Jones Soda Co

Good afternoon, everyone. Thank you for participating in today's conference call to discuss Jones Soda's financial results for the third quarter ended September 30th, 2022. This call is being recorded. 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, 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 replay through November 10th, 2022, starting at 730 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.

Okay, thank you, Jenny, and thank you, everyone, for joining us today. We wrapped up another solid quarter here at Jones Soda Company and reported our ninth consecutive quarter of year-over-year revenue growth. Looking at our results year to date, our top line has grown 26% when compared to the same period last year. To provide additional context on what that means to the organization, year to date, at the end of the third quarter, we posted 5% more revenue than we did for the entire year of 2021. That said, all our sales for the upcoming quarter will reflect incremental year-over-year volume increases for the company, which we are proud to be able to share with you today. While we have faced inflationary headwinds, our focus on expanding our points of distribution managing costs, and strategically spending our trade and marketing dollars has allowed the company to capture growth in today's volatile market. Although we have experienced year-over-year margin compression as a result of higher raw material costs, we are not only in line with, but we are performing slightly better than our internal expectations. I am very proud of our team's achievements in the third quarter and their dedication to helping Jones Soda become a leader in the craft soda and cannabis channels. The entire team has put in an exceptional effort to manage costs, execute on our marketing strategies, and continue delivering superior customer service, all in the face of a very difficult macro environment. I firmly believe we are set up nicely to continue delivering great results for the rest of the year and into 2023. On the call today, I'll provide further details on our sales performance, new and upcoming marketing initiatives, core supply chain and operation updates, and a commentary on our cannabis segment, Mary Jones. We'll 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 third quarter increased 5% to $4.8 million, compared to $4.6 million in the third quarter of 2021. This increase was primarily due to the sustained growth of our core bottled soda business in our retail and alternative channels, along with generating approximately $114,000 in revenue from the company's cannabis products that launched in the current year. I'll let Mark explain the revenue-generating dynamics of this segment later during the call. Gross profit as a percentage of revenue was 26.9% compared to 32% in the prior year period. The decrease was due to a combination of sales mix and inflationary pressures, slightly offset by decreased freight costs and previously implemented price increases. While we did experience margin compression compared to Q3 of last year, as Mark mentioned, we slightly beat our internal expectations due to the overall management of our supply chain costs. Operating expenses in the third quarter were $3 million compared to $1.4 million in the same year-ago quarter. The increase was primarily due to $800,000 of planned spending to support our strategic entry into the cannabis sector, along with an increase in marketing dollars being spent to drive special promotions for our core bottled soda business. Net loss in the third quarter was $1.7 million, or negative two cents per share, compared to a net loss of $59,000 or zero cents per share for the same quarter of 2021. The increase in net loss was primarily driven by the expenses related to our cannabis launch and decrease in gross profit. Adjusted EBITDA in the third quarter was negative $1 million compared to positive $72,000 in the year-ago quarter. Now moving to the balance sheet. As of September 30th, 2022, cash and cash equivalents increased 76% to $8.2 million compared to $4.7 million on December 31st, 2021. Working capital was $12.9 million at September 30th, 2022 compared to $6 million on December 31st, 2021. I'll now hand the call back over to Mark for his remarks.

Thank you, Joe, for sharing our third quarter financial results.

