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Executives

Hassan N. Natha - Chief Financial Officer & Secretary

Stephen C. Jones - Interim Chief Executive Officer & Director

Joth Ricci - Chief Operating Officer

Analysts

Nicole Miller – Piper Jaffray

Mark Astrachan – Stifel Nicolaus & Company, Inc.

Alton Stump - Longbow Research

Jacklyn Rider - Lazard Capital Markets

Bill Allbright - New Castle Pacific

Jeff Kanter - UBS O’Connor

Jones Soda Co. (OTCQB:JSDA) Q4 2007 Earnings Call March 10, 2008 4:30 PM ET

Operator

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Jones Soda Co. fourth quarter fiscal 2007 year end 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 for questions. (Operator Instructions) I’d like to remind everyone that this conference is being recorded. I will now turn the call over to Hassan Natha, Chief Financial Officer of Jones Soda. Please go ahead, sir.

Hassan N. Natha

Good afternoon ladies and gentlemen. Welcome to the Jones Soda fiscal 2007 earnings conference call. I will begin this conference call by reading out the Safe Harbor language. Before we begin let me remind you that certain portions of our comments today about future expectations, plans and prospects of the company including, without limitation to the financial guidance we will provide, constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigations Reform Act of 1995. Forward-looking statements include all passages containing verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, projects or targets, the negatives of those words or 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 discussed under the heading Risk Factors in our most recently filed annual report on the 10-K and our quarterly report on Form 10-Q filed in 2007. Listeners are cautioned not to place undue reliance on these forward-looking statements that speak only as of 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. In addition certain financial measures discussed on this call are non-GAAP financial measures. The information required by Regulation G with respect to these non-GAAP measures is included in our earnings release issued today which has been posted under the link on the Investor Relations portion of our website at www.JonesSoda.com. Gross revenues is one of them that we could specifically state that non-GAAP financial measure is gross revenues.

I will now turn the call over to Steve Jones, Chief Executive Officer of Jones Soda.

Stephen C. Jones

Welcome everybody and thanks for joining us today. With me on the call as you just heard is Hassan Natha, our Chief Financial Officer as is Joth Ricci, our newly appointed Chief Operating Officer. What I would like to do today is briefly put 2007 into perspective with comments on how we are restructuring the model of the business including a critical assessment of what we did well and where we fell short, then review the fourth quarter and fiscal 2007 which was obviously a disappointment to us. Hassan will then review the financials in more detail. And I’d also like Joth to introduce himself and spend a few moments talking to us about what he sees as the challenges and opportunities as we move forward and I’ll come back to outline our strategy for 2008 and beyond.

Before we begin I want to acknowledge the significant contributions Peter Van Stolk has made to Jones Soda. During the past 11 years, he has created a truly unique brand and a powerful company full of energy and creativity and proven himself one of the most successful innovators in the beverage industry. We look forward to his continued involvement as a member of the Board.

So before we jump into the fourth quarter and full year results I’d like to set the context for Jones Soda performance. Jones Soda Co. is in the middle of a transition as we restructure the business to create more sources of profitable growth. The transition began in mid-2006 and may run 18 to 24 months. For 10 years Jones Soda operated as a supplier and marketer of finished glass bottle products to specialty or high-end shops ranging from Zumis to Barnes & Noble. Unique flavors, bright colors, customized labels, zany holiday flavors, extreme sports sponsorships, online web community marketing were the features of a successful business that generated innovation and excitement in the industry. While innovative and successful, that model had limited potential to expand.

In 2005 and 2006 Peter Van Stolk experimented with a new growth driver, multi-pack cans at Target. That test went extremely well. And based on that success in 2007 Jones Soda took a bold new direction to increase its long term capability to generate new sources of growth. In addition to being a supplier and marketer of glass bottles Jones introduced a concentrate business model and launched a new partnership with National Beverage Corporation to bring Jones Soda multi-pack cans into new channels of regional and national grocery chains and mass merchandisers. In true Jones fashion we launched with high expectations, determination and flair. As Peter raced to sign new listings across the country our global market infrastructure was being developed on the fly. New distributors, brokers, salespeople were being signed up as National Beverage was converting lines to run Jones Soda. We made a major investment in listing fees to expand our points of availability and by the end of the year we had an important new asset at Jones, 15,000 new outlets that gave us 25% of the market of canned soda. And consistent with our commitment to provides Jones drinkers with the highest quality products we converted from high fructose corn syrup to pure cane sugar which is a much healthier and better tasting sweetener system.

Under the heading of There’s Never A Dull Moment At Jones Soda, in the midst of the can introduction we secured the rights to sell Jones Soda at Qwest Field, the home of the Seattle Seahawks. The Jones team worked around the clock with the Seattle Seahawks’ organization to make that happen and by all accounts they did a fabulous job. The sponsorship is a great way to support our hometown Seattle Seahawks and develop our brand in the Northwest region. They’ve turned out to be a fabulous marketing partner and we look forward to many more seasons with them. And just a few weeks ago Alaska Airlines, another of our Seattle neighbors announced that they are converting from Coke products to Jones Soda products. We’re helping Alaska to give their 16 million passengers a great experience onboard and hopefully we’ll persuade them to switch to Jones by the time they land.

