Jones Soda Co. (NASDAQ:JSDA)
Q2 2016 Earnings Conference Call
August 4, 2016 16:30 ET
Max Schroedl - VP, Finance
Jennifer Cue - CEO
Eric Chastain - COO
Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Jones Soda Company Second Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone this call is being recorded.
I will now turn the call over to Max Schroedl, VP of Finance. Please go ahead, sir.
Thank you and good afternoon, ladies and gentlemen. 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 words 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 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 current reports on Form 8-K. Listeners are cautioned not to place undue reliance upon these forward-looking statements that speak only as to the date of this earnings call. Except as required by law, we do not assume any obligations to update the forward-looking statements we make today.
I will now turn the call over to Jennifer Cue, Chief Executive Officer of Jones Soda.
Good afternoon, everyone, and thank you for joining us today. Today, we are pleased to report positive results for the second quarter of 2016. Our case volume was up 7%, with revenues up 1%, compared to the second quarter last year, and we realized a very small net loss from operations of only $6,000 in this quarter. On a year-to-date basis, case volume is up 35% with revenue up 20%, resulting in positive income from operations of $650,000 for the first six months of 2016. We started 2016 off with a brand new mission statement and a four-point strategic plan, and our company is focused on the execution of this plan.
First, our core brand. We're focused on building our core brand, Jones Soda, in the increasingly popular craft or premium soda segment of the beverage industry. We continue to build our brand in glass bottles, 12-ounce cans, and have added our fountain business, which continues to garner more and more attention and traction, as we develop new retail partners. Second, strategic relationships. We are taking advantage of our 20-year history of beverage manufacturing and innovation to develop strategic relationships and private label opportunities with partners such as 7-11. We continue to receive interest from various other retailers who are excited about who Jones Soda is, and what we have to offer. Third, Lemoncocco. We announced in early 2016 the launch of a new brand: Lemoncocco, which allows our company to participate in the all-natural and noncarbonated segment of the beverage industry, with a brand that is unique in its form, function and Italian heritage and completely distinct from the Jones Soda brand. We're looking to grow this new product and brand significantly. Fourth, innovation. We are constantly looking for opportunities to innovate within and outside of the Jones brand, and evaluate them against our criteria for growth and profitability.
I will now turn the call over to Max Schroedl, who will outline the details of the numbers. And then I will return after to add a little more insight on our results.
Thanks, Jennifer. For the comparative quarters, revenue in the second quarter of 2016 was up 1%, at $4.3 million, compared to $4.3 million in Q2 2015. Revenue growth was primarily due to 7% case sales growth driven by various Jones initiatives.
Timing differences of certain retailer programs impacted the period-over-period revenue comps. In addition, a reminder to everyone that our first quarter results for this year included the load-in of the new, Seven Select by Jones business. This is a new piece of business for our company and made a large impact on our first quarter case sales and revenue. Comparatively, the second quarter results did not include such load-in.
Promotional allowances increased $142,000, to $458,000 for the second quarter 2016, due primarily to timing differences in the 2015 comparable period. The accounting impact of these promotional allowances is a direct offset to gross revenues. Gross profit margin in the second quarter 2016 increased 25.2% from 24.7% in Q2 2015, primarily due to continued year-over-year favorable impact and the Canadian/U.S. exchange rate on cost of goods sold.
Operating expenses in the second quarter decreased to $1.092 million from $1.145 million in the Q2 2015 period, primarily due to continued discipline around our expenditures. Operating expenses included non-cash expenses, depreciation, amortization, and stock-based compensation, totaling $52,000 compared to $95,000 last year. Operating expenses as a percentage of revenue decreased to 25.4% for the quarter compared to 27% in 2015. The second quarter of 2016, we only had an operating loss of $6,000, compared to an operating loss of $92,000 in Q2 2015.
Net loss for the quarter ended June 30, 2016 was $65,000 or $0.00 per share, compared to a net loss of $116,000 or $0.01 per share a year-ago. This is the result of modest growth and having the appropriate infrastructure in place.
