Jones Soda Co

OTC:JSDA

Earnings Call Analysis

Jones Soda Reports Challenges Amid Transition with Growth Potential Ahead

Jones Soda faced a challenging third quarter, generating $4.2 million in revenue, down from $4.5 million last year. Contributing factors included distributor transitions and operational delays. However, the Mary Jones segment surged with 263% revenue growth to $800,000. Gross margins fell to 21.2%, down from 32.9%, as operating expenses rose to $3.5 million. Despite a net loss of $2.6 million, management is focused on cost management and operational excellence, with over 20 new HD9 distributors expected to support revenue growth in 2025. New product lines, especially in the emerging Pop Jones category, are anticipated to drive future performance.

Introduction to Changes and Challenges

In the latest earnings call for Jones Soda, Interim CEO Paul Norman acknowledged that the third quarter did not meet the company's expectations. Sales volume suffered due to a variety of factors, including unexpected softness and transitioned distributor challenges, leading to a net revenue decline from $4.5 million to $4.2 million year-over-year. The net loss increased during this period, indicating financial stress as the company navigates through both management changes and operational hurdles.

Leadership Transition and Stability

Recently, the company experienced significant leadership changes, including the resignation of its former CEO. Paul Norman, who previously served on the Board, stepped in as Interim President and CEO. He emphasized the importance of stabilizing the management team and prioritizing candidates for both CEO and CFO positions who can drive growth. Norman brings extensive experience from major consumer brands and aims to leverage this to improve the company's performance and shareholder value.

Revenue and Operating Expense Insights

The earnings call highlighted a concerning increase in operating expenses, which rose to $3.5 million compared to $2.4 million the previous year. This rise in costs is attributed to heightened spending on product innovation and marketing. Alongside decreasing revenues, the adjusted EBITDA also reflected a negative trend, dropping to a negative $2.2 million from negative $0.8 million year-over-year. The management is committed to correcting spending habits to ensure sustainable growth moving forward.

Market Challenges and Resilience

Key factors contributing to revenue decline included difficulties with Canadian distributor transitions and the loss of a discount retailer in the U.S. However, there’s optimism as new distributor relationships are being established. For instance, there are over 20 new HD9 distributors expected in Q4 compared to earlier in the year, which should help position the company favorably for future growth. Additionally, the Mary Jones product saw remarkable success, with a 263% surge in revenues year-over-year, attributed to increased demand in the California market.

Focus on Profitability and Cost Management

Amidst the losses, Norman assured stakeholders of their commitment to identifying and rectifying problems related to revenue growth and cost management. The current inventory position has been strategically enhanced to support upcoming product launches, notably the HD9 beverage line. Although current inventory is higher than preferred, the company is confident in its ability to align production with market demand to bring inventory levels back to normal.

Strategic Shift Towards Growth Areas

Jones Soda is pivoting its strategy to focus on three core areas: First, core soda products, including new formats catering to consumer preferences, such as mini cans and zero-sugar versions. Second, the modern soda market, highlighted by the promising launch of Pop Jones, aimed at capturing the attention of health-conscious consumers. Third, they are expanding in the adult beverage segment through Mary Jones and HD9 products. This focused approach aims to push for sustainable growth and maximize returns on investment.

Looking Ahead: Guidance and Growth Initiatives

As they set their sights on 2025, Jones Soda is committed to ensuring that their operations are led with rigor and a focus on profitability. The management believes that with their robust product pipeline and revitalized distribution strategy, they can return to profitable growth. While specific financial guidance for the next quarters has not been extensively detailed, the overall sentiment leans towards improvement based on the ramp-up of new distributors and innovative product lines.

Conclusion: A Path Forward

While the third quarter results reflected a challenging environment for Jones Soda, the leadership's commitment to operational excellence, coupled with a focused strategy on innovation and product development, paints a cautiously optimistic outlook for the future. Investors should keep an eye on the forthcoming announcements related to management appointments and the effectiveness of the new distributor strategy, as these may serve as indicators of the company's return to a growth trajectory.

Earnings Call Transcript 2024-Q3

[Operator]

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 30, 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, intend, 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 1 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 Soda's Chairman of the Board and Interim CEO and CFO, Paul Norman.

[Paul Norman, executive]

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 onetime gross 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 have 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 way of background, I have served as a Director on the Board since 2019 and as Chairman on the Board since 2022 and I bring over 3 decades of experience in creating brand and shareowner value for leading global consumer product companies. In fact, I was President of Kellogg North America. And most recently, I served as Interim CEO and Board member for BlueTriton Brands, the largest water -- 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 noticed that our Interim CFO, Joe Culp, 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 shareowner value. In the meantime, we have a strong seasoned team at Jones that is fully aligned with our mission 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 U.S. and our ramp-up of HD9 distributors taking longer than we had expected.

We're highly confident in our ability to fix all 3 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 to 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 21.2% compared to 32.9% in the prior year. 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 mix. 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 increase was 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 and 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 developments 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 improvement 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 $0.02 per share compared to a net loss of $1 million or $0.01 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 efficiencies and executing fundamentals with excellence, we are confident that we can get Jones back on the right trajectory towards profitable 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 rephase or eliminate other initiatives.

As we look to 2025 and beyond, we plan on focusing our business into 3 key areas and are prioritizing our resources accordingly. The first area will be core 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 [ 4-SKU ] range of zero sugar versions of our best known 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 5 flavors plus a test of Fiesta Jones in the C-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 U.S. 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, Spiked Jones in the West and with a rollout to the Midwest region of the U.S. starting in 2025. Other initiatives we've had in the pipeline, like mixes, 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.

This 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 prebiotic beverage available in 5 Jones original flavors with just 30 calories per 12-ounce cans 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 4 grams of sugar and only 2 grams of added sugar, which is half the added sugar of other modern soda brands and 1/20th 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 Hy-Vee and Albertsons, who will be placing their first orders here in Q4 and early 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.

So 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 innovative 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 shareowner 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 personally further questions and we'll be happy to take one-on-one calls with investors later this week. Please direct any inquiries to [e-mail] 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.

[Operator]

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