Jones Soda Co

Good afternoon, everyone. Thank you for participating in today's conference call to discuss Jones-Sota's financial results for the third quarter, ended September 30th, 2024. 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, anticipate, estimates, expects, believes, intends, plans, predicts, will, may, continue, projects or targets, and negatives of those 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. A telco replay will be available after the call through November 27, 2024, and a webcast replay of today's webinar will also be available for one year 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 Jones Sotas, Chairman of the Board and Interim CEO and CFO Paul Norman.

Thank you, Rob, and thank you everyone for joining. Overall, the third quarter did not meet our expectations. We had unexpected softness in sales volume, a one-time growth profit impact and higher than planned operating expense, all of which culminated in the financial results you're seeing today. I, along with the rest of the board, are disappointed in these results and have taken corrective actions to improve the financial performance of Jones. Before we dive into those results for the quarter and the go-forward strategy, I wanted to address the most recent management changes. As you've all seen by now, our former CEO is no longer with the company. In the meantime, I have stepped in as interim president and CEO. By their background, I've served as the director on the board since 2019 and as chairman on the board since 2022. I bring over three decades of experience in creating brand and share owner value for leading global consumer product companies. In fact, I was president of Kellogg's North America and most recently I served as interim CEO and board member for Blue Triton Brands, the largest branded water company in North America. I have ample experience in the food and beverage space. I've been in this seat before and I'm highly focused on driving both revenue growth and value through operational efficiencies. You may also have noted that our interim CFO Joe Colt departed the company as well. Joe had been planning his transition for some time and has been a valuable financial leader in the Jones organization. On behalf of the entire board, we are thankful for Joe's many years of service and helping us navigate the initial weeks of this management transition. While we search for Joe's replacement, I will also be serving as your interim CFO. We've already initiated an executive search for both roles. We need a CEO and a CFO that are well equipped to scale our operations, accelerate growth and deliver sustainable share and value. In the meantime, we have a strong seasoned team at Jones that is fully aligned with our missions while we execute our search. I don't have further updates on the executive search at this time, but know that I'm highly committed to leading from the CEO seat until we find a permanent replacement. With that said, let's dive into our third quarter results starting with the top line. Net revenue in the third quarter was $4.2 million compared to $4.5 million in the third quarter of 2023. This decrease was primarily attributable to a continued disruption in our Canadian distributor transition from earlier in the year, a loss of a discount retailer in the US and our ramp up of HD9 distributors taking longer than we had expected. We're highly confident in our ability to fix all three of these issues as we're in process with adjusting our sales model in Canada right now. We have added more HD9 distributors here in the fourth quarter and we're working hard to secure new distribution channels that we believe will position us strongly for 2025 and beyond. In fact, as we move through the fourth quarter, we have more than 20 more distributors for HD9 than we did in the front half of the year, setting us up for a promising start to 2025. We did see significant growth in our Mary Jones business, generating approximately $800,000 in revenue in the third quarter of 2024, which represents a 263% increase year over year. This was primarily driven by a re-acceleration of Mary Jones sales in the regulated California dispensary market as well as having HD9 products that weren't in the market the prior year quarter. Gross margin decreased to .2% compared to .9% in the prior year. We're now at a loss of $2.5 million. This decline was primarily driven by having to make an adjustment to the trade spend associated with the Canadian distributor transition, along with an impact from unfavorable product links. We still feel very confident in our ability to continue to expand our gross margin in the future. Total operating expenses in the third quarter of 2024 were $3.5 million compared to $2.4 million in the year ago period. This is the increase, which primarily as a result of increased spending on product innovation and the associated marketing initiatives to support the company's product expansion. Overall, we are over budget on our expenditures for the year to date, and we don't view this as acceptable. While we've been working on significant levels of product development innovation, I will also be hyper-focused on returning Jones to a state of operational excellence and ensuring that our future investments in innovation and development are within budget and deliver acceptable ROI. As we look to the fourth quarter, we expect to have a continued level of expenses associated with the management transition and don't expect to report immediate improvements during the quarter. However, we are diligently working on improving the overall cost structure and reestablishing an appropriate foundation to generate profitable growth as we move into 2025. Net loss in the third quarter was $2.6 million or a negative two cents per share compared to a net loss of $1 million or one cent per share for the same quarter in 2023. Adjusted EBITDA in the third quarter was a negative $2.2 million compared to a negative $0.8 million in the year-ago quarter. The decline in bottom line performance was primarily a result of the aforementioned decrease in revenue and increase in operating expenses. Lastly, I wanted