Jones Soda Co. (PNK:JSDA) Q4 2022 Earnings Call Transcript

Jones Soda Co. (PNK:JSDA) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good afternoon, everyone. Thank you for participating in today’s conference call to discuss Jones Soda’s Financial Results for the Fourth Quarter and Full Year ended December 31, 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 8-K. 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 replay through March 16, 2023, starting at 7 p.m. ET 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. Please go ahead sir.

Mark Murray: Thank you, operator, and thank you, everyone, for joining us today. Closing out the year we delivered our 10th consecutive quarter of year-over-year revenue growth. Looking at our results, our revenue during the fourth quarter of 2022 has grown 28% compared to the same quarter in 2021, and 29% for the year ended 2022 compared to 2021. To provide additional context, this follows a very strong 2021 when we grew revenue by 26% compared to 2020. Also in 2022, we both sustained and gained incremental market share with the addition of new outstanding partners as we continued to lean on our core bottled business to fuel our sales growth. Despite facing challenges posed by inflationary pressures, we stayed laser focused on expanding our points of distribution, optimizing cost management, and strategically allocating our trade and marketing dollars, which we believe have enabled us to capitalize on growth opportunities in today’s volatile market.

2023 marks the third year of our three year plan and turnaround strategy, and we entered the new year ahead of internal expectations. We’ve made enormous strides in our transformation efforts during the last two years. To name a few of the highlights we’ve accomplished since this implementation of our turnaround strategy in 2020 we’ve grown our annual net revenue by 80%. We expanded our gross margin by 650 basis points, doubled our direct-to-consumer e-commerce business, increased our points of distribution and all commodity volume by 100%, and leveraged our brand in flavor equity to build a new cannabis business called Mary Jones. Not only were we able to achieve these milestones ahead of plan, but we did so in the face of persistent macroeconomic headwinds associated with global pandemic, significant supply chain issues, and the highest inflation in decades.

I am extremely proud of our team for never making excuses and staying focused on executing our multiyear plan. During today’s call, I will deliver details on our sales performance, upcoming marketing initiatives, updates to our supply chain and operations, and exciting progress within our Canada segment. Lastly, we’ll conclude the call by addressing the questions submitted by shareholders in the past few weeks. Before I dive in, I’d like to hand the call over to Joe to discuss our strong financial results for the fourth quarter in more detail. Joe?

Joe Culp: Thank you, Mark and good afternoon everyone. Net revenue in the fourth quarter increased 28% to $3.7 million compared to $2.9 million in the fourth quarter of 2021. This increase was primarily due to the continued expansion of our primary bottled soda business in retail and alternative channels, coupled with the successful launch of our cannabis products in March of 2022 which generated approximately $353,000 in revenue during this year. Gross profit as a percentage of revenue was 24.8% compared to 26.5% in the prior year period. The decrease was primarily due to a onetime write off related to discontinued programs including the Mike Tyson and Costco Root Beer programs, and an increase in material costs being partially offset by price increases for our products.

Despite the year-over-year margin compression, we are proud of the team’s ability to manage our supply chain costs and exceed our internal expectations. Operating expenses in the fourth quarter were $2.6 million compared to $2.1 million in the same quarter a year ago. The increase was primarily due to costs associated with the development of cannabis infused beverages and related products, higher marketing expenditures aimed at promoting special promotions for our core bottled soda business, and the recruitment of strategic personnel to support the ongoing growth of our food service and fountain business. Net loss in the fourth quarter was $1.6 million, or negative $0.02 per share, compared to a net loss of $1.3 million or negative $0.02 per share, for the same quarter of 2021.

The increase in net loss was primarily due to the before mentioned operating and development expenses related to the build out of our cannabis business, as well as the hiring of additional personnel to drive the growth of our food service and fountain business. Adjusted EBITDA in the fourth quarter was negative $1.3 million compared to negative $1.2 million in the year ago quarter. Lastly, as a result of some changes with one specific counting treatment, we are not disclosing balance sheet figures until audit process has been complete and the 10-K is filed with the SEC, which we expect to happen in the coming weeks before the deadline of March 31, 2023. We do not anticipate this having an impact to the financial figures on our income statement that we disclose today.

