our back half sales momentum. In our alternative channels, our partnership with Dollar Tree continues to develop with meaningful sales growth. I'm excited to report that we have orders in the system for the back half of the year, and we expect to continue expanding our relationship with Dollar Tree. With over 8,000 stores throughout the U.S. and Canada, Dollar Tree has quickly become a key partner in the overall growth strategy of our alternative channels. World markets formerly cost world market, is another partnership that continues to exceed our internal expectations. What initially started as a summer program has evolved into another continuing program for the back half of the year. Our special release pineapple cream soda complemented world market summertime promotional programs while leaning into our strengths, appearing the right flavors to the right customers at the right time. With over 240 stores, World Market has a sizable footprint and reach that continues to push our brand to new customers. I am also pleased to announce that we are going back in one of the largest retailers in the country. Coming soon, we are introducing four items into Target cafes in approximately 1,000 stores across the nation. While we have engaged with Target in the past on various initiatives, this is another positive step in our efforts to establish long-term partnerships with blue chip retailers. We will also continue to have success with regional key account sales and merchandising programs. For example, the custom Fred Meyer Founders Day special release root beer promotion we developed and implemented in May through June led to our securing of additional rack placements across the chain, which we plan to use to bring in our special release cherry and blue raspberry icy flavors to all 132 Fred Meyer stores across the Pacific Northwest. Leveraging Fred Meyer's roots in Portland with our established relationship in the IndyCar racing, we'll be using the additional rack placements to run special promotions during the Portland Grand Prix, which is being held September 2nd through the 4th. to further capitalize on our event-driven marketing strategies. We are working to schedule pre-race appearances at local Fred Meyer stores featuring Dublin DeFrancisco, Ms. Carr, and the parking lots of these stores. This is another memorable and meaningful way we are able to leverage our portfolio of assets. Then to maximize the return of these new placements, we also expect to utilize the newly acquired shelf space secure displays of this year's special release holiday flavors, which I will provide more commentary on in the latter part of this call. Our fountain segment continues to produce consistent sales growth each quarter and now contributes around 15% to the overall revenue product mix within our core soda business. After a successful test period, We scored another win this quarter with our partners at Circle K, expanding our Blue Bubble Gum Fountain products to an additional 900 stores, bringing our program to a total of 1,800 stores across Canada. This comes along with additional wins at the Meijer Grocery Chain and the Come & Go Convenience Chain, where we are both now featuring Joe's Soda Fountain products at select locations. Since our fountain products generally produce higher margins compared to our other beverage product offerings, it remains one of our priorities to continue to invest in the growth of our fountain business in order to increase its percentage of the overall revenue mix. I believe there is still much room for growth, and I look forward to seeing more fountain flavors in more stores. Now for an update on Lemon Coco, which we relaunched last quarter. We have reestablished a steady manufacturing relationship and overall our distribution network, and I am pleased to report that the business is healthy and growing. Canada has proven to be the right market for this brand, which has a target audience who so far have been responding well to the product. We believe this has the potential to continue developing into a meaningful revenue stream. We will continue to monitor and evaluate this business in the future, and we'll give updates of further progress. Overall, we produced strong sales results for this quarter, and our growth continues to validate the approach we have in transforming this company. While we continue to find new ways of putting Jones Soda in front of as many customers as possible, we are grateful for the maturing partnerships we have with our existing clients. and we will look to capitalize on future opportunities that we have identified. Let's move on to the marketing strategy and initiatives. We began to reap the benefits of various marketing projects that were introduced over the past few quarters. Initiatives such as microsites, our AR labels, and mobile apps, and our existing collaborations and partnerships have all helped drive higher engagement rates with the Jones Soda community. With around 20,000 unique users now registered on our mobile app, we have continued to find success using technology and various collaborations to expand and engage with our community. Announced last quarter, our partnership with Sub Pop Records and its sister record label, Hardly Art, launched last month promoting 15 Sub Pop artists with albums releasing throughout the summer. Through our AR labels, our customers are able to see and hear exclusive clips from artists within the Sub Pop and Hardly Art record labels by scanning our soda bottles with the Jones mobile app. I am very proud to see this creative collaboration come to life, which combines the strength of our unique labels with the artistic heritage of Sub Pop Records. As part of this partnership, we have also given the keys to our fully customized and Jones-branded RV, the Sub Pop Artist Suki Waterhouse, which she will use to tour the country from July through October. Our marketing team continues to be on the forefront of innovation when it comes to consumer engagement within our industry, and we expect This collaboration brings together both soda and music fans. Our special release, Crushed Melon Soda, crafted in partnership with former UFC champion Juliana Pena, was released last quarter. Crushed Melon has been a fan favorite for many years, and we are continuing to see success with both the release and our engagement with Juliana. We love being able to use our distinctive flavors to craft products that fit with our partners' unique personal mission and style. And this special release is no different. Given the success of the program and our other cap collaborations, we intend to continue to target cultural icons that we feel fit our brand's mission statement. Looking forward into the back half of the year, we are excited to announce a new social program where we'll be connecting with incoming college students across the US and Canada. The program includes product giveaways and other special offerings specifically designed to help young adults transition into the next stage of their education. There's more to come on this very exciting program. Unique flavor offerings will always be at the core of our brand and our marketing efforts. With the success of turkey gravy last year, bringing in immense brand value and recognition, we have decided to once again bring this unique flavor back as a special release for the holiday season. We have already begun accepting orders from our distributors and customers can expect to see turkey and gravy on shelves in the coming months. Additionally, we have developed a brand new flavor, Sugar Cookie, that we believe will help us capitalize further on the engagement we are known to have with customers during the holiday season. We are excited for our customers to try this unique special release flavor, expected to roll out just in time for the season. Stay tuned for more updates. Our marketing team has been instrumental in pushing new boundaries and leading our brand across unchartered waters. Jones has always lived on the edge of technology and unique product offerings, and our future marketing initiatives are going to continue down this path. We are always excited to share with you the innovative ideas that our marketing team brings forth, and we look forward to continuing crafting products that create an emotional connection with our community.

