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Executives

Jennifer Cue – President and Chief Executive Officer

Mark Miyata Principal Financial Officer, Vice President-Finance, Secretary

Jones Soda Co. (OTCQB:JSDA) Q2 2014 Earnings Conference Call August 7, 2014 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Welcome to the Jones Soda Company Second Quarter Fiscal 2014 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 that this conference is being recorded.

I will now turn the call over to Mr. Mark Miyata, Vice President of Finance of Jones Soda. Please go ahead, sir.

Mark J. Miyata

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 the 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 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 obligation 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.

Jennifer L. Cue

Good afternoon, everyone, and thank you for joining us today. I would like to start by introducing Mark Miyata formally on our call. Mark was promoted as our new Vice President of Finance in June. Mark joined the Jones Soda team with some history working at Jones in our earlier days as well as a wealth of additional experience gained including a CPA license in MBA in many years in public accounting and other financial management provision. In addition and his strong skill set I’m mostly pleased with Mark’s solid understanding of our brand, its future potential, and the process we have been executing over the past two years of realigning our business closer to sustainability and the need to focus on growth and profitability for the future.

Speaking of our results, while our second quarter results showed a slight decline in sales as well as a net loss. I am still convinced we are in the right track. During our second quarter, we spend valuable time implementing some critical distributor changes in the U.S. market that we believe will be in the best long-term interest for our brand.

Distributor changes are necessary to ensure that we have the right partners who understand our long-term strategy, which for Jones requires the ability to service our key national account such as Wal-Mart and Kroger, while at the same time understand the necessity to build our base of independent account for many of our Jones’ fans shop.

Distributor change has caused a slowdown in sales as we transition from the previous distributor as well as some increased cost such as trade center, sanctified our new distributor to open accounts for brand. I am very excited with our new distribution partners in various regions which I am pleased to report included three new states provided to the Republic National Distributing Company, the new distributor we launched in Texas in the first quarter of 2014.

In addition to executing certain distributor changes, our second quarter results were also impacted by an increase on glass prices as well as some increased cost associated with the special tax created for our new relationship with the retailer in our Canadian business. We took advantage of an opportunity that came to us pretty quickly to do a program with Costco in Eastern Canada, which well it did add to our cost of goods for the new packaging definitely created a lot of excitement in that market with our consumers responding overwhelmingly to the Jones product being back on shelf in Costco in Canada for the first time in over 20 years. We look forward to building upon this relationship now and into the future.

Finally, we made additional key personal changes late in the second quarter with the addition of a new Vice President Sales for the Eastern U.S. region. Mike Ward is leading the charge as we expand our brand in the Midwest and reopen our brand in the U.S. Eastern Seaboard market. Mike Ward previously worked in Jones Soda for over 10 years and was the critical member of the Jones team during the early 2000, when we completed the turnaround of the company during that time and moved into the phase of growing the brand in a larger way. We’re all excited to be working with Mike again, as we enter this new place for Jones Soda.

I will now turn the call over to Mark to review the second quarter result and then I will follow this with an update on the business and closing remarks.

Mark J. Miyata

Thank you, Jennifer. Revenue in the second quarter of 2014 decreased by $408,000 or 9.5% to $3.9 million compared to the second quarter of 2013, as a result of key distributor transition in certain regions which were implemented during the quarter. Promotional allowances decreased $13,000 to $459,000 for the quarter due primarily to the timing of promotional programming. The accounting impact of these promotional allowances is a direct offset to gross revenues.

Gross profit margin in the second quarter decreased to 22.5% compared to 28.8% in the second quarter of 2013, as a result of commodity glass price increases and special packaging for a major retail chain.

Operating expenses in the second quarter decreased to $1.27 million from $1.32 million in the prior year period, primarily due to a 5% decrease in selling and marketing expenses with general and administrative expenses remaining relatively flat.

Operating expenses as a percentage of revenue increased to 33% for the quarter from 31% in 2013. Net loss for the quarter ended June 30, 2014 increased to $429,000 or $0.01 per share compared to a loss of $95,000 or $0.00 per share a year-ago.

