Good afternoon, everyone. Thank you for participating in today's conference call to discuss Jones Soda's financial results for the Q3 ended September 30, 2023. 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 provision 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 of expression. 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 recent filed reports with the SEC, including our annual reports on Form 10-K, our quarterly report on Form 10-Q, and our current report 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 of non-GAAP measures are available in the earnings release and other documents posted on the company's website under Investor Relations. This call will be available for telco replay through November 16th , starting at 7:30 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, David Knight. You may begin.
Thank you, Renju, and thank you everyone for tuning in today. Since joining the company four months ago, I've been able to fully integrate into the operations, and I'm confident in the future of Jones Soda. We have some really exciting stuff in the works that I can't wait to share with you all. Before we get into that, I wanted to briefly recap the quarter. The Q3 was more challenging than anticipated, as sales velocity within our most important bottled soda channel, grocery, has taken longer than expected to rebound, and we did have a few unexpected headwinds in our food service channel. However, the initiatives we've implemented to improve efficiency across our supply chain, coupled with strategic pricing adjustments, allowed us to expand our gross margin by 600 basis points to 32.9%.
We are marching closer to our goal of consistently reporting a gross margin of around 35%, while continuing to move closer towards breakeven on the bottom line, with most of our one-time operational costs to establish the foundation of Mary Jones now behind us. As I discussed last call, my two key areas of focus are delivering great taste and growth through both innovation and marketing. We have really only begun to scratch the surface in both of those categories, and I firmly believe we are setting the stage for for some exciting growth opportunities in the coming quarters. I'll dive into a few of these initiatives later on during the call, but I'd first like to pass the call over to Joe to discuss our Q3 financial results in greater detail. Joe?
Thank you, David, and good afternoon, everyone. Net revenue in the Q3 was $4.5 million, compared to $4.8 million in the Q3 of 2022. The decrease was primarily due to a decline in the company's food service channel, along with a decline in sales velocity within the grocery channel compared to the Q3 of last year. Our cannabis-related business generated approximately $220,000 in the Q3 , which represents 93% increase year-over-year. David will be providing more detail of our Mary Jones revenue to give you more insight into the success our brand has seen. Gross profit as a percentage of revenue increased 600 basis points to 32.9%, compared to 26.9% in the prior year period.
This increase was primarily due to continued enhancements in our supply chain to better manage costs along with continued strategic pricing adjustments. Operating expenses in the Q3 improved to $2.4 million, compared to $3 million in the same year-ago quarter. This decrease was due to lower marketing and G&A costs, mostly as a result of lower startup costs associated with the development of our Mary Jones brand. Net loss in the Q3 improved to $900,000, or -$0.01 per share, compared to a net loss of $1.7 million or -$0.02 per share for the same year-ago quarter. Adjusted EBITDA in the Q3 improved to $-862,000, compared to $-980,000 in the year-ago quarter.
The improvement in our bottom line was primarily driven by the expansion in gross profit and a decrease in total operating expenses. Now moving on to the balance sheet. As of September 30, 2023, cash and cash equivalents were $5.2 million, compared to $5.1 million at June 30, 2023, and $8 million at December 31, 2022. Working capital was $8.8 million at September 30, 2023, compared to $11.6 million on December 31, 2022. Now I'll turn the call back over to David, who will provide further insights into the various growth initiatives we have planned and overall progress being made throughout the organization. David, back to you.
Hey, thanks, Joe. Let's jump back into it, starting with our sales performance. As I mentioned at the start of this call, lower sales velocity in our grocery channel has been a headwind on our core bottled soda business for the past two quarters. In addition, during Q3, we lost one of our major legacy customers within our food service channel. That further contributed to the negative impact. Although we are certainly disappointed by these short-term hiccups, we are still very confident in our core soda strategy and continue to take steps towards long-term solutions that we believe will further solidify our position in the craft soda market. While the broader consumer environment has seen a slowdown in discretionary spending, we are seeing growth return to craft sodas and specifically a return to natural cane sugar beverages.