When we filed the 10-K with the SEC, we anticipate reporting cash and cash equivalents of approximately $8 million as of December 31, 2022. I’ll now hand the call back over to Mark to dive deeper into the drivers behind these results and the overall progress we continue to make here at Jones. Mark, back to you.

Mark Murray: Thank you, Culp, for recapping another strong quarter of financial results to close out the year. Let’s begin by discussing our sales performance. Our core bottled business continues to be the backbone of our sales growth. Over the course of the year our core retail and alternative channels help deliver incremental revenue through the development of new partnerships and the optimization of product mix. Additionally, we continue to leverage effective and creative promotions to maximize the impact of our trade and marketing dollars. With a 28% year-over-year revenue growth for the quarter and 29% revenue growth for the full year, our sales team continues to deliver exceptional results. The key pillars of our success include protecting and building our core business, establishing more distribution points to grow our market share, using marketing and trade dollars efficiently and impactfully, and continually improving our product mix and providing best-in-class product innovation.

We view these pillars as our North Star in setting our goals for the year and believe these will continue driving our growth for us in 2023. We continue to expand our reach of new customers by working diligently with several incredible partners, such as Dollar Tree, Target, Meijer, Save Mart, Lucky, Hagen, World Market, Town Pump, Circle K and Giant Target. We believe that our ongoing efforts to continue growing our partnerships and increasing our new points of distribution will more than offset any softness we may experience in sales velocity, given the potential for broader economic uncertainty and higher levels of inflation affecting the consumers in 2023 and beyond. At Jones, we recognize the importance of innovation and new product developments that drive continued interest in our products.

As I’ve mentioned, over the course of several calls, our special release program continues to prove its value to the Jones Soda brand. The program gives us the opportunity to showcase our innovation multiple times a year, and I am pleased to say that this business has doubled in the last two years as our customers respond to the regular introduction of new, unique and great tasting products. We will continue to lead our category for innovation in 2023 with an exciting lineup, starting with our recently released Key Lime Pie flavor. As part of our three year turnaround strategy we decided to focus on improving the mix and development of our food service and fountain business. Although our food service business grew 36% during the full year, we believe that we haven’t even scratched the surface in terms of the results this channel is capable of producing and we are highly focused on expanding this initiative.

In fact, during the fourth quarter, we made a significant hire to lead the charge. We are pleased to announce that Victor Patron has joined the Jones Soda family as the previous head of a sales as a leading national beverage company with a strong track record for success. Victor will be dedicating 100% of his time to building our food service and fountain business. We believe that this investment is critical to our long-term success in this channel and I look forward to providing updates on our progress over the coming quarters. Lemoncocco continued to be successful with another quarter of steady customer adoption and growth in both Canada and the U.S. In Canada, we grew our Lemoncocco business by 85% during the full year. As mentioned in our update in Q3 we believe this product category has the potential to become a significant part of our overall portfolio.

Because of Lemoncocco’s consumption versatility, our brand team continues to develop sales and marketing strategies to introduce the product into cocktail mixer segment of the grocery store channel in both the U.S. and Canada. As part of this strategy we intend to continue to create unique drink recipes for restaurants and bars offering Lemoncocco beverages across Canada and the United States. We value the strong relationships we have dealt with our partners. We look forward to introducing new opportunities for continued growth through strategic and synergistic collaboration. Our sales team has once again delivered an exceptional quarter and year, and we remain committed to continuing to execute against our sales strategy. Now let’s jump into our marketing efforts.

Jones Soda is committed to creating engaging and dynamic marketing campaigns that efficiently connect with our customers as impactfully and as cost effectively as possible. I am delighted to share that our team has brought several previously outsourced key initiatives in house, resulting in significant cost savings and increased agility. This has allowed us to direct more resources towards strengthening our brand and promoting our products and thus continue to support the overall growth. Our marketing team’s exceptional efforts are reflected in our strong social media presence where we have successfully built awareness and introduced new consumers to our brand. Our Influencer program continues to play a critical role in our marketing mix and represents the diversity and flexibility of our fan communities.