Let me start by discussing our sales performance. Our core bottled business continues to be the backbone of our sales growth, where we added additional points of distribution and continued our expansion into new channels. Our core retail and alternative channels remain strong and drive incremental revenue through new partnerships, the optimization of product mix, and finding the right promotional activity to maximize the impact of our trade and marketing dollars. We continue to strengthen our key partnerships with customers like Kroger and Dollar Tree, and I am grateful for their continued support of our products. We look to continue our work in deepening our relationships with them and maintaining healthy long-term partnerships. Last quarter, we announced a new partnership with Target, where we introduced four items into Target cafes in approximately 1,000 stores across the nation. I am proud to report that this new business has been positively received and Target has increased their sales forecast based on the demand generated over the quarter. Going into the end of the year, we expect to receive additional reorders and we will be working to develop marketing programs with Target heading into 2023 and beyond. In our regional key account sales and merchandising programs, last quarter we announced we would be partnering with Fred Meyer Kroger Banner in the Pacific Northwest, Lucky Stores in the Southeast, and Dublin DeFrancisco, our sponsored IndyCar driver, to schedule pre-race appearances at local stores during both the Portland Grand Prix and the Firestone Grand Prix. I am happy to report that these promotions were well received by both the local communities and IndyCar racing fans alike. By utilizing our existing relationships, we were able to efficiently leverage our portfolio of marketing assets to maximize the return of additional rack placements in retail stores. We'll continue to utilize this expanded shelf space to drive incremental volumes with our special release holiday flavors, turkey gravy and sugar cookie. I'll expand more on those items in the latter part of this call. Our partnership with IndyCar has connected us with a broader racing community and has given us the opportunity to use our marketing dollars for efficient, targeted promotions with our regional partners. Lemon Coco continues to find greater success We experienced another quarter of steady adoption and incremental growth from our customers in both Canada and the U.S., showing signs that this segment has the potential to become a meaningful part of our overall portfolio. Building off the success we have had in Canada in the food service channel, the brand team is working to develop sales and marketing strategies that will allow us to enter the mixer segment in the groceries channel in U.S. and Canada. We will also continue to develop Lemon Cocoa's signature cocktail and mocktail drink recipes that can be featured on menus at restaurants and bars that offer Lemon Cocoa to their customers. This has proven to be a key component of our growth in Canada. Heading into 2023, we intend to continue diversifying our mix through the growth of Fountain, frozen slush, bottles, and new packages currently being evaluated for the food service channel. While we have continued to deliver consistent sales growth quarter over quarter, we are launching new efforts intended to supercharge this segment and continue to shift our mix towards higher margin products. In the last month, we attended the National Convenience Store Show in Las Vegas, in a conference in New England where we gained over 250 leads from leading convenience stores and food service groups across the country. Furthermore, we attended an international expo in Florida that will help us expand our international presence with both our bottled Jones soda and fountain products into new markets. While these efforts are still early in their sales cycle, we're confident in our sales team to begin capturing the full potential of these products and expanded channels in new markets. As a reminder, this segment is an integral part of our transformation strategy and is a key driver behind improving our gross margins in the future. While we are dedicated to our core bottled business, we believe this is an important step in ensuring long-term profitability of Jones Soda. We are grateful for our longstanding relationships with existing partners, and we look forward to continued collaboration to find new ways to put our brand in front of consumers. Our sales team delivered another solid quarter, and we will continue executing on our growth strategy to expand our opportunities to their fullest capacity.

Let's move on to the marketing strategy.

One of our key highlights was the launch of a college photo challenge contest where we gave college and university students the chance to win Jones branded mini fridges, perfect for the dorms with the stock of our special release holiday flavors. The contest is a great representation of our brand personality where we put the spotlight on our community through a call for action to submit photos and videos that highlight the creativity of our fans. We're getting a great response, and it's exciting to see this meaningful engagement we are experiencing with this critical growth segment of younger fans. As evidenced by our user-submitted photos and other user-generated content, we have always relied on our community to help define our identity. This is another great initiative that leans on our ability to emotionally connect with our audience to produce additional creative input. Our Sub Pop record partnership has generated a lot of interest from both our fan base and the music community alike. As a reminder, by scanning our soda bottles, our customers can see and hear exclusive clips from artists on the Sub Pop and Hardly Art record labels. This unique blend of technology and art has been a standout. It has inspired us to continue to find new ways of connecting the Jones brand with the new fan communities. We also hosted Sub Pop artist Zuki Waterhouse, where she used our Jones branded RV on a cross-country summer tour Zookie has a large, dedicated fan base with over 2.5 million followers on Instagram. Our boldly branded RV served as a cultural billboard traveling with Zookie and her band across 35 cities and 21,000 miles and playing for over 100,000 concert-going fans. Each stop, the bus made became the backdrop for fan photos with the band often postings through the social channels from inside. We're grateful for our partnership with Sub Pop and all the participating artists in helping us bring our like-minded audiences together. And I look forward to continued collaborations with them in the future. Looking forward, we are excited about the return of our limited special holiday release flavor, turkey and gravy. Given the huge reception we got last year, we expect to generate continued demand for the flavor throughout this fall. In fact, with the seasonal flavors already available on many more U.S. grocery shelves this year, early indicators tell us that we are already exceeding internal expectations, making us even more excited for both current and new fans to be able to try this truly unique flavor. Alongside the launch, We also announced a social media challenge where we invited fans to post videos of their friends and family chugging the soda for a chance to win a limited edition Turkey and Gravy Challenge t-shirt. It's been fun to see our fans who have already participated in this one-of-a-kind experience. To complement the return of Turkey and Gravy, we have launched another unique holiday flavor with Jones Sugar Cookie Soda. a delicious new seasonal innovation that will raise your holiday party menus to a whole new level. This special release is part of our continued efforts to leverage our ability to create exclusive, great tasting flavors to drive our strategic growth plan. The success of the special release program has been marked by increasing shoppers' basket sizes and driving incremental sales of raising our brand awareness, expanding our customer base. This year's flavors are no different, reinforcing our role as a leader in innovation in the craft soda community. Our marketing team is also working on a number of internal directives for 2023 that are intended to shift a large percentage of our marketing dollars toward proactive campaigns in the field versus production and back of the house costs. While the shift will remain seamless from the outside, our marketing dollars will be used more efficiently, allowing us to allocate more resources to marketing efforts through activation rather than efforts through production. This shift is expected to flow through our financial starting in 2023 and will provide more updates as they come. Our marketing team continues to position Jones Soda to experiment with new ideas and push boundaries. As always, they've done a great job this quarter taking our brand to new heights and expanding our community.