Late in the year in the midst of the can rollout, we launched a new source of growth, a functional beverage platform with the brand 24C. This is a vitamin fortified flavored water that tastes great and is uniquely refreshing. We think that we have a new platform here capable of supporting a lot more products than just flavored water. So for a small boutique beverage company with a very active calendar of events our team achieved a great deal this past year. Most importantly though Jones Soda began the process of transforming its business model to create new sources of growth and turn us into a highly profitable national player and on a case growth basis we did it successfully. We sold 1 million cases more in 2007 than in 2006, that’s more than a 20% growth rate. That’s about 30 million drinks a year that represents more than a quarter million new drinkers that we recruited. In any business that’s a real great success.

But we did encounter a number of problems along the way. We paid almost $3 million for listings but failed to reach our volume per shelf targets that were necessary to pay for the fees. We experienced continuous out of stocks after we secured new listings which limited our volume potential. We had to write off a lot of HFCS inventory. We used our most popular bottle flavors in the cans but found that shoppers weren’t necessarily interested in all of them and some of them didn’t sell so we had to dispose of them. We introduced pure cane sugar but didn’t utilize that differentiator to create awareness and drive sales of our products. Our 16 ounce can, Halloween packs, Hanukkah and Christmas packs were launched to bolster sales but the selling was incomplete and we didn’t perform to our expectations and we had to write off some of those packs as well. With all this activity our attention to organics and naturals and energy dropped off and as a result sales were down and some of the new team that we brought on board through the year decided to leave the company in the fourth quarter so we have higher than expected severance costs.

Much of the cost of the inventory write downs came in the fourth quarter. The effect of the inventory write downs, severance costs, one-time write offs coupled with lower than expected concentrate shipments contributed to a loss of $9 million which Hassan will take you through in more detail.

Hassan N. Natha

I will now begin an overview of fiscal 2007. Total case sales for fiscal 2007 increased 21% to 5.7 million cases compared to 4.7 million cases in the same period 2006. This includes sales of all our finished products primarily bottle and concentrate sales. Total case sales of our finished products in 288 ounce equivalents for fiscal 2007 increased 20% to 3.1 million cases compared to 2.5 million cases for the same period in 2006. Total case sales of our concentrate of 288 ounce equivalents for fiscal 2007 increased 23% from 2.1 million cases to 2.6 million cases. For fiscal 2007 gross revenue before deduction of promotional allowances and slotting fees increased 14.7% to $45 million compared to $39 million for 2006. The increase is due primarily to an increase in revenues in our DTR and our DSD channel. During the year we incurred slotting fees and promotional allowances for our DSC and CSD channels of approximately $5.5 million. The slotting fees refer to payments for the acquisition of shelf space primarily in the CSD channel. Promotional allowances refer to cash and credits to distributors and retailers for various price promotions throughout the year. Gross margin for 2007 decreased to 23.7% versus 39% in the prior year. Included in the 2007 margin were inventory provisions of approximately $1.7 million related to the transition of HFCS conversion, discontinuance of the 16 ounce cans, specialty packs and certain flavors in the CSD channel. Approximately $700,000 of these provisions related to HFCS transition costs that were incurred in the first three quarters. We recorded approximately $1 million of inventory provisions in the fourth quarter related to 16 ounce cans, specialty care packs and the discontinued flavors. Excluding the impact of inventory provisions gross margins for 2007 were 27.9%.

Operating expenses for the fiscal year 2007 increased to $20.8 million from $13.2 million in the prior year. Included in the 2007 operating expenses were charges of approximately $1.2 million related to severance costs recorded in the fourth quarter and increased expenses related to promotional advertising, salaries and benefits, legal, audit and SOX fees incurred throughout the year. As a result of the losses incurred in the fourth quarter of 2007 and the potential losses in 2008 the company recognized a full valuation allowance against its net US deferred tax assets in the amount of approximately $5.5 million. For fiscal 2007 the company reported a net loss of $11.6 million or $0.45 per diluted share loss compared to net income of $4.5 million or $0.19 per share in the year ended December 31, 2006. Excluding the impact of recording the valuation allowance against the net US deferred tax assets in the fourth quarter of 2007 the loss for fiscal 2007 would be $0.23 per diluted share.