With that being said, let's now dive into operations.

Broader economic headwinds have continued to persist throughout the quarter, and we are not expecting any back half relief within the supply chain, inflationary environment, or labor markets to materialize. Our team has done a great job in developing various cost control levers keep us on target with our bottom line and will continue to do so as we move through the remainder of 2022. As an act to mitigate some of the rising material cross pressures, we were able to lock down a three-year contract with our glass supplier after six months of negotiations. This will provide our team with better stability and predictability to our material costs in the coming months and years amid a constantly changing macro environment. While transportation and other raw material costs are still volatile, I am confident in our team's ability to maintain margins consistent with our internal expectations. We will continue to control what we are able to and manage through any challenges that the macro environment may present. As consumer discretionary spending habits evolve through the rest of the year, we intend to keep a close eye on our customers and provide updates as they come. We have always been committed to delivering quality products in a reliable and cost-effective way, and the rising pressures of inflation will not change our core belief. Now, I'd like to provide a brief update on our terminated binding LOI with Simply Better Brands. With everything that has happened in the broader economy, we were unable to continue with the proposed transaction. We wish the team at Simply Better Brands nothing but the best, and we remain confident in the platforms we built here at Jones Soda to continue driving our success as a standalone company. That being said, While we continue along our transformation journey, we are always trying to find more ways to diversify our portfolio in higher growth categories and expand our reach beyond our existing audience. And this is a perfect segue into our cannabis segment. On our last call, we mentioned that we were a little disappointed that we were not in the marketplace as soon as we expected. but we spent this critical time securing key manufacturing, distribution, and sales partnerships to ensure that our launch into cannabis was well positioned for success. In manufacturing, we secured a partnership with the Tinley Beverage Company, the premier licensed manufacturing company of terpene and cannabis-infused products that owns a 20,000-square-foot facility specifically engineered to manage and manufacture cannabis-infused beverages. Last month, Tinley successfully executed a merger with Blaze Holdings, effectively doubling their existing manufacturing capacity. With our high growth priorities, Tinley has quickly proven to be a capable partner that is willing to expand and adapt to meet our total manufacturing needs as we work to establish ourselves in the cannabis industry. Our distributor and sales partner, Kiva Sales and Service, has also been immensely valuable as we prepared to launch Mary Jones across California. Their sales and distribution capabilities range across the entire state and overall have secured distribution to over 80% of the dispensaries in the state. With key customer support and data, they have been essential to our work in strategically positioning Mary Jones for a successful launch in capturing the attention of the cannabis consumer. This brings us to our successful launch of Mary Jones, which has surpassed our high expectations and has already exceeded the forecast that we initially developed. Our product launch press has generated over 300 million press hits so far, over 600,000 in media value, which is a reflection of the excitement that our entry into cannabis has generated with both trade and consumers. This is in addition to the press promotions and endless social media that has surrounded the Mary Jones launch from each of our partners. We have received extremely positive consumer feedback, and I have generated high demand for our product as it hit retail shelves last month. Mary Jones Soda, a 12-ounce product featuring 10 milligrams of THC and four of our most popular flavors, Berry Lemonade, Green Apple, Orange and Cream, and Root Beer, was intentionally released in limited quantities to select retailers due to manufacturing constraints we have since overcome. We are pleased to report that we are actively replenishing supply and will be ready to debut new products within the portfolio in the coming months. The launch of our 16-ounce, 100-milligram Mary Jones Soda will arrive