And now to the year-to-date results. For the first six months of 2016, revenue was up 20%, at $8.6 million, compared to $7.2 million in the prior year. Revenue growth was due to 35% case sales growth, largely driven by our new Seven Select product offering. Currency volatility and timing for certain retailer programs impacted the comparable year-to-date periods. During the first six months of 2016, 19% of our total revenues were generated from Canadian sales, compared to 30% in the first six months of the prior year. Promotional allowances increased $380,000, to $992,000 for the six-month period, with the largest driver being related to the launch of the Seven Select product.
Gross profit margin for the first six months increased to 26.3% in 2016 from 25.7% in 2015, again, primarily driven by the impact of the Canadian/U.S. exchange rate. Operating expenses for the first six months ended June 30, 2016, increased slightly to $2.198 million, from $2.116 million in the prior year, representing 25.6% of revenue, down from 29.6% in the comparable period. We believe our discipline around expenditures is the primary reason for the relatively small dollar increase associated with the revenue growth during the year.
Operating expenses included non-cash expenses totaling $85,000, compared to $144,000 last year. For the six months ended June 30, 2016, we had operating income of $60,000 as compared to the loss from operations of $321,000 in the 2015 six-month period. Net loss for the first six months of 2016 was $16,000, or $0.00 per share, compared to a net loss of $394,000 or $0.01 per share, a year ago.
Turning now to our balance sheet, at June 30, 2016, we had working capital of $1.9 million and cash and cash equivalents of approximately $584,000. At this time, we believe that our current cash and cash equivalents, combined with our loan facility and cash from operations, will be sufficient to meet our anticipated cash needs through the second quarter of 2017.
Cash used in operations during the six months ended June 30, 2016, was $462,000 compared to $984,000 in the prior year, primarily due to increased revenue related to case sales growth. We have a loan facility available for our working capital needs, which allows us to borrow up to $3.2 million.
Our eligible borrowing base as of June 30, 2016, was approximately $1.9 million of which we had drawn down $1.2 million compared to a line balance of $908,000 at December 31, 2015
I'll now turn the call back over to Jennifer to give an update on our sales and marketing highlights.
Thanks, Max. I would like to provide a bit more insight into the application of several of our initiatives. However, as a reminder, we do not provide guidance or any detailed breakdown of financial results between initiatives.
First, with respect to our core Jones business, we continue to work at building strong retailer relationships across independents, chain, convenience and mass. We mentioned our case volume in our core business for the second quarter 2016 was slightly impacted by the fact that the time of certain seasonal box offerings moved from the second quarter to later in the fourth quarter of this year. In addition, with a high percent of sales coming from Canada, the weakness of the Canadian/U.S. exchange, our comparable year-to-date dollar revenue in our core business from Canada was not as high in 2016 as it was in 2015.
We continue to have new opportunities in various regions in North America and we see very encouraging signs as large retailers continue to dedicate shelf space to craft or premium sodas. Our fountain business, while still small, is gaining momentum. We participated again in the national restaurant show in Chicago in May and continue to sign up our retailer base of accounts on fountain from such shows. While we do not have the infrastructure and brand recognition of a Coke or Pepsi for fountain, we are extremely enthused by the conversion of mostly independent restaurants to stand up and decide to offer a refreshing new choice on fountain. We look forward to one day attracting large retailer who are willing to make the jump from the “same old same old” to the Jones offering in cola, sugar-free cola, lemon-lime, as well as some of our great fountain flavors such as green apple.
During the second quarter and into the third quarter, we held a fun school bell for summer contest to give away the first Jones fountain machine to a consumer, and have thousands upon thousands of entries. The lucky winner of a Jones fountain machine will be announced in the next several weeks.
With respect to strategic partners. Our co-branded program with 7-11 moved from the initial product load in first quarter of 2016 to the reorder stage in the second quarter. While sales of Seven Select by Jones are not as high in the second quarter as we had anticipated, Jones and 7-11 are committed to the success of our co-branded, private label program, and are working on certain changes to product and placement strategies. Overall, I feel very positive about our partnership and co-branded program and am looking forward to continued evolution of this program through the balance of 2016 and into 2017.