I will now begin to review the fourth quarter of fiscal 2007. For the fourth quarter gross revenue before deduction of slotting fees and promotional allowances decreased 6% to $9.7 million compared to $10.4 million in the fourth quarter of 2006. The decrease is due primarily to a decrease in revenues in our DSD channel and no shipments of Jones Pure Cane Concentrate in the fourth quarter due primarily to the promotion programs not generating enough consumer pull off the shelves of the retailers. Promotional allowances and slotting fees of $2.8 million reduced gross revenues during the quarter. We incurred significant slotting fees in 2007 as part of our effort to penetrate and gain distribution in the CSD channel as we launched our can soda product. We do not expect to incur the same level of slotting fees in the year 2008. Net revenues which is calculating after deducting slotting fees and promotional allowances from gross revenues decreased 45% to $5.9 million compared to $10 million in the fourth quarter of 2006. As indicated earlier this increase is due to a decrease in revenues in the DSD channel and no shipments of Jones Pure Cane Concentrate in the fourth quarter. Total case sales in the fourth quarter were 786,000 cases compared to 2.4 million cases in 2006. This is for the sales of all our finished products and our concentrate sales. Total case sales of our finished products primarily out bottle sales in 288 ounce equivalents for the three months ended December 31, 2007 increased 22% to 693,000 cases compared to 566,000 cases in the same period 2006. Total case sales of concentrate in 288 ounce equivalents for the three months ended December 31, 2006 were nil compared to 1.8 million cases for the same three month period in 2006.

Gross profit before taking into account licensing revenue for the fourth quarter was -$1.7 million compared to $4.7 million in the prior year a decrease of $6.4 million. The negative margin is due to a number of reasons, due to the deduction of slotting fees, the promotional allowances in the CSD and DSD channels, the recording approximately $1 million of provision for inventory that I mentioned earlier. For the fourth quarter our licensing revenue was $53,000 a decrease of 585 over the same period last year. The decrease in licensing revenue is due primarily to the elimination of licensing revenue from Target a year ago. Total promotion and selling expenses for the quarter were $1.7 million compared to last year’s fourth quarter of $1.6 million a decrease of $100,000 or 6%. Decrease in selling and promotion expenses due primarily to decreased advertising offset by increased hiring in CSD and DSD sales teams. Marketing expenses also included costs related to our sponsorship agreement with the Seattle Seahawks for which there were no comparable costs in 2006.

Total general and admin expenses for the quarter increased to $3.9 million compared to last year’s fourth quarter expenses of $1.5 million. The increase in general and admin expenses is due to the recording of a $1.2 million termination severance, increase in legal fees and increase in audit fees as well. Interest income and other income for the quarter was $149,000 due to interest income on our cash balances. The decrease was due to lower interest rates and decreased cash balances in the quarter. For the fourth quarter 2007 we reported a loss before interest and income of $7.4 million compared to an income of $1.7 million for the comparable quarter in 2006. As I mentioned earlier it’s due to the promotional allowances, slotting fees, inventory reserves, severance charges and various professional fees of legal, audit and SOX. During the fourth quarter of 2007 due to the losses incurred in the US subsidiary and potential losses in 2008 we recorded a full valuation allowance against our deferred tax assets of approximately $5.5 million. Although part of these losses relate to costs such as slotting fees and severance costs and inventory provisions that Jones does not expect to incur in the future we concluded it was appropriate to record a full valuation allowance in accordance with FAS 109 due to the uncertainty regarding the full utilization of our deferred net tax assets.

The company reported a net loss of $10.2 million or $0.38 per fully diluted share compared to $1.2 million or $0.08 per fully diluted share earnings for the comparable period in 2006. Excluding the impact of recording the valuation allowance against the net US deferred tax assets in the fourth quarter the loss for fiscal 2007 would be $0.23 per diluted share.

I will now begin a review of the highlights of the company’s balance sheet as of December 31, 2007 as well as key metrics the company uses to monitor its performance. Cash, cash equivalents and short term investments as of December 31, 2007 were $27.8 million with zero borrowing against the company’s $15 million line of credit. This compares to cash and cash equivalents of approximately $30.2 million and zero borrowing as of December 31, 2006. The decrease in cash is due primarily to the losses incurred during the year offset by decreases in working capital items and increase in accounts payable. Accounts receivable outstanding at the end of the quarter were 76 days an increase of 14 days over last year. Accounts payable outstanding decreased to 52 days compared to 61 days for the same period last year. Average days of inventory in stock decreased to 69 days at December 31, 2007 compared to 100 days for the same period last year.

As you know we have not provided specific guidance in the past. That being said, as we have stated before our transformation into the $70 billion CSD market through the manufacturing and distribution agreement with National Beverage affords the company growth opportunities into the future. And given the transition issues and the costs related to Jones Soda’s entry into the CSD category we expect net revenue growth in 2008 to be in the range of 20 to 25%. We anticipate full year of net revenues to be in the range of $48 million to $50 million. We anticipate gross margins to improve significantly from 2007 as we anticipate reducing our slotting fee spend in 2008 and we do not expect to incur the same level of charges for inventory provisions. In addition we don’t expect to incur charges for severance and other one time costs that were incurred in 2007. We however continue to face the same commodity pricing pressures as all other companies in the beverage industry and we plan to aggressively manage these increases throughout the year. That being said we expect the year 2008 to be a year of transition and expect a loss for the year. As regards to the first quarter the first quarter revenues are currently in line with our expectations for the 20 to 25% annual growth for the year. We however expect concentrate sales to still lag in the first quarter of 2008 so we expect margins will be impacted in the first quarter of 2008.