to touch on our balance sheet. Our cash balance at the end of September increased to $2.7 million. In August, we raised $3.7 million of net proceeds through a private placement to further support our growth initiatives and strengthen our balance sheet. We also have access to a $2 million revolving credit facility for working capital needs. So we are comfortable with our liquidity position today but are also working to quickly correct our cost management issues and alleviate any concerns our stakeholders may have down the road. I also want to touch on our increased inventory position. We strategically built our inventory out to support the upcoming launch of several new product lines including a significant amount of HD9 beverage. While it may be heavier than we would like at the moment, we are confident in our ability to sell through this inventory and return to more normalized levels as new distributors, as I said, have now been onboarded. As I said on the onset of this call, our third quarter results did not meet expectations. However, with more rigor and focus on revenue growth, innovation strategy, cost management, operational efficiency, and executing fundamentals with excellence, we are confident that we will be able to achieve considerable growth in 2025. So let's talk a bit more about that growth strategy. Our goal is still to transform this company from a craft soda company into a fully-fledged beverage company. We have continued to move forward driving innovation to accelerate growth and meet the evolving demand across the consumer beverage industry. While we have a robust innovation pipeline, we actually have more in it than we can execute in the near term. As we have shifted to a more focused approach over the past couple of weeks, I have worked with the team to clarify product roles within our portfolio, prioritize our biggest bets, and re-phase or eliminate other initiatives. As we look to 2025 and beyond, we plan on focusing our business into three key areas and are prioritizing our resources accordingly. The first area will be called soda, which includes 12-ounce glass bottles and cans, along with our push into formats that better suit consumer needs, formats that, until recently, we were never really in. I'm talking about mini cans as well as a foreskew range of zero sugar versions of our best man flavors. In doing so, we believe we will bring new consumers to the heart of the Jones brand. The second area will be modern soda, which includes our recent launch of Pop Jones in five flavors, plus a test of Fiesta Jones in the Sea Store Channel. This subcategory of soda is literally exploding with more dedicated shelf space in store and accelerating consumer demand. Pop Jones is a big bet for Jones, and we will be shifting resources towards this initiative to accelerate distribution growth. More on Pop Jones in a second. The third area will be adult beverage. This area contains our regulated Mary Jones business in the US and Canada, as well as our other big bet, which is HD9 beverages. Also in this area, we will continue to test under a license agreement Spike Jones in the West and with a rollout to the Midwest region of the US starting in 2025. Other initiatives we've had in the pipeline, like mixers, powders, waters, have been pushed out or canceled as we look to focus on what we believe will be the biggest difference makers for Jones. It brings me back to Pop Jones. We're incredibly excited about this initiative, as the modern soda category has experienced rapid growth over the past few years, growth which we don't see slowing down. As a leader in craft soda, we absolutely have a right to be a leader in this new category as well. We believe we are doing just that with Pop Jones, which is an all natural, pre-biotic beverage available in five Jones original flavors with just 30 calories per 12 ounce can and better taste than any comparable product. We deliver that pop of flavor through a clean combination of real fruit juice, pure cane sugar, and natural stevia leaf extract. In fact, Pop Jones contains only four grams of sugar and only two grams of added sugar, which is half the added sugar of other modern soda brands, and one twentieth of a standard soda. In addition, Pop Jones provides fiber and immune support with a blend of apple cider vinegar, agave inulin, and 20% of the recommended daily intake of zinc. Our debut of Pop Jones has been well received by retailers, including Hybe and Albertans, who will be placing their first orders here in Q4 and only Q1. Conversations with other retailers are ongoing and going well. We expect to hear more from them in the near future. We're excited to provide more updates on this initiative as we move forward. Overall, I remain incredibly optimistic about the future of Jones. We are hard at work to return the company to operational excellence while continuing to drive our lifted product launches forward to capture profitable growth in both existing and new channels and new markets. Jones has an incredible brand equity. We remain committed to unlocking the full potential of Jones going forward. We intend to stay focused on our mission of becoming a high-growth beverage company, but we plan to do so with an operational rigor and appropriate cost controls to keep the company healthy and ultimately deliver significantly increased share owner value. Lastly, I'd like to recognize and thank everyone at the company for their unwavering commitment to Jones and to each other every day of the week. We have a great team and I'm excited to work with them to see what the future brings. This concludes my prepared remarks for today's call. We will not be hosting a live Q&A session after this call. However, I would welcome further questions and will be happy to take -on-one calls with investors later this week. Please direct any inquiries to JSDA at -grp.com and I'd be happy to address all those questions as I said accordingly. We look forward to speaking with you again when we report our fourth quarter and full year results in March. Thank you again. Have a great day. Rob, back to you.

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