We used our Influencers to share our product news about sugar cookies, leveraging custom creations and icing recipes that featured our soda as an ingredient. We look forward to continuing to push the envelope and innovate in the marketing space, all while staying true to our brand values and mission. At Jones Soda, we recognized the significance of innovation and new product developments to drive continued interest in our products from our loyal Jones community. The fourth quarter was a great example. We leveraged our special release program to launch our sugar cookie flavor and take advantage of the holiday season and once again brought back the special release of our Turkey and Gravy flavor, which received resoundingly positive results for the second year in a row.

By opening up the program early for pre-orders, we captured greater demand and delivered nearly seven times more volume than we did in 2021 coupled with our social media based Turkey and Gravy challenge, the special flavor led to a combined 5 million and add value through organic publications and broadcasts. In fact, a single Yahoo publication generated over 40 million impressions, worth more than $750,000 in ad value. This demonstrates our ability to make our own news and authentically drive awareness to expand our fan base without being dependent on paid media. Touching on some of the other marketing initiatives. We continue to see positive reactions from the College Photo Challenge contests we launched last quarter. We believe college and university students are an important growth audience and that they will continue to grow into a meaningful percentage of our consumer base in the long run.

Our College Cooler program not only put delicious Jones Soda in door rooms within a strategic growth audience for the brand, it generated invaluable insights as we continued our strategic expansion into colleges and universities as part of our food service strategic focus. Kicking off the third quarter of our special release program, we recently released our Key Lime Pie, or Key Lime 3.14 soda, packing one of America’s favorite desserts into a bottle. As always, with special release, we look for meaningful ways to engage our consumers by hiding little Easter eggs and games for our fans to discover. No spoilers here. You’ll have to find them for yourself. We believe this fun approach to marketing our products encourages interaction with the fans and reinforces the idea that they are part of a special club once they discover these hidden surprises.

This is just the beginning of an exciting lineup of new products and exclusive releases that we have in store for the new year. Our marketing team has consistently demonstrated their ability to think outside the box and explore innovative new ideas. This quarter was no exception as they delivered exceptional results that elevated the Jones Soda brand and expanded our community of loyal customers. We are excited to see what they have in store for us in the future and we are confident that their passion and expertise will continue to fuel our growth and success. Now shifting our focus to the operational piece. Similar to last quarter, we faced some margin compression due to rise in material costs. Despite this challenge, we ended the quarter in line with our internal expectations, which is a testament of our team’s exceptional ability to manage sourcing and procurement.

Against a backdrop of supply chain disruptions, a rise in the cost of glass, and a macroeconomic headwinds particularly associated with discretionary consumer products we are proud of our ability to effectively manage product costs throughout the quarter and drive the top line growth. While we continue to experience some modest relief in shipping and freight costs, we remain vigilant in managing our cost and supply chain, utilizing timely price adjustments across our products to mitigate cost increases. We will continue to prioritize excellence in all aspects of our operations and supply chain management, while maximizing our potential for profit and keeping a keen eye towards maintaining our high service standards and meeting the needs of our customers.

Now diving into the economist business. As we wrap up this transformational year for the organization, I’d like to reflect on why we strategically entered our cannabis base. Our decision was driven by several factors, including leveraging our brand equity and flavors in adjacent channels, diversifying our portfolio, entering high growth categories, participating in high margin products, and most importantly, believing we could win. Looking back on these critical reasons, all signs point to yes. We are more confident than ever in the decision we’ve made. The excitement from our Jones Soda community in the broader cannabis consumer has been fantastic. Through various forms of media, including podcasts, interviews and industry publications, Mary Jones has gained 322 media placements, 822 million impressions and an estimated add value of over $1.7 million displaying an amazing excitement for the entry into the cannabis space.

On the last earnings call, I shared our California business model to give you a sense of the timing lag between manufacturing and revenue recognition. While our Q4 revenue is much better than Q3, we expect to see further incremental improvements in the incoming quarters. For our initial product rollout, we had a soft launch with the limited SKUs in a single state, starting with our 10 milligram product and four key flavors root beer, berry lemonade, green apple and orange cream. We then followed up with a multi-serving 100 milligram can in the same four flavors, which hit the market Halloween weekend. We ended the year launching our 100 milligram syrups in these same four flavors as well. These special mixing syrups were released in select dispensaries a week before Christmas and the initial response has been strong.