We view the years 2007 and 2008 as a transformation period for Jones Soda. We are evolving from a regional beverage company with one primary platform, Jones Soda in 12 ounce bottles to a national beverage company with various platforms for growth such as the 12 ounce can in the CSD category, 24C in the enhanced water beverage category and the 12 Jones Soda bottles being widely distributed across the country and internationally.

I will now turn the call over to Joth Ricci, Chief Operating Officer of Jones Soda.

Joth Ricci

Let me begin by saying how excited I am to be here. I look forward to building on the foundation Peter established and helping write the next chapter in Jones Soda’s history. I’ve been in the beverage and consumer products industry for over 16 years, most recently serving as General Manager of a Northwest based Columbia distributing company. So I’m very familiar with the strong brand equity and emotional connection Jones has established with its consumers. During the six weeks that I’ve been here I’ve spent a great deal of time meeting with each department and examining how things are run. There is no doubt we have a great team here. However I think the organization has been spread too wide and therefore we’re doing a lot of things well but not very much great. We are currently in the process of developing systems that are focused on improving accountability, discipline and results throughout everything that we do while maintaining the creative culture of Jones. Through those levers we will execute against our portfolio of brands, improve our business relationships with our suppliers, our customers and our distributor partners, we’ll develop innovative products and consumer marketing that drives pull through each of our brands and be a creative, aggressive and innovative winning team. Jones Soda operates a host of compelling products from our line of premium glass bottle sodas with our distinctive labeling and uncommon flavors to our newest introduction, the 12 ounce canned sodas and the aforementioned 24C enhanced water. In addition the company has established an incredible brand image over the years that continues to grow and evolve. We must now take advantage of our position to get more of our product into the mouths of consumers and drive higher sales volumes across our business with improved execution.

We already increased focus on two of our largest most under developed markets, that’s Southern California and the Northeast most of which have manufacturing plants nearby that should allow us to rapidly expand our reach and presence in those markets. I’ve already made several trips to Southern California and I’m currently in New York to evaluate market expansion here. We’re also in the process of instituting a number of changes with regard to our performance management of all departments. I’m a firm believer in accountability and therefore we’re transitioning to a more performance based compensation system which I expect will improve our execution and increase the cohesiveness of the entire organization from top to bottom.

I do want to inform everyone that Peter Burns our Executive VP of Sales will be resigning effective March 31st to pursue other interests and to be closer to his family in Colorado. It is with mixed emotion that I announce that and I want to thank Peter for his tireless efforts he has put into Jones and wish he and his family nothing but the best for the future.

In closing once again I’m very excited to be at Jones and I look forward to updating you on our progress throughout the year. I will be available to answer questions later in the call.

With that, I’ll turn it back over to Steve.

Stephen C. Jones

As I said up front, Jones is in the middle of a three year transition plan moving from a niche soda company to a national highly profitable growth beverage company. Despite the issues we faced in 2007 it is important to recognize that Peter and the company took the right strategic course. We know it’s the right course in part because we grew the business by 30 million drinks. The issues were caused by poor execution of the details and not a result of any flawed strategy. Scott Bedbury, Chairman of the company, and I have agreed with the Board to focus on four priorities this year. Not only to address the issues from last year but to continue to transform the business model to create new sources of long term growth. Our first 90 days’ initiatives are consistent our four macro priorities for the business. One, get the right people in the top jobs, develop everyone’s skill level and make sure that everyone has the proper tools and systems to perform at the highest possible level. Two, create a world class distribution infrastructure to build on what we already have, capable of reaching more customers with execution excellence at the shelf. Three, achieve marketing superiority by designing and implementing unique and effective branding and consumer purchasing initiatives. Four, be a leader in product innovations, be the first to market with the products consumers are most interested in.

But more specifically we will create profitable volume by creating more points of availability in existing outlets and new outlets and with the highest in store merchandising standards. By providing the right flavors and a broader mix of packs in outlets and by getting more consumers to trial and repeat purchase the brands through relevant marketing programs. A lot of our initiatives have already begun. First we brought Joth on board. You just heard how he will approach his role and set priorities. I don’t want to repeat what he said, but there are some other things that we’ve already started in the last 90 days. For instance, we’re in the process of recruiting some new top notch sales leaders with excellent track records. Joth and I have already interviewed a few who could add some real substantial heft to the team. We are fortunate in that we inherited a very strong Jones team full of dedicated, smart people, but one of our highest priorities in the first 90 days has been introduction of new management routines and systems that improve our direct management control over things like inventory, financial reporting, logistics forecasting and marketing expenses. We will invest in the right tools for everyone to do their job properly. This will be an ongoing process throughout the year, all aimed at increasing capability, efficiency and eliminating costly issues that we faced in the past.