Based on what we have done with 7-11's private brands group in the United States, we continue to build relationships in their organization and are looking at some other interesting opportunities being offered to us. We are also entertaining interest with other large retailers as a private label and other types of new business, of which I am personally very focused on.
With respect to Lemoncocco, I continue to be excited and enthused by the response from consumers who've sampled the product and get hooked on it, especially in the hot, hot summer. What is interesting with this brand is that it appeals to young children and millennials, Gen X, and Baby Boomers. And it makes a fantastic cocktail. So nice broad appeal. This brand offers our retailers, food service and grocery alike a high-margin, non-carbonated differentiated product. What I'm also very excited about is that this one SKU, and the way that it has been set up, it offers our company a branded product that is highly profitable for us. I remain committed to the disciplined buildup of this brand and do look to the potential mainstream and blockbuster appeal at some point down the line.
Our marketing program continues to support our brands and our initiative in the way that Jones, and now Lemoncocco, know how to best. Grass roots marketing is where we thrive. Our partnership with Fiat for our core Jones brand ended its fourth year in a row as we launched our fourth Jones and Fiat photo contest to give away a Fiat 500X to one lucky and creative photographer at the end of the year. In addition, and with the obvious Italian connection with Lemoncocco, we have a couple of Fiat 500X's branded with the Lemoncocco design driving around the country, promoting this new fun brand. The majority of our marketing for Lemoncocco, though, is focused on sampling the brand and introducing this great-tasting beverage to more and more consumers.
And finally, we are in the process of looking at potential PR firms to assist in telling the story of our brands and initiatives, such as fountain and Lemoncocco, as well as the compelling and evolving story of our company. I am very proud of the Jones and Lemoncocco teams who work hard at not only building our great brands and partnerships, but also maintaining a mindset of watching out for the bottom line. We definitely have a bunch of entrepreneurs here at the company whose focus is to guide Jones to be a successful and profitable company. You, as shareholders, should be very happy to know how much all of the employees are dedicated to creating growing and profitable initiatives. I know, as a large shareholder myself, that I am excited by the passion that this small group of 26 has, and what they are creating for the future.
I will now open the call up for questions.
Thank you. [Operator Instructions] And we'll now take our first question from Shawn Gordon [ph].
Yes, hi, Jennifer. Just two things, observations, and questions around it. The 7-11 co-branding versus Lemoncocco. When I look at the Lemoncocco product, it's actually delicious, obviously all natural, and the packaging and the can, it's just very clean and crisp and it stands out. When I look at the 7-11 packaging, first off, I do enjoy the flavors and I wish they were all natural in the sense of no artificial colors or having sweeteners other than cane sugar. That's a separate issue. But the packaging to me is not very cohesive. If I look at Gatorade or I look at Fanta, which is even closer to what this line's doing, when I look at this branding on the package, it's very clear. But when I look at the 7-11 co-branded beverage, there's just so much noise on the package I don't really know whose it is, or what it is. And then the names are also very long for each particular flavor. So, just to me, an attractive thought around it, it tastes good but it's kind of a blurry message when I try to see it in a crowded refrigerator section among many drinks.
I appreciate your comments on Lemoncocco and definitely on the Seven Select selection and, yes, we are evaluating the brand and the labels, if it can be a little bit more simplified and improved upon. But again, this is being driven with -- by 7-11 but with us as well looking at it. But, yes, I agree with you.
Okay, and that's all for the moment.
Okay, thank you, Sean.
[Operator Instructions] And we'll now take our next question from Garry Getz [ph].
Hi Jennifer. First of all, you're really motivational, and I wanted to commend you on that. I'm sure the company's in good hands.
On the 7-11, just giving you feedback as an investor, I was expecting more this quarter. I'm sure many others were. Q1 had the initial rollout but I was expecting more reorders and for more of a differentiation in revenues between Q2 of this year and Q2 of last year. So, just some feedback.