This is a result of the decrease in revenue combined with the increase in cost of production. This also included a slight increase in non-cash expenses, which include depreciation and amortization, and stock-based compensation totaling $152,000 compared to $135,000 last year.

For the first six months for 2014, revenue decreased 8% to $6.8 million from $7.4 million in the prior year period. During the first half of the year, promotional allowances declined $126,000 to $740,000 for the period. Gross profit margin for the period decreased to 23% from 27%, due to the increases in cost of production I mentioned earlier.

Operating expenses increased slightly to $2.48 million from $2.46 million in the prior year period. Net loss for the first six months of this year increased to $968,000 or $0.02 per share from a loss of $494,000 or $0.01 per share a year ago. this includes non-cash expenses totaling $292,000 compared to $265,000 of last year.

Now turning to our balance sheet, as of June 30, 2014, we had working capital of $2.9 million, and cash and cash equivalents of $519,000. At this time, we believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through the year.

Cash used in operations during the six months ended June 30, 2014 was $1.1 million, compared to $321,000 in the prior year, primarily driven by the ramping of production to meet increased summer sales volume, compared to the prior year, combined with an increase in accounts receivable. We have an asset-based credit facility available for working capital needs.

Following the end of the second quarter, we made initial growth on our credit facility in July 2014. As of August 6, 2014, the outstanding balance on our credit facility was $284,000, which is paid down daily with cash receipts from sales. Again, I will reiterate we believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through the year.

I’ll now turn the call back to Jennifer to give an update on our sales and marketing highlights for the quarter.

Jennifer Cue

Thanks Mark. On closing, I would like to highlight the achievements we have made in the past two years. Upon my arrival, we had approximately $2.4 million of cash in the bank and have come up a five-year period with the company was losing any worker’s $6 million to $15 million per annum, burning almost equal amounts of cash in those years.

For the past two years, we have utilized the $2.4 million of cash and can be most efficiently profitable, focusing our efforts to turn this company back into our more entrepreneurial business that it once was and one that’s so much more fit with Jones Soda is all about. We all believe in the power of this brand, however, we also understand the need to build a sustainable company, and then worked very hard to implement a lean infrastructure that makes sense and promotes profitable growth.

I believe we had implemented the right operating structure to effectively build our core brands. As we complete the restructuring process of our business, we are now shifting the management team’s focus from stability towards growth and profitability. We believe that our sales and marketing expenses are at the right level for our business, and we do not expect any significant decrease in the future under the current operating structure.

However, we will continue to monitor our general and administrative, operating expenses to continue to be as lean as possible. I look forward to Mark’s leadership and experience in maintaining the high level of efficiency for our business. At the same time, it is our – it is the priority of ours to bring our healthier options in the Jones’ line up, that a Jones Stripped, our natural line of Jones.

As you will recall, we initially introduced Jones Stripped last year exclusively in the California market, and we have spent time in 2014, we’re leaving out to other market. During the second quarter, we began to sell Jones Stripped into two divisions of Whole Foods, which were the Northern California and the Pacific Northwest divisions, as well as ATB in Texas. We are feeling strong about the response to this new line up in our portfolio and I’m pleased to announce that we will be launching nationwide in the United States through UNFI and natural foods distributor beginning this month.

This new natural line of Jones provides opportunities for us to sell our products through additional channels, compared to where we sell our Pure Cane Jones Soda. And from this; we will be able to reach a broader set of consumers. Jones Stripped made it only eight grams of sugar and containing 30 calories and with no artificial preservatives, colors, or sweeteners represents for us a foray into the natural category, which we believe will be a key to our portfolio of products in the long-term. With respect to our full line of Jones Soda, with the launch into Costco in Eastern Canada during the quarter, we are happy to announce that this market will be restocking show, starting in August with a fashioning supplier by a variety pack.