I believe Jones Soda offers a higher quality and indulgent beverage for consumers looking for an enjoyable treat during these challenging economic times. We continue to be recognized as having the best-tasting craft soda in the market. Given this, we are continuing to make important adjustments across our key accounts and aggressively pursuing incremental growth opportunities with a few new channel leaders in place. We are seeing steady progress in Kroger, with sales improving in both dollars and units. The team continues to execute temporary price reduction feature programs with $2 for $3, combined with a $1 digital coupon during key holiday periods to drive sales. In Costco Canada, we implemented a 12, 12-ounce bottle variety pack with strong initial orders as we enter the holiday season. In Q3, the team secured national listing at Ace Hardware and attended their national trade show.
We have secured over 280 new accounts and so far have sold 99 pallets, with more expected to come in Q4. Sales team continues to increase distribution by both securing new DSD distributors and ranging in some key regional grocery chains. In the Midwest, we picked up the Spartan Group with over 200 stores. On the West Coast, we have picked up SF Naturals and JK Distributors, and in the Northeast, Featherstone Distributors and Penn Beer. We welcome these new distributors as they drive Jones Soda through their direct store distribution capabilities. In Q3, we also started selling Jones through Amazon Fresh. We are now on our fourth order and look forward to growing this direct-to-consumer opportunity.
Our Jones Root Beer in Kroger is also off to a fast start, and we are now on shelf in 1,560 Kroger stores, with sales increasing, and it is now ranked as our number six SKU and climbing. Within food service, we are making notable progress with a new sales leader we have brought on for this channel. We remain very bullish on the opportunities at hand to increase sales on our fountain offerings, which is our highest margin soda product, through a more aggressive and tactical approach. We are very excited with our recent partnership with The ONE Group Hospitality. What started as a test placement of our top five craft sodas into Kona Grill in Salt Lake City, has now expanded to six flavors being offered at all Kona Grill locations nationwide.
So far, our relationship with ONE Group has been a huge success, and we are now expecting in Q1 2024 to be selling our products in both Kona Grill and the STK Steakhouses nationwide. Jones Soda is proving to be a high-margin offering in the fine dining channel, with more to come as we build on the ONE Group's success. Now, I'd like to dive into our core soda marketing efforts. As you all know, one of the pillars that we are most proud of at Jones is our special release flavors. I believe our team knocked it out of the park once again with the latest special release we announced in October, Orange Chocolate flavor. A centuries-old flavor pairing that has come to be associated with special occasions and holidays. This classic combo has never been celebrated as a soda.
I'm very proud to say that Jones Soda is the first beverage company to create a cane sugar-sweetened, carbonated version of this iconic flavor combo, that we believe is sure to be reminiscent of your favorite fall and winter holiday memories. Not only is this a great treat to enjoy on its own, but we've had great feedback on its ability to be a tasty option for cocktails and floats at holiday gatherings. This was our third special release introduced this year, and we already have some amazing things in the works for 2024 that we look forward to announcing soon. In Q3, we also developed and tested a new version of Jones with caffeine, called Jones Plus Energy Soda.
We believe the combination of natural cane sugar and 160 milligrams of natural caffeine from green coffee beans with our core flavors, Blueberry Lemonade, Green Apple, MF Grape, and Cola in a 16-ounce can is a great way to start your day. We're excited about the early results and the opportunities ahead for 2024. Now moving to operations. We continue to increase our gross margin towards our target profile of 35%. While we have absolutely benefited from pricing adjustments, I want to be really clear that the work we've done to shore up our supply chain and create more predictable and manageable raw material and freight costs has been the main driver behind this.
This is an important distinction to make because it means we have a good insight into our cost of goods sold, that we believe we will allow us to manage the business accordingly and ultimately achieving our target goal. Our SG&A also continued to decline year-over-year due to fewer expenses in 2023 associated with building the foundation for Mary Jones. We have a much more efficient expense structure in place that I believe allows us to appropriately fund our growth initiatives without having to cut into our bottom line. With an ever-improving margin profile and a healthy overall cost structure, we remain confident that we are positioned to capture revenue growth and more profitability going forward. With that, let's turn to Mary Jones. First and foremost, I want to address our geographic expansion.
We're incredibly excited to have launched into Washington State at the end of the quarter. We strongly believe that having our cannabis presence in our home state and a state that was at the forefront of cannabis legislation will be incredibly valuable for our long-term growth potential. So we are live in Washington, and we're expected to launch in Michigan this month with our core range of cannabis-infused sodas. We are working hard on our next large market, which is the province of Ontario in Canada, scheduled for Q1 2024. We have signed our agreement with Tilray as our strategic licensing partner for Canada and are looking forward to seeing Mary Jones on shelves in dispensaries as we plan to expand across all of Canada in 2024.