These syrups are widely versatile and that they can be added to any soda, cocktail, dessert or recipe. As distribution expands, we anticipate more traction on this product, especially in consumption lounges and on premise events where mixed cannabis infused cocktails are demonstrating what the near future of social cannabis beverage experiences could look like. Looking at the cannabis market, which grew by 25% last year in the beverage category within cannabis which grew by 54% we are thrilled to be at the forefront of what is proven to be a high growth category in the highest momentum formats and segments. In California we are making significant progress proven our model and our brand power. In just a four month period, we achieved a remarkable 300 dispenser replacements, 200 of which were in the first 90 days.

Additionally, we recorded the fastest point of distribution growth for a new brand in California history in March to number one in the 10 and 100 milligram carbonated beverage segment. After six months in the California market and two more flavors set to launch in the coming months, and continued growth points of distribution and new products, we believe our cannabis segment is on track for significant revenue growth. While we are already the number one beverage brand in the 10 and 100 milligram carbonated beverage segment, we are only at 50% of our planned distribution capacity and expect to expand our reach to 450 plus stores by the end of Q4. We are committed to continued product innovation that expands our brand and flavor equities. We have finalized our hard candy formulas and expect to be in the market in the next 60 to 90 days.

We are thrilled about the opportunity to participate in the edible category, which currently represents 25% of the trade dollars in the cannabis market whereas beverages only account for 3% today. Additionally, our beverage portfolio is expanding with the addition of two new flavors; grape and cola launching in California. This will bring our number of base flavors to six, securing our leadership position across all the classic soda flavors popular among cannabis consumers. With our full portfolio expected to be active in California marketplace within the next 60 to 90 days, our expansion efforts are just getting started. We signed contracts with partners to manufacture, distribute and sell our entire portfolio in Washington, Nevada and Michigan, one of the strongest Jones Soda markets.

As detailed in our recent press release, Mary Jones will be launching a full portfolio of products, including both beverages and edibles, with low and high dose options in Washington dispensaries this summer. We’ve tailored our products to match the specific preference of this robust recreational marijuana market. As our home state, Washington has been at the forefront of legalization since 2012, making it a priority market for us to establish and grow the Mary Jones business. Washington is one of the country’s top ten cannabis markets, with annual sales of roughly 1.5 billion in 2021 and projected to reach 2.5 billion by 2025. We are confident that our carefully crafted products will resonate with consumers in this market and beyond. While we’re already seeing encouraging results in California, we believe our potential for growth in the new states is fast.

We’re on the cusp of expanding the footprint of Mary Jones into several more territories and we are optimistic that as we scale our cannabis segment our growth trajectory will continue to steepen. Our decision to pivot into this space and leverage our brand equity has proven to be the right choice and we believe it will be instrumental to the future growth of the organization. So let me recap the call. One, we delivered another strong quarter of financial and operational results. We had our 10th consecutive quarter of year-over-year revenue growth, which was up 28% in the quarter, 29% for the year. Two, our core bottled business continues to see exceptional growth as we leveraged partnerships, added new points of distribution across all channels, and leveraged our promotional dollars to drive consumer demand.

Three, our marketing team continues to find new ways to engage with our community while delivering out-sized return on advertising spend. Four, our operations team continues to do an excellent job managing costs and ensuring we are serving and meeting the demands of our customers. Five, our cannabis business is just getting started and early indications are very exciting. We will continue to introduce new products in California and gain share in this very important market and more importantly, they focus opening up new market to expand the Jones Soda brand. And then six, our three year plan and turnaround strategy is working and I’m very grateful for the commitment and execution from a very talented and dedicated Jones’ team. We are grateful to our Jones Soda community and stakeholders for their unwavering support in our pursuit to establish ourselves as a prominent brand in the craft soda and cannabis industry.

With a talented team and a solid strategy, we are confident in our ability to deliver results and unlock the full potential of Jones Soda. As we move into the new year, we are determined to maintain our momentum and carry it through 2023 and beyond. Our focus is on long-term success, and we remain committed to executing for the benefit of our shareholders. With that, I’ll turn the call over to Joe for prepared Q&A. Joe?