We look forward to continue building our relationship with Costco and Canada, as it represents critical access to many independent accounts that which is where the Jones Sodas’ consumer shops. We are also excited by some upcoming innovations in the works, as well as our bargaining initiatives such as international expansion. We continue to create excitements within our ground by doing the concept things that Jones is know for Caps for Gear, our annual consumer contacts have continued to generate a lot of excitements, especially with the GoPro camera that our product the price offering.

We have continued to partner with the Fiat brand now for the second year, utilizing a Jones Soda photo contest, where we are giving away a Fiat 500 at the end of this year to lucky winner. We are (indiscernible) various event such as the U.S. Open of Surf from Huntington Beach, which took place this past weekend, the Woodward Dream Cruise initiative, happening in a few weeks and really anywhere we can get together on July sampling event.

We also brought back our Made in Michigan program in July, really bought our product in Detroit to help bring business back to that state, and moving photos contained from our distribution partners in Michigan. With the success of this unique program for the second year in a row, we are looking to recreate this program within other selection we need across North America.

And finally, we continue to near-term build our focused international markets that are building our brand in an offensive and gracious way that we know is a right for brand. We look forward to updating you in the future with our continued progress into international market.

I will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) we will take our first question from Gary Guilds, Private Investor.

Unidentified Analyst

Yes. Hi, Jennifer. Hi, Mark. Thanks for the update, it was very clear and hopefully, we are making progress. I had three questions. First, on the cash, you mentioned we had enough cash for the end of the year; does this involve a significant additional drawdown on the credit facility?

Jennifer Cue

No, it is not Gary. Actually, we’ve – we drew down right after the end of the quarter in July based on PO’s on hand and based on production that we have to produce, if it comes down significantly, and we are anticipating a zero line of credit by the end of the year with our forecast in place. So no, it is not yet included in the higher draw downs on the line of credit.

Unidentified Analyst

Okay, great. Thanks. The next series of questions involves the – you have mentioned some issues impacting both revenue and impacting costs. Are those continuing in Q3, or that’s behind you?

Jennifer Cue

The revenue discussion was related to a – it was a fair number of distributor changes that we had to make in approximately eight states in the United States, which we have a little challenging through our second quarter. we worked through them and we’re really excited by the partners that we have in place and working to build our brand again, in those states. So that was where our revenue was impacted in terms of our cost of the goods with the combination of glass price increases that we had been – we knew what was coming, we planned for it in our budget.

There was additional cost in the second quarter related to the glass price that we’re not expecting, those will go away in the third quarter. However, our budgets in place for 2014 anticipate with the initial glass price increases that we had. And we’re working on hurdles to not have to go to a price increase to our partners to offset that and we’re working at volume instead of price increases.

Unidentified Analyst

Okay, so.

Jennifer L. Cue

And then the third thing to our path was on Costco in Canada that added some cost to us for our cost of goods. We are moving forward, the result in Eastern Canada were really strong, so we are moving forward with this path into the third quarter. We will be looking at reconfiguration of the path if permanent broader listing comes into play because that the cost of goods were impacted and we are looking at changing that up as we going forward more permanently.

Unidentified Analyst

Okay, so looking ahead do you expect gross margin to be comparable to this quarter or comparable to year ago quarter on an order magnitude basis?

Jennifer L. Cue

That’s a difficult one to assess in our third quarter; we have a whole different set of product mix coming forward. So it’s a kind of a hard one to access, but without that changing of the product mix I’d say it would be somewhere in the middle range because that was impacted in the second quarter because of certain things that happened as I mentioned. It will not be as high as last years second quarter because we are permanently hit with the glass price increase. And we have not raised our prices to our distributor at this point. So, we’re working, trying to work our ways throughout without an increase in price to our distributors, but we will look at it and evaluate it through the year.

Unidentified Analyst

Okay, on the glass are you looking at alternate suppliers?

Jennifer L. Cue

We have definitely been looking at alternate suppliers; we did a very intensive valuations before accepting this price increase. We got some good volume rebates in place with this glass supplier. So, is it volume increasing we can take advantage of the reduction there, but, yes, we did an intense thorough negotiation and assessment of the entire market.