We’ve added new distributors, some with some real important upgrades in major markets. We are in the process of reviewing several distributor agreements to increase their in-store merchandising role. One important solution to our out-of-stock issue and slow velocity is to get merchandisers in the store at least once a week to make sure that the shelf is stocked and we have the right brands and packs available. Most distributors can provide that service. In some cases we may have to switch to distributors, ones that can execute in store merchandising and Joth is taking the lead with our distributors to review that service. And the first step towards success in any case is our commitment to be a much more reliable partner with them.

We’re finally launching new Jones Cola nationally sweetened with pure cane sugar and a diet version sweetened with Splenda. I spoke with Joe [Caparola] at National Beverage Corporation last week about the importance of getting Jones Pure Cane Cola on the shelves as soon as possible and everyone at National is focused on that critical mission. Joth will be at their offices in a couple of days for an update meeting on this. You can expect shipments to begin in about six weeks and see product on the shelf by Memorial Day weekend.

A major issue in 2007 was the lack of marketing support to pull product off the shelf at our new points of availability and lack of a continuous re-introduction of the brand to new young drinkers. Scott Bedbury has been working hard and smart with a couple of our really bright marketers and our new agency to design some very breakthrough Jones Soda style marketing programs for 2008. Normally I wouldn’t go into such detail but considering what we’re facing here I don’t mind sharing with you what’s going on in the world of marketing and here is just a few highlights.

You can expect a lot of breakthrough online marketing from Jones. Jones has been an online marketer since day one for Jones users are a very web based community. I think Peter Van Stolk and his web crew really invented a lot of what is used in the industry today. We’ll put a lot of emphasis behind our MyJones.com initiative. That’s where consumers send their photos that we put on our packages and where people order their own special personalized bottles. It’s what makes Jones such an open source brand, literally defined by the average Jones fan. MyJones.com is not only a revenue generating opportunity but a potential marketing tool and we plan to bring it to life in several programs this year including launching My Jones videos on April 1. Another online in the market street initiative is Campaign Cola our national launch of our cola business. In this program we are keeping pace with a youthful spin on the Presidential race and we plan street activation crews of young volunteers, all avid Jones fans in major markets. There’ll be lots of Jones Cola sampling, cool Jones style ways to generate awareness and trial of Jones Cola. And as part of Campaign Cola, and I’m going out on a limb here, we’re trying to convince McCain, Clinton and Obama to put their photos on our labels and have consumers buy their favorite candidate at MyJones.com and we’d send all the proceeds to local community initiatives to help create some change in the marketplace. That would be awesome if they let us do it and I’ll keep you updated if that actually happens.

Our Jones Soda theme will be Run with the little guy… create some change. It’s a theme line that’s been a part of the Jones story since the beginning but never openly promoted. Jones is all about independent, irreverent fun youthful expression of self confidence that wants to make a positive change in our world. This theme not only differentiates us from the others but distinguishes us as well. Run with the little guy… create some change celebrates that everyone of us at some time feels like the little guy up against the odds but with passion, humor, courage and the simple desire to create some change and make the world a better place we can achieve great things and to have fun doing it. It will headline all of our promotions. And our Jones promotions kick off this week. Go to CBSSports.com. Jones Soda presents the March Madness brackets and will have a link to JonesSoda.com where you can pick your own fantasy team of underdogs to win prizes. Go check it out.

As part of our plan to drive can volume we’re going to run a Willy Wonka gold chocolate bar style multi-pack can promotion in key markets and that’s sure to kick off the Jones Cola business in a big way. And we’ll follow that up with a bottle under the cap promotion that uses digital cell phone technology to collect your prizes. And of course you’ve heard about Gallop and our exclusive rights to use in Beverages North America. Well stay tuned to upcoming announcements on how we’ll bring that to market. And of course we’ll be running some ongoing activities with Alaska Airlines and the Seattle Seahawks later in the year.

But as fun as all these promotions are, success depends on our ability to execute them well at the point of purchase. That’s our number one priority. We will continue to invest in building up the infrastructure and capability of Jones Soda throughout 2008. These investments will create long term sustainable growth and build momentum for us going into 2009 but we will not break even in 2008. In Phase 3 or 2009 we will fully utilize a strong distribution infrastructure, accelerate case sales and generate profitability.

In closing I want to reiterate that despite the changes that have taken place and the challenges that we have recently faced, the creativity is still much alive at Jones Soda. While we have only been collaborating for a short while the senior management team currently assembled, that’s Scott and Joth, Hassan and myself, have worked very well together and we believe we are the right group to lead the company at this time. Therefore we are temporarily postponing our search for a new Chief Executive Officer in order to focus on running the business and improving our recent performance. Finally I’d like to thank our employees for their hard work and dedication over the past year and during the recent transition. As well I’d like to thank our shareholders for their continued support through this challenging period. Looking ahead we are fully committed to making the necessary changes to build a stronger, more efficient company for the long term. However, regardless of the modifications we make our mission remains the same, to be a high growth company that out-innovates the beverage industry giants.