Overall, I remain very excited about Mary Jones, and from a sales perspective, we grew our cannabis-related revenue 93% year-over-year to approximately $220,000 in Q3. In the meantime, we are continuing to create momentum with our product and marketing initiatives. In terms of new categories and progress with current formats, I believe we are seeing the same success. We also continued to make progress with our category expansion this quarter. Overall, I continue to be impressed with what we've been able to accomplish in Mary Jones. This business started from scratch a little over a year ago and has already risen to one of the top cannabis-infused soda brands in California. We firmly believe we've captured lightning in a bottle. Now we need to scale the business.
As we continue to expand our geographic and category presence, we are highly confident that Mary Jones will be a major contributor to the overall revenue growth of the company. Finally, on the growth front, we're excited to announce a new member of the team, Jerry Goldner. He has started with the team as our Chief Growth Officer to lead our key growth initiatives for 2024. Jerry has worked in sales and marketing for Kellogg's, as well as several CPG startups, and is a consummate sales professional. He will be leading our key growth teams, being food service, convenience channel, and Mary Jones. We're excited to have him on board as we develop our growth plans for 2024 and beyond. With that, I'll pass the call over to the operators to see if there are any questions from our listeners today. Renju, over to you.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question comes from the line of Daniel Teal, a private investor. Please go ahead.
Hi, David. I'd first like to state that I appreciate you taking live Q&A. That means a lot to us. Given your background in alcohol, I was curious if Jones Soda is exploring an entry into that space?
Hey, Daniel. Look, firstly, I'm really excited about opening the communication channel to our investors and really appreciate your commitment to Jones Soda. Yeah, so I'm a beverage guy. I'm really excited at the brand that we have. I think it resonates and plays in that over 21 category. So for instance, Mary Jones is a perfect play to, to really engage consumers that are looking for the next functional beverages. The team previously has scouted out Spiked Jones as an opportunity. It's currently on the radar as we build our innovation, but no firm plans yet for, for next year and beyond. But I do think it's a, a space that we should play in.
Okay, thank you. I appreciate that, David. And can you share any more insight into. I'm very excited about the entry into Canada. Could you share any more insight into further state expansion here in the U.S. for Mary Jones?
Yeah, absolutely. You know, we're excited about Canada, too. As we look through the opportunities of regulated markets, we're really doing kind of a ground-up assessment of what it takes, what it costs, and what our capabilities are. As you're aware, you know, some of the startup costs in the States are quite expensive, depending on the market. And so we're doing a ground-up evaluation. No decisions made yet, but really focusing on Canada, as our first kind of launch for Q1 next year. I would also say that now that we're in California and we're in Washington, and Michigan will be launched this month, that we're excited about moving beyond just beverages. So the team is innovating into edibles as well.
Currently the strategy is to go very deep in the markets that we're in, expand in Canada, and then do a state-by-state evaluation of which states we'll add to the agenda for next year.
Okay, thank you. That makes sense. That's, that's exciting to hear that we're getting into edibles and the like. Would you be able to clarify any expectations for a timeline getting into, edibles and, and anything additional to Mary Jones?
We're fast-tracking it, Daniel. I would think that by Q1, we should be starting to roll out some of our edibles. So we're looking at the basics, right? So gummies as a starting point and some other kind of alternatives. We're doing the candy in Q1 as well. So trust me, we're fast-tracking it. Again, it's finding the right partners in each state to produce, and we're excited about the conversations we're happening. So it's a target right now. We'll firm it up in our next investor call.
Okay, great. Thank you. And then last question I have. Sorry to hog your time. I noticed in an interview previously, Bohb Blair, who I know who's no longer with the company, had mentioned a licensing deal to get into the sparkling water space, leveraging Jones brand and flavor portfolio. Is that something the company is still pursuing?
Absolutely. We're excited about the progress that we're making. We're going into concept testing in this quarter just to ensure that we have, one, the right to succeed there, so the Jones Soda brand, which we're pretty confident we can. We're developing a zero-calorie sparkling water, and we're excited about some of the strategic partnership conversations that we're having. So yes, it's, it's probably on the top of the list of our innovation agenda for 2024, 2025.
Fantastic. Thank you, David. I appreciate your time and appreciate the energy that you're bringing to the company.