Unidentified Analyst

Okay. Because one would think that glass is even more of a commodity than Soda.

Jennifer L. Cue

Yes, you would think that unfortunately what happens in the glass industry, there is very few players and that’s where you are limited. We’ve looked internationally too, we’ve looked immediately, we do everything to keep our cost down and we look and assess everything including international markets and looking at Mexico, looking at China evaluating what’s that – those types markets what we get after that, so yes, a thorough assessments have been made where we do have some release as volume rebates with our directed focus on growing this brand we will get some volume rebate.

Unidentified Analyst

Great, great. That’s good to hear, good to hear, growing volume and rebates associated with that.

Jennifer L. Cue

Yeah.

Unidentified Analyst

Okay. well, thank you very much for your time, and I wish you all of you the best and Mark, welcome to the company.

Mark Miyata

Thank you.

Jennifer L. Cue

Thanks Gary.

Operator

(Operator Instructions) There are no further questions at this time. I would like to turn the conference over to management for any closing or additional remarks. I’m sorry, I had an interruption. We did have one pop in. We do have Mr. Dan Baxter, Private Investor.

Jennifer L. Cue

Okay.

Unidentified Analyst

Hello.

Jennifer L. Cue

Hello.

Unidentified Analyst

Yes. I would like to ask a question about your energy drink. I haven’t heard anything about it, or seeing any things, going on with it, can you tell me anything about it?

Jennifer L. Cue

Yes. That was sort of on its way out, even before I came on board, the WhoopAss Energy Drink.

Unidentified Analyst

Yes.

Jennifer L. Cue

Yes. that was – we have been selling as customers requested, it was a very, very heavily launched energy drink that in the end, was not that successful, this was – that was sort of blocked even prior to when I came and it was reported, it was and has been, it was reported as a subsequent event that it has been discontinued, because there was the response to the brand, it was extremely competitive market with other energy drink manufacturers and that with the name WhoopAss, everybody saying it was decided, let’s focus on some core products, which are the joint portfolio products with our limited resources and execute those at this point.

Unidentified Analyst

All right. and I’ve noticed that you guys are expanding into Texas? Is that right?

Jennifer L. Cue

That’s right. We, in the first quarter secured our first statewide distributor called Republic National Distributing Company, and we are very excited by, what we’re doing in Texas, we’ve – if they are a large company, they are a wine distributor, they don’t take on a lot of non-alcoholic brands. So we’re excited by that. they get the Jones Soda brand, and we’ve kicked off the Dallas and the Houston, and actually as you speak right now, Austin we’re doing a big blip right now to kick off Austin and the next one will be San Antonio.

So we have to go in every months, and work with the sales team and educate the sales team or from Lime to Jones Soda. and yes, we’re excited by that and from that excitement in Texas; we’ve been able to partner with that same amount of distributors three more states. So we’re very excited about our partnership with Republic National.

Unidentified Analyst

That’s awesome, because that’s – I mean, from Texas, I’m down here right now and I have been talking to a lot of people down here, and they are anxious to get their hands on Jones Soda, so...

Jennifer L. Cue

Okay great.

Unidentified Analyst

Hello…

Jennifer L. Cue

Hello, yes, we can hear you, Dan. Are you there, Dan?

Unidentified Analyst

Yes, yes. hello.

Jennifer L. Cue

Anymore questions, Dan?

Unidentified Analyst

No. that will be it. thank you so much for your interest. Thank you.

Jennifer L. Cue

Okay. well, thank you for asking the question and participating.

Unidentified Analyst

Thank you so much.

Operator

And at this time, there are no further questions. I’ll turn the conference back over to management.

Jennifer L. Cue

Okay. thank you, Shannon and thank you everyone for joining our conference call and we look forward to speaking with you at our third quarter conference call results, and that will be some time in November.

Mark J. Miyata

That’s correct.

Jennifer L. Cue

The first Thursday of November. Talk to you later. Bye.

Operator

And ladies and gentlemen, that does conclude today’s conference. we do thank you for your participation. you may disconnect. have a great rest of your day.

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