with the same core flavors We expect this to be the most in-demand cannabis product yet. This will bring another high-margin product to the cannabis portfolio. With the wonderful feedback and demand we've already seen in the initial product launch, we expect this to be another hit. Rounding out the product portfolio for the back half of this year and into next year, will be our cannabis-infused carbonated Jones candies and gummies, which will be coming soon. We have made tremendous progress with our Mary Jones brand. We are now laser-focused on ensuring that our supply chain supports the demand we generate. In coming quarters, we will look to refine our inventory allocation to the right dispensaries and strengthen our capacity to get Mary Jones in front of as many customers as possible. We already beat our forecasted cannabis product sales number for the entire third quarter by the end of July, and we expect this momentum to continue. Simply put, we are blown away by how positive the reception has been from the community. We have aspirations. become the number one beverage and edibles brand in the cannabis category, and we believe we are on the right path to meet this goal. Given the excellent reception, we have been hard at work negotiating and exploring partnerships with manufacturers, distributors, and NMSOs across multiple extension states. We are excited to announce that we've begun the process of launching Mary Jones in the state of Washington with an expected Q4 arrival. With Washington consumers and retailers already asking us when the product will be made available, we can't wait to launch our cannabis line in the backyard of Jones Soda headquarters. Furthermore, We also have ongoing negotiations with other states that are slated to be announced in the coming quarters. And we are not stopping in the U.S. We have active conversations happening in other countries. We anticipate Mary Jones to become an international brand. The journey getting to this point has certainly been challenging, but we've already made a splash with our entrants in the markets. And I want to thank the team for all the hard work they put in getting Jones to where it is today. We've gone from concept to products being sold in the marketplace in eight months. This is a tremendous accomplishment by the team. This is a promising new chapter for Jones Soda, and I can't wait to share more updates with you in the future.

So let me recap the call.

One, we had a tremendous quarter growing revenues by 35% versus the same quarter last year, marking our eighth consecutive quarter of revenue growth and posting the largest first half revenue number for the organization since 2009. Two, we continue to build on our core business with solid growth and our current customer base have done an excellent job adding new customers across all channels, making our customer base larger, more diversified, and we believe more sustainable. Three, we continue to innovate with our labels and have an exciting partnership in the market with Sub Pop Records. We will continue to leverage our labels as our point of difference and develop programs like the Fred Meyer 100-Year Anniversary. Four, we have worked hard to establish the right manufacturing, distribution, and sales partnerships to launch Mary Jones. We are excited to announce the launch of Mary Jones has exceeded our internal expectations, and we cannot wait to round out the portfolio and enter new states and countries. Five, Our operations team continues to do an excellent job managing supply chain, controlling costs, and serving our customers and their growth. And six, we continue to execute against our three-year turnaround plan. And I am very proud of the progress the team has made. Overall, we had a great second quarter here at Jones. Our sales pipeline is strong. and our existing partnerships continue to evolve into new and exciting opportunities. Our marketing team continues to bring innovation to the industry and new developments that connect with our core audience. While the broader economy remains volatile and unpredictable, I am confident that we have the right plan and team in place to ensure that Jones Soda remains operationally effective, with the necessary resources to tackle whatever challenge comes next. We remain committed to providing best in class products and services to our customers and partners. And I want to thank our team, our partners, our loyal consumers, and committed stakeholders for their continued support in Jones Soda. I truly believe the best is yet to come. With that, I'll turn the call over to Joe and our prepared Q&A session. Joe?