I’m ready to take any questions.

Question-And-Answer Session

Operator

(Operator Instructions) We’ll for first to Nicole Miller with Piper Jaffray.

Nicole Miller – Piper Jaffray

Just two quick questions, first can you give us the quarterly inventory write downs by quarter so we can reconcile the model? I see you gave it this quarter, I believe it was $1 million in cost of [inaudible].

Hassan N. Natha

For the fourth quarter and what we indicated is that for the first, second and third quarters, it’s $700,000. What we will do is in the 10-K we’ll provide you that information. I don’t have that on me currently.

Nicole Miller – Piper Jaffray

And then I guess just really my last - the question I’m really trying to reconcile is this comment about not expecting slotting fees in 2008 or at least not to the same degree, I’m just wondering how you either plan to grow ACV or throughput, how can we kind of reconcile increasing sales without having to pay for it? That’s the question, I guess.

Stephen C. Jones

Well, Nicole, I think we will spend a bit on listing feesasHaHassan. We have currently budgeted about $500,000. That’ll handle continued investment in 24C, new points of availability and in some cases it’ll fund some of our Cola listings. So we will be spending some but really I think that the growth comes from we’ll continue expanding in some of the regions that Joth talked about Southwest, the Northeast and so we will be picking up new points of availability but really we’re focusing on volume per outlet of the investments we’ve already made, maximizing the opportunity on the shelf in getting more volume per point of availability that we already have and to me that’s where the real source of growth in 2008 and 2009 will come from. So hopefully that clears that up.

Operator

We’ll go next to Mark Astrachan with Stifle Nicolaus.

Mark Astrachan – Stifel Nicolaus & Company, Inc.

The first question relates to the sales of concentrate in the quarter, what happened there in terms of why there weren’t any shipments, was it inventory, was it other things? And then the second part of that question is what were the slotting fees used for in the quarter?

Hassan N. Natha

In terms of no concentrate sales in the quarter, really two reasons. One is the inventory levels at National Beverage and secondly is the promotion programs that we put into the fourth quarter were not as effective as we thought they would be. So that’s the reason for the no sales of concentrate in the fourth quarter. In terms of the slotting fees, the slotting fees that were incurred in the fourth quarter were again related to customers that we had acquired and also the amortization of the ongoing slotting fee costs that we’ve incurred throughout the year.

Mark Astrachan – Stifel Nicolaus & Company, Inc.

And then the final question is in terms of your expansion into the Southwest and the Northeast or I guess you’re focused on those two areas, I guess my question is why are you focusing on those two regions where like New York for example has some of the highest slotting fees in the US and I would imagine Los Angeles is in there as well and obviously the cost of doing business in those two markets is really higher than it would be in the rest of the country and I guess kind of your thoughts there in terms of why you’re focusing on those markets.

Stephen C. Jones

Let’s take Southwest first. Jones Soda has a good heritage in the Southwest and so we were already building on a foundation. We have not invested in the Southwest in recent years but we think that going back and reactivating that consumer interest is really wise responsible way to grow the business. The Northeast is more than just Manhattan and the Boroughs, we see a lot of opportunity to get some very good value with a lot of customers, not just in the Boroughs but outside the Boroughs. So there’s a lot of good value to be had whether you’re talking about Philly on up through Jersey on up into Connecticut, even up into Massachusetts, we’ve got some great new customers lined up. So there’s good value to be had in the Northeast even if you don’t pay the big prices in New York.

Joth Ricci

I think in addition to that the other reason why we’ve picked those two markets is that we weren’t as developed in the DSD up and down the street business so it was important to us to decrease bottle distribution up and down the street so we could support the effort of the canned launch that happened last year.

Mark Astrachan – Stifel Nicolaus & Company, Inc.

And then the final question is can you describe your relationships with the retailers where you were selling in the canned product of Jones Pure Cane Soda, like Wal-Mart, Albertson’s, Safeway, etcetera, what are their thoughts on the kind of shelf space and promo programs that they’re expecting for 2008?

Stephen C. Jones

We’ve gotten nothing but positive feedback from our customers. They were very excited in 2007 and they remain committed in 2008. So we have an opportunity to make sure that not only do we have the space but the marketing programs to draw consumers into the store and create pull and that’s their challenge to us and we’ve put the plans together to deliver that to them.

Mark Astrachan – Stifel Nicolaus & Company, Inc.

So in terms of the amount of space that the product is in, is it comparable to last year, is that your expectation in 08?

Stephen C. Jones

I think we’re going to be taking generally space up. As you know we’re coming in with the national launch of Cola now, we’ll add in some cases some space. Does that answer it?

Mark Astrachan – Stifel Nicolaus & Company, Inc.

Yep, that’s it.

Operator

We’ll go next to Alton Stump with Longbow Research.