Now let's look into the operational piece.

Much like last quarter, we experienced some incremental compression to our margins because of rising material costs. Given this, we still perform better than our internal expectation, and that's a testament to our team managing costs and continuing to deliver outstanding customer service. Though we saw some positive relief on shipping and freight costs, we are going to continue carefully managing our costs, supply chains to maintain our margins and continue our excellence in customer service. We achieved a 98.5% fill rate and our operations team is dedicated to consistently delivering these results regardless of the broader macro environment.

Okay, let's move on to the fastest growing segment, Mary Jones.

After a successful launch last quarter, we continue to receive positive feedback from both our Jones community and the broader cannabis customer. Our customers have been raving about our ability to bring the same unique Jones flavors into the cannabis space, where multiple influencers have named our 10 milligram soda as the best tasting cannabis beverage in the market. Through various forms of media, including podcasts, interviews, and industry publications, In just a few months, Mary Jones gained over 600 million impressions, which is an estimated $1.3 million in media value. To reinforce brand loyalty within the cannabis space and to show our appreciation to the cannabis community for their continued support, we are launching a limited paper print publication which we are calling Mary Zine. Available exclusively at partner dispensaries where Mary Jones is sold, this cannabis compendium features fun activities, lifestyle content, and photography, all submitted by Mary Jones fans, and importantly, the cannabis trade. One ongoing feature, A-BUDD, spotlights many of the wonderful people dedicated themselves to the cannabis industry by profiling their artistic pursuits outside of work, celebrating them as unique individuals, and promoting their art. Mary's zine is produced in a DYI aesthetics of classic zines, making it both perfectly on brand and efficient to publish. This gorgeous publication demonstrates the love and respect we bring to the cannabis community and our ongoing thanks for the warm welcome, which has helped Mary Jones become an overnight success story. Through our limited launch, we can proudly say that our products are now distributed through over 200 dispensaries throughout California. We'd like to take a moment to thank our manufacturing and distribution partners, Kinley Beverage Company and Kiva Sales and Service for helping us to make this all possible. Given how much excitement we've expressed with Mary Jones in the business exceeding our expectations, I'm sure many are wondering about the modest revenue we reported for this segment in Q3. Let me take a moment to walk you through our California cannabis-based business model. Through our manufacturing partnerships, Kinley secures the exclusive ingredients they need to develop and manufacture our products, while Kiva Sales and Service distributes our products to retailers across California. As a non-licensed holder, Jones is not able to hold title to the products. We are paid through licensing revenue, which is reconciled after retail sales. Consequently, there's a lag of time between the point of manufacturing when revenue can be recognized. At the end of the quarter, we were able to post approximately $114,000 of revenue through the sale of our first 56,000 produced bottles. With this single product line, we are already beating the pace of the incumbent category leaders. As we release new products and flavors, we intend to continue to capitalize on the momentum we've gained and expect our revenue figures to grow in the coming quarters. This will play a critical role in our success in 2023. To this front, we recently launched our new 100-milligram cannabis-infused sodas, which are already out in the marketplace. With the same top Jones flavors that our community can't get enough of, root beer, berry lemonade, green apple, and orange cream, 100 milligram resealable multi-serve cans are designed for the mature cannabis consumer to pace their consumption as they wish and to share with friends. This is a valuable product. that brings higher margins than our 100 milligram product. And we are thrilled to see meaningful demand coming from both the cannabis community and the long-standing Jones Soda community. As we look towards the end of the year, we also have a four-ounce syrup product that is on track for a Q4 release. These syrups will be the same four flavors and will allow us to capture a margin comparable to the 100 milligrams. Syrups attract two consumer segments within cannabis, those seeking versatility as a mix-in or topper for desserts, cocktails, and mocktails, and those seeking a higher-dose product for direct consumption. The Jones Flavor Development Team has formulated an incredible product that is optimized for both use cases, and we are excited to track the consumer response over the holidays. Heading into next year, we look to round out the portfolio with our highly anticipated edibles on track for Q1 23 launch. Finally, we are excited to announce that we have engaged in partnerships to bring Mary Jones to two new states, Washington and Michigan. The work we have accomplished in California has both piloted the products and modeled the way for a successful expansion which I believe will enable us to bring a full portfolio of products into Washington and Michigan when we launch. We look forward to scaling these markets quickly, keep us on our high growth trajectory 2023 and beyond.