A – Joe Culp: Yes. 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 last few weeks. We have selected what we believe to be the most important and relevant questions to answer. So starting with the first question. Can you please provide some more background on the new board appointment of Greg Reichman?

Q&A Session

Mark Murray: Sure. Greg has been a shareholder of Jones for over ten years. He has been very engaged with the organization in our vision and progress. He has an incredible track record and skill set that we believe will be very beneficial to the organization. He has built and sold several companies and will bring tremendous business acumen, financial expertise, and a strong M&A skill set to the team. We welcome Greg to the board.

Joe Culp: All right, question number two as we enter the third and final year of the turnaround strategy, can you expand on longer term goals for Jones Soda? Are you thinking of strategic evaluations for a potential sale?

Mark Murray: In terms of a strategic sale of the company, the board will consider all opportunities that are in the best interest of the shareholders. It is the board’s obligation to ensure the company is on the path that maximizes shareholder value and we are committed to acting in the best interests of our shareholders. Our priority is to remain focused on our core objectives and we believe that we have a strong plan in place to continue capturing market share and expanding our presence across all channels.

Joe Culp: All right, question three. What are your capital market priorities moving into 2023 and beyond? Do you envision needing to raise additional capital to fund all various expansion initiatives you’ve spoken to? Have you thought about making an effort to uplift your U.S. listing to NASDAQ?

Mark Murray: So we believe we are in a good position with cash and do not anticipate needing to raise or borrow money to fund our expansion plans. As far as NASDAQ is concerned, we absolutely have considered it. We had our legal team look at a path forward and address any issues relative to stock price, market cap and being in the cannabis business. So more to come on this topic.

Joe Culp: Question four. Can you provide an update on the pipeline for new partnerships for Jones Soda, particularly as it relates to the fountain service business?

Mark Murray: Yes, I mean, as we mentioned on the call, we experienced strong growth in our food service and fountain business during the year, but we believe there is still a significant amount of green space for this business to grow. The pipeline for the new opportunities in this area is very strong and we are excited to see the benefits and fuel that Victor Patron will add to this initiative as we continue to build this pipeline. This is a potential growth channel for Jones Soda with a very attractive gross margin profile, and we anticipate that it will grow to a larger percentage of our overall revenue mix in the future.

Joe Culp: All right, question five. Can you give more details on the expected timeline for the expansion of Mary Jones into Nevada and Michigan?

Mark Murray: Well, I cannot provide an exact timing for our expansion into Nevada and Michigan, I can say that we are diligently working to see these expansions come to fruition. All of the positive feedback that we have received about our Mary Jones brand continues to be a tailwind as we work towards expanding Mary Jones into new territories. We are especially looking forward to entering the market in Michigan, as it is already one of the strongest markets for the Jones Soda brand. We have a great partner that is ready to go as soon as we work through the state regulatory obligations and we are excited as we know, we have a full portfolio that will resonate with our consumers and provide us the mix and margins that we anticipate.

Joe Culp: All right, last question. Now that Jones Soda is fully European and UK regulated, how are you planning on tackling the growth opportunities in these territories such as England, France and Belgium?

Mark Murray: Firstly, I’d like to express my gratitude towards our partner, American Fizz, for supporting and capitalizing on this organizational priority. The company’s CEO and co-founder, Brad Armitage, has a proven track record for establishing, developing and growing brands that resonate with European consumers looking to connect with American culture. We are confident that Brad and his team at American Fizz will duplicate their previous successes with the Jones Soda brand. This work is actively underway and we believe the interest and engagement received so far from our downstream customers in these mentioned markets is a strong indicator of initial opportunity and further success. Through American Fizz’s deep knowledge of unique differences in each European region and country and our strong ability to sincerely and authentically connect with consumers we believe that galvanizing our efforts through them will maximize these opportunities for Jones Soda in both the short and the long-term.

Further to that, we have allocated additional internal resources towards our international group initiatives and we believe that there is an additional opportunity in Asia and Central and Southern American markets as well. We will report back on progress in these markets on the future calls.

Joe Culp: 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 first quarter of 2023 results. Thanks again for joining us.

Operator: Ladies and gentlemen, that concludes today’s conference. Thank you for joining us. You may now disconnect your lines.