Hey, Daniel, really appreciate you, and, yeah, I look forward to getting more questions. The reason that we're opening up the mic and doing these things live is that I want to be as transparent as I can with the exciting plans that we have going forward. So appreciate you and your support for the team and the company.
Thank you. A reminder to all the participants that you may press star one to ask a question. Next question comes from the line of Pat Lazar, a private investor. Please go ahead.
Hi, David. This is Pat Lazar. Thanks for taking my call and really appreciate you guys taking calls in general, once again. Excited about Mary Jones, and we've been told that there's been a. Well, obviously, there's been an effort to grow that. Can you speak a little bit to the quarter-over-quarter 45% drop in sales, if I've got that number right, going from about $400,000 in sales last quarter to $220,000 in the most recent quarter?
Yeah. So let me do a reality check with Joe. Joe, can you just confirm what the overlap on Mary Jones is?
Yeah, so thanks for the question, Pat. Yeah, so that's from... He's comparing the Q2 number in comparison to Q3 in the California market. That did in fact come down to $220,000 from $400,000 in Q2 for California.
Okay. Hey, Pat, firstly, thanks for the question. California is a key market for us, obviously. And, you know, we're dealing with a little bit of pipeline load in Q2, but we've got some exciting plans for California as we add to the line, as I mentioned earlier, with edibles, et cetera. And we've also kind of moved our production facility from Tinley over to El Cajon. So there are some changes in terms of what we're doing in California. But again, we've got some significant growth opportunity there that we need to focus on. So appreciate the question.
Mr. Lazare, are you done with your question?
Yes. Thank you.
Thank you.
Thanks, Pat.
The next question comes from the line of Oleg Gull, a private investor. Please go ahead.
Thank you, David. Appreciate you doing this live now. Very, very transparent, and I know the group appreciates as well. Just if there's any comments in regard to the cash balance, I know that it's at $5.2 million, but with all the initiatives being spoken about, I don't come from the beverage industry, but it seems like there is gonna be some investments required to open up Canada. I'm very excited about the Tilray partnership, to go into the sparkling water business. I'm just curious, in regards to the cash balance and how you guys are feeling about that.
Hey, Joe, that sounds like a question for you, and then I'll comment at the end.
Yeah, yeah, for sure. Yeah. Thanks for the question. You know, that is absolutely constantly on our minds, is, you know, balancing working capital. You know, we, you know, and our cash balance. We are evaluating everything right now as we put together the growth plan for 2024. And that does include discussions with possible line of credit or you know, or any other sort of raise that maybe needs to happen. But at this point, there's no further information that we're ready to give. But it is certainly top of mind, you know, as we're putting together our plans for the future.
Yeah, I would, I would just add on to that. I mean, the cash position that we have is probably the number one priority and the number one discussion we have with the board. So we're confident where we're at today. We do feel that there may be an opportunity in the future as we understand the opportunity behind Mary Jones and maybe some other kind of new categories that we enter into. As we test and learn, you know, our ideal scenario would be, you know, as we see progress, and excitement and profitability and revenue growth, that we may come back to the market with a requirement for investment. So again, you know, from my standpoint, it's a very disciplined approach to innovation, understanding what the opportunity is and then scoping out what do we need to be super successful in those categories.
So as Joe said, no plans yet, but it's on our radar screen to see if we've got a tiger by the tail. So Ollie, thank you for the question. Any more?
Awesome. Thank you. That's pretty straightforward, and looking forward to what's coming up in the next quarter. Sounds very exciting.
Thanks, Ollie.
Thank you. Next question comes to the line of Daniel Teal, a private investor. Please go ahead.
David, I'm back. Sorry, I lied to you about my previous question being the last. I know Jones previously attempted a merger with Simply Better Brands, probably over a year ago at this point. Is any sort of merger, sale, or acquisition something that Jones is currently exploring?
Daniel, nothing on the horizon. you know, I was aware of the Simply Better Brands discussions, but right now, nothing, nothing on the radar. What we are focusing on is innovation to find channel segments, and opportunities in different categories that the brand can resonate in. But, no, no mergers, acquisitions on the radar right now.
Okay, I'm glad to hear that. I feel like the Jones Soda brands stands alone very well. In the past, Jones hasn't-
Yeah, I agree.