So let me recap the call. One, we had another great quarter at Jones.

We marked our ninth consecutive quarter of year-over-year revenue growth. We are up 26% year-to-date and have already surpassed last year's revenue numbers. Two, our core bottled business continues to steadily grow across our retail and alternative channels through the expansion of our existing relationships in the space, the addition of new distribution points, and our targeted promotional activities stimulating consumer demand. Three, our marketing team continues to find new ways of driving our brand forward and engaging with our community. We are becoming more efficient with our spend while still developing the same high-quality content that our brand was founded upon. Four, our operations team has done a great job managing our costs, keeping margins above internal expectations. consistently maintaining our reputation of providing great customer service regardless of market conditions. And five, and finally, we believe our cannabis segment is on a high growth trajectory that we look to capitalize on expanding our product portfolio and developing new partnerships to tackle new markets and territories. Our team is has done a great job executing in a relatively volatile economic environment. And we have hit some major milestones against our transformation strategy. I'd like to thank our Jones Soda community and the stakeholders for their continued support of our efforts to become a leading craft soda and cannabis brand. I believe we have the team and the strategy in place to drive results and maximize the full potential of Jones Soda. I look forward to finishing the year strong and heading into 2023 with momentum pushing us forward. We're well positioned for long-term success, and we will execute for our shareholders. With that, I'll turn the call over to Joe for prepared Q&A. Joe?

Yeah, thanks, Mark. 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 starting with the first question, are there any countries outside of the U.S. and Canada that you see as having good potential for Jones Soda to expand into?

Yeah, I mean, absolutely. As a matter of fact, we are currently partnered with a few select distributors that have asked us to present the Jones brand and markets that we are currently developing. We are seeing success in Ireland, the UK, and a growing number of European countries where, in partnership with our distributor, we recently co-developed market-specific European compliance formulas and packagings. This investment will allow for a more aggressive push into new territories where we believe there is opportunity for incremental growth. As a result, we have made a strategic decision to allocate more internal resources towards this initiative for 2023. All right.

Thanks. Question number two, with the relative success of IndyCar, Have you identified any other alternative sports that you would like to develop partnerships in?

Well, we are constantly evaluating our success with existing partnerships as well as entertaining other potential partnerships. We have a limited budget, and we need to make sure all our marketing dollars are working hard for the brand and the business. At this time, we do not have any specific alternative sports or athletes in the plan.

Okay, question three. Can you explain what you've done differently this time with Lemon Coco to achieve the early success that you have?

Well, we really believe in Lemon Coco as a brand. After falling victim to the same supply chain challenges most of the industry faced over the last two years, we went through a period of time in late 2021, early 2022, when we couldn't fill all orders. During this time, we received encouraging feedback from consumers who made it clear that they missed a product in the marketplace, which reinforced the importance of the brand within our portfolio. After fighting through our supply chain challenges, we aggressively rebuilt the core business and quickly regained customers as we refilled the pipeline. The addition of Natel as our master sales and distributor partner in Canada has helped us regain our momentum with their assuming ownership of the brand across all channels and growing the business. In the U.S., we have been able to work with our sales agent, Good Now Foods, and our key distributors to regain placements across all key accounts in the western regions. Additionally, we've been working to secure new placements with select distributors and accounts in the Midwest.

All right. Question four. Can you provide an update on your partnership with 7-Eleven?

Sure, sure. Our relationship with 7-Eleven remains strong. In addition to a national listing with five of our top flavors across all Canadian stores, we also support this business with a private label program that continues to be a strategic priority for their organization. In the U.S., we are currently finalizing the terms of a national Slurpee program, that is targeted to hit the market in the mid 2023.

All right. Last question here. Are you planning to take Mary Jones abroad into other countries where cannabis has some form of legalization like Canada?

We would agree that Canada seems like a good fit for Mary Jones. Not only is cannabis legal, but the Jones brand started in Canada where we maintain a very strong business and community of fans. We are currently having several conversations to find the right partner in Canada. As for the other countries, simply put, if cannabis is legal for adult use, we want to be there. In conclusion, I'm very excited about the possibilities in 2023, the trajectory of the organization and a path to profitability.

All right. Yeah, thanks, Mark. This concludes our Q&A session. 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 results for 2022.

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.