Alton Stump - Longbow Research

Just had a quick question, obviously a disappointing case line result over the course of 07, could you talk a little bit about if there’s any risk whether or not some of the major retailers could potentially pull a product if we don’t see results pick up over the next couple quarters this year?

Stephen C. Jones

What we’re seeing really more is an opportunity for re-sorting our mix of flavors. That’s really where we’re concentrating with our customers. If we don’t do a better job of executing at the shelf I think in the long term, yeah some of that space could be at risk, but right now our discussions with all the retailers are about getting the execution in the store, the marketing pull programs and everybody has given us the space to go do that. But as I said you will see some mix sorting out. When we went into the cans we assumed that the bottle flavors would work well, the shopper going down that aisle already some skews and some expectations on flavors and so we’ll be re-sorting the mix to make sure that we’re in line with their expectations in that.

Joth Ricci

And we are also working with National at this time to look at some skew rationalization on some of those items that have not been performing well so that we can actively on head with the customer to solve that and to also make sure that space is there for the Cola launch that happens in the second quarter.

Alton Stump - Longbow Research

And then just I guess one quick follow up and then I’ll hop, in terms of the pricing structure of the can I think one of the things we heard from our channel treks is that some other retailers had difficulty with the premium price point versus of course the top two or three soft drink flavors, is there any plans to potentially work a little bit with pricing to maybe bring that down to get the initial sell through and then maybe potentially raise it back up later on? Or could you maybe just talk about sort of what the strategy might be there?

Stephen C. Jones

I think our ongoing strategy is to be a premium quality beverage with higher prices and so we’re not planning on coming off of that. But you will find us this year managing the shelf and the floor a little bit better. In some cases where we had the big displays, the multi-pallet displays and didn’t necessarily move all the volume we wanted to, we’ll be careful to make sure we have a culmination, not just of pricing, but marketing support as well. So you’ll continue to see us on average premium price to the national leaders, you’ll see us balancing more effectively some price opportunities together with coupon drops or trial generating programs and in-store marketing activity. So that’s really where you’ll see us adjust our strategy is in a more integrated approach to creating consumer pull.

Operator

We’ll go next to Jacklyn Rider with Lazard Capital Markets.

Jacklyn Rider - Lazard Capital Markets

First question, how much inventory is left at National Beverage?

Stephen C. Jones

How much inventory is left at National Beverage?

Jacklyn Rider - Lazard Capital Markets

Yes, if that’s part of the why concentrate didn’t sell in the quarter, how much more do they have to sell off before you can ship them more concentrate?

Hassan N. Natha

I don’t have the last information on that so I’m not sure if I can give you that right now.

Jacklyn Rider - Lazard Capital Markets

And then do you have any benchmarks for us to look forward to in 2008, whether it be within your case model, looking for number of concentrate sales, looking for volumes, certain milestones that we should hit that we can say, they hit this number, we’re seeing success?

Stephen C. Jones

I’ve talked with the Board a lot about what the parameters of success are going to be and first and foremost, we sell cases and that’s the most important thing we can do. So selling 7 million cases this year, equivalent cases, that’s the first metric you should be looking at.

Jacklyn Rider - Lazard Capital Markets

For 2008?

Stephen C. Jones

2008.

Jacklyn Rider - Lazard Capital Markets

You sold that in 2007. No you didn’t, no. Sorry. So 7,000 cases in 2008 is what you’re looking for?

Stephen C. Jones

7 million cases, $52 million in revenue, a little softer here, this will be tough to fit in your model but to promise and deliver every quarter. I think the parameters of success also include the need to be responsible around sustainable growth and then finally on top of parameters of success is not only our current business that we have with bottles and now cans, but you can never stay still and so getting something really innovative out there will be, I’d say, the final parameter of success that I need to demonstrate or we all need to demonstrate.

Jacklyn Rider - Lazard Capital Markets

Now I guess my other big question is you’re talking about a lot of sampling, increased in store merchandising systems, all that stuff costs a lot of money. Where do you see your general administrative costs going in 2008 relative to 07? Do you think you can hold those levels and just move your spending around?

Stephen C. Jones

We plan to hold exactly that and do different things with the investment.

Jacklyn Rider - Lazard Capital Markets

And now your promotion and selling though at the same – I mean there should be – are there going to be more dollars spent there? I was surprised the number was flat with fourth quarter of 06.

Hassan N. Natha

Yeah, Jackie, we’re looking at it two ways for 2008, one is as part of our budgeting and planning process we are going to be aligning our trade promotion and marketing expense with our revenues, so there’s a direct in a sense ratio that we are managing internally as to how much we want to spend against our revenues. The second layer of this is, and that’s what Steve talked about earlier, is that where there are strategic opportunities for us to invest in, put off certain markets and certain marketing initiatives and opportunities to increase consumer awareness or pull of the program itself, we will identify those, evaluate those and then look at implementing those. So in a sense as Steve said earlier is a more responsible approach towards the spending of marketing and trade promotion dollars for 2008 and onwards.