Yep. Apologies. In the past, Jones hasn't provided forward-looking forecasts at all. Is there anything you guys are willing to share as far as forecasts or goals looking towards Q4 or 2024?
You know, I wrestle with this every day, Daniel. It's a great question, and it gives me the opportunity to discuss it. I'm not a believer in forward projections. You know, they're precarious in terms of, you know, setting a commitment and a destiny. We are walking into categories that have high potential, and, you know, moderate risk. So, you know, I think what we're best to do is share what we're looking at in terms of innovation, channels, ideas, but not prepared, as the leader of the organization to get into forward-looking statements. I don't think it sets us up for a good conversation and certainly doesn't set us up for success.
Understood. Well, I appreciate the thought. My last question, for real this time. You mentioned that a large core bottle customer in Q1 or in Q3 had fallen off. Would you be able to share who that is?
Unfortunately not. It was a large food service account. We're under nondisclosure agreements with that team, but I would say we're aggressively trying to get that business back, so.
Okay. Well, thank you again, David. I appreciate the time.
Thanks, Daniel. Appreciate you.
Thank you. Next question comes from the line of Oleg Gull, a private investor. Please go ahead.
Yeah, David, similar to Daniel, I also lied. You can see how excited we are to have this dot com being live. Just a very, if you don't mind sharing your brief thoughts on your U.S. legalization with cannabis. I know there has been some movement recently with the suggestions coming out of HHS. And just your thoughts overall on the market, if you could comment on that, and if it does go to the next level of de-scheduling, level three, is there kind of a plan to speed up the across state, I guess, expansion of Mary Jones? I'm assuming that's where you guys are kind of being a little bit more cautious right now because the climate is not very stable in cannabis specifically.
Yeah, look, Ollie, it's a great question. It's something we really struggle with. You know, as we enter these categories that are kind of at the whim of legislation, we need to be cautious and prudent, yet take bets, right? I mean, you know, I think we're, we're confident as we see more states, you know, moving forward, at the state level. The federal side, again, de-scheduling, you know, in this political climate, you know, pros and cons. It's a lot wrapped around the 2024 election, I would think. But we also have our eye on, you know, hemp-derived, THC beverages. I think we think it also is an interesting space to potentially play in. And therefore, we're very attuned to what's going on with the Farm Bill.
And it sounds like that's also being kicked down the track. So you know, again, we're the Mary Jones team is looking at this every day. We think there's a huge opportunity for Mary Jones. It's one of our key growth drivers for the next several years and beyond. We are, you know, like, we're very special. I think we all need to be very proud of what Jones Soda has. So we're a publicly traded company, point one. Point two is we have a very solid soda business that is actually gonna be ignited to grow through innovation. We are the only brand, to my knowledge, that's publicly traded and in the soda business that has stepped into the regulated cannabis market.
The adoption and attraction by consumers in California and now Washington show that we have a huge brand power behind Jones and Mary Jones, and it gives us a lot of synergy in terms of what we can do from a marketing standpoint. So, eyes and ears to the ground, we see it as a state-by-state opportunity. We need to assess the cost of entry versus the return. But the good news is we're nimble and agile. We perform with the best-tasting beverage. So you know, our core flavors, green apple, blueberry lemonade, cola, Root Beer, Orange and Cream, you name it. They play so well in the cannabis market because they taste great. It's a consumer that's not necessarily calorie conscious, especially in the mode of consuming either a THC or an alcohol beverage. So lots of opportunity.
Trust me, we are on it. We're focusing on it. We have the right team, we have the right product. It's really state-by-state opportunity and keeping an eye on both the federal and state regulations. So hopefully that answered your question, Ollie.
It does. Thank you very much. Really do appreciate it.
Yeah.
Thank you. This concludes today's question and answer session. I would now like to turn the call back over to David Knight for closing comments.
Hey, firstly, thank you, Renju, for navigating, you know, the call today. I do want to really thank everybody that asked questions today, and I would encourage more going forward. I would just say I'm excited about leading this team. I'm excited about the opportunity ahead, and just wanted to thank everybody for taking their time today to listen. We obviously look forward to speaking with you and to report our Q4 and full year results in March. We have a lot of great stuff that we're working on, and I would just say, hey, I am proud and humbled to be leading this great team with such a great brand and such opportunity ahead. So thanks everybody again. Have a great day, and speak to you next time.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.