I appreciate your feedback, and get what you're saying. Going into this program and relationship, we didn't -- we did not know what to expect. We definitely had a very high load-in in the first quarter, so yes, it was very front-loaded and, yes, we expected a little higher as well for the second quarter. But we're constantly evaluating it with 7-11 and as the previous shareholder mentioned, we are looking at the label and ways to improve it moving forward, in terms of a lot of different things, and promotions, etc. So it's an evolving program.
Okay, thanks for the feedback on that. Then with Lemoncocco, are you also looking at a carbonate version of it?
At this point, we are not, Garry. It is -- it has been created to allow us an opportunity to be in the non-carbonated beverage -- or segment of beverage industry. It's extremely refreshing as a non-carbonated option. It's -- we're looking -- eventually -- it started -- it's a brand -- it's a beverage from Rome, Italy, which is non-carbonated, its origin. I think we may have ideas on how we might extend it in various ways, but I think, really, it's going to remain a non-carbonated beverage. And the non-carbonated beverage segment of the industry is huge, so I'm excited to be a part of that segment as well, with Lemoncocco.
Okay, thanks for that. Any possibility of getting it into 7-11 and rather than having a slow rollout of it, having sort of like a quantum leap?
I am definitely open to quantum leaps. There's no question. I would love -- and we're -- what excites me, and 7-11: great partner, we would love to have that there, one day for sure. There is a lot of large restaurant chains that I think -- this is such a great pair for food. So I will definitely take a quantum leap with the right large partner. I'm not -- no, you can count on that, Garry. If one of those comes along, we will definitely be jumping on it.
Okay, great. Great. The reason I mention that is, in going to 7-11's webpage recently, they seem to be pushing non-carbonated as well as carbonated beverages. In fact, they seem to be leaning a little bit more towards non-carbonated. So maybe it's an opportunity.
Yes, I believe you. I mean, we talked with our 7-11 continuum [ph], we definitely present them with what we're doing as a whole -- as a company, so…and yes, we would definitely give them the opportunity as well on this one for sure. So I will definitely -- we're building it in the specialty distributors and building it up the right way, but we are very open, and it's going to hit with a large, either QSR or a 7-11-type account at some point, for sure.
Great. Okay, well keep up the good work and thanks so much for the update.
Okay, thank you, Garry.
And we'll take our next question from Shawn Gordon [ph].
Hey, Jennifer, just a follow-up for M&A. You mentioned talking with other potential private label partners. Just curious if you could elaborate a little bit on that.
At this point, I cannot, and I don't want to, so no, I'm not going to outline those upcoming partnerships.
Okay, but, at a minimum, there is some conversation being added, whether or not it formalizes is obviously another topic.
Yes, definitely, there is.
And we'll now take our next question from Tom Clark [ph].
Yes, Jennifer? Congratulations, by the way. I think you're doing great. But just an FYI, I go into a 7-11, I purposely go in actually looking for your product, because that's why I'm there, basically. But I find that they're not filling their shelves. And obviously there's nothing you can do about that, but I have yet to really find a really full display. And so I have to go to the cooler. And it's just kind of an FYI that I thought I ought to pass on. It's very difficult when you just have one or two people in the store, two people to keep it full or keep it half full. But a lot of times that I've done that, they just haven't kept the display full, and so that doesn't benefit you. And so that's just kind of an FYI for your information.
Yes, no, I appreciate that, Tom, and the 7-11 U.S. organization is a franchise system, which is -- all the locations are owned by their own group of franchisees, and they have the ability and/or decision making power to do what they want in each of their stores. In Canada, it's a bit different. The Canadians 7-11's are all corporate-owned, they have a schematic in place that they adhere to, and it's done the exact same way across each location. But in the U.S., it's quite different. But yes, that's the challenge there.
Well, I appreciate what you've all done so far and I look forward to the future. So you guys have a wonderful day and take care. Thank you.
Okay, thank you, Tom. You, too.
And there are no further questions in the queue at this time.
Okay, well, then, thank you again for your interest in Jones Soda and we will next speak with you when we report our third quarter results in November.
And ladies and gentlemen, that concludes today's conference call. We thank you for your participation.
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