Thanks, Mark. Yeah, before wrapping up the call, Mark and I would like to address some of the questions we've received from investors via email over the past few weeks. We have selected what we believe to be the most important and relevant questions to answer. So to start with the first question, can you provide a brief update on the 7-11 program that was announced last quarter?

Yeah, sure. On the last call, we talked about a national Slurpee program that would be in stores during the back half of Q3 and Q4. And we developed a caramel apple flavor that was absolutely delicious. As we were getting ready to start building inventory for the launch, we were told the program needed to be moved to Q1 of 2023. This was right at the same time 7-Eleven Corporate was going through a reorganization and eliminated over 800 corporate positions. Our main contact is still with the company, and we look forward to executing the program next year. Yes, we are disappointed, but understand and support the decision.

All right, question number two. Given the recent termination of the merger between Jones Soda and Simply Better Brands, are there any discussions in the pipeline for future mergers?

Well, first I'd like to say that we believe strongly in our current platforms and are very happy with the progress we have made at Jones. But as we have discussed before, we will look to diversify our portfolio in high growth categories and channels. So we will remain optimistic and open to M&A prospects if it is the best interest of our shareholders.

Question three, with the successful launch of Mary Jones, can you provide a timeline on how quickly you expect to expand into new territories?

Boy, I talked a little bit about that earlier, but unfortunately, it's really hard to share a firm timeline. But I can say that we are moving as fast as we can. We believe we'll be able to be into another state by the end of 2022, as I mentioned, with Washington. And we are working on several other partnerships. Everyone we are talking to is excited about the brand and the portfolio. The main challenge is making sure we have the necessary manufacturing, sales, and distribution aligned to guarantee success. We intend to add more resources to the Mary Jones team to help accelerate on the expansion plans and we'll stay focused on our market expansion. Also, I'd like to mention that we are very excited about a partnership we are finalizing in California that will be a direct-to-consumer business. I believe this opens up the potential for 16 million more customers. And we think beverages will be a perfect fit for this business.

All right, question four.

With some of your peers raising revenue forecasts and seeing resilient demand in soda, what are you currently seeing in terms of demand within the craft soda market?

Yeah, I think I saw the same reports from the peers, and I would like to say that the craft soda market is a little bit different. We talked on our last call about concerns with demand as inflationary pressure continues and impacts discretionary income. As we just discussed, our revenue numbers were strong for the first half of the year. However, we are starting to get data from some of our retail partners showing demand is starting to slow down. That being said, with our incremental points of distribution and our marketing strategies continuing to effectively engage with our customers, we are optimistic for continued revenue growth in the back half of the year. We are watching the trends in data very closely.

All right. And last question.

Can you walk through how you tackle distribution expansion into national accounts? Do you use direct store delivery wholesalers?

Yeah, so we have a very robust direct store delivery network. We have over 120 distributors throughout the country. We are also adding a few more in pockets on the East Coast where we have gaps. We actually added three in the last 30 days. So when we talk to a national accountant, We can feel confident that we can handle their distribution needs and service of all their stores, regardless of geography. Some national accounts have their own distribution, like Walmart. Some use a hybrid of self-distribution and direct store delivery, like Kroger. And some use 100% direct store delivery. Consequently, we intend to work with our customers and support them in a way they feel most comfortable and is most advantageous to their business.

All right. Thanks, Mark. This concludes our Q&A section. We'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our third quarter 2022 results. Thanks again for joining us. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.