Jacklyn Rider - Lazard Capital Markets

When it comes to your systems are you talking about completely brand new financial inventory systems that could potentially – are you going to a whole new system platform or is this just upgrading existing systems?

Hassan N. Natha

What it is, is we’re not looking at replacing the current IT systems, what we’re looking at is areas of improving significant processes, where an opportunity exists to implement different types of add ons to our current system itself. We’re not looking at a massive upgrade of our systems in 08 but it’s just a case of better processes, better approaches, better metrics and layering that on to the current system that we have with any kind of small add ons that we may have to do.

Jacklyn Rider - Lazard Capital Markets

And just what was it about your promotional campaign I guess in the fourth quarter with all these slotting fees and that just didn’t draw customers in that you’re going to change for next year? And was there something off about the – obviously something didn’t work with the campaign, what was it or what do you think it was?

Stephen C. Jones

I think the biggest issue we faced in 2007 and are working to correct already is integrated marketing. I think we have to get listings, we have to get the shelves well merchandised and you have to have the right price point as we talked about before and you have to have integrated consumer pull programs and we did not pull all that integration together on a timely basis for the fourth quarter. We had a very successful Halloween pack that went real well. But I don’t think that we integrated all the marketing levers nearly as impactful as we will going forward and that’s really where we’ll concentrate, on those points of sale, making sure that we’ve got integrated plans inside the store to create kind of revenue and case sales that we’re talking about.

Jacklyn Rider - Lazard Capital Markets

And then is there any way you can give us, if you think that your promotion and operating expenses are going to be generally flat with 07, is that fair? The 08 will be generally flat with 07 and that we’re looking at some improvement in gross margins and then obviously, just trying to go for the model and just try to come up with a realistic number here. If you can give us more guidance because I suspect that the street’s going to come out all over the place unless you give us a little more on what 08 should be.

Hassan N. Natha

I think at this stage we want to be able to give only guidance at the revenue level and not go any deeper to gross margin or operating expenses. The thinking that we can share with you is that we are anticipating a loss in 2008, the loss in 2008 is not going to be similar to 07. Obviously there were significant one-time costs involved.

Jacklyn Rider - Lazard Capital Markets

But comparatively are you talking about take out the write off and your –

Hassan N. Natha

Take off the write off, take off the slotting fees, take off some of the severance costs and –

Jacklyn Rider - Lazard Capital Markets

You won’t be at those levels?

Hassan N. Natha

And what we would do is all our marketing and promotion will be tied as a percentage of revenue as part of our first initial spending that will take place in the quarters and then as I said as we look at different opportunities and various markets we may layer on but right now we’re looking at aligning our spending with our revenues for 2008.

Operator

We’ll go next to Bill Allbright with New Castle Pacific.

Bill Allbright - New Castle Pacific

Regarding the CEO search, Steve, did it ever actually begin and if it did, how was the decision reached to suspend it? For you to go along and keep the reins, so to speak.

Stephen C. Jones

We have a nominating committee, it created a job description, targeted our internal network candidates, some people were interviewed, but it was over time, over the first 90 days and leading up to the Board meeting last week. First of all the four of us had the first opportunity really to assess what had gone on in January and February and come to the conclusion that we were working very, very well together and wanted to remain involved. I decided I wanted to remain involved in the business. I think we’re having great success at reshaping where we’re going.

Bill Allbright - New Castle Pacific

So you didn’t want to stay involved from the beginning? Are you saying you changed your mind recently?

Stephen C. Jones

Always from the beginning it was I was coming as an interim, always, and the intention was to go out and recruit a full time CEO and have them in place, I think we said by the Annual Meeting. But no, it was during the first quarter that the Board was very happy with the way Scott, Joth and Hassan and I were working, asked us to consider staying as a team and move forward. And I agreed and so has Scott.

Operator

(Operator Instructions) We’ll go next to Jeff Kanter with UBS O’Connor.

Jeff Kanter - UBS O’Connor

Hassan, or Steve, what does it mean when you say that gross profit margins will increase significantly in 2008? Is that in line with 2006 levels?

Hassan N. Natha

Yes, that would be. Once you back out – as we indicated a few factors that come into play in terms of the 07 margin, first of all is that we would not incur the same level of slotting fees, we will not incur the same level of inventory provisions, we expect better management of our cogs in our gross margin and we anticipate the 2008 gross margin levels to be comparable to what we’ve historically achieved for this company.

Jeff Kanter - UBS O’Connor

So again, starting point of around 40% is not unreasonable?

Hassan N. Natha

40% might be on the high side for us. I think for 08 as we go into 08 and we work through it, I think as I said, historical approach is a much better approach as we start adding more and more concentrate sales and start working that through we start see the margins go up, but I would not start off with 40%.

Jeff Kanter - UBS O’Connor

And G&A relatively flat year-over-year, is that right?

Hassan N. Natha

Expectations are, yes.

Jeff Kanter - UBS O’Connor

But why would it be flat if there were – let me ask you this, what is the total amount of one-time spends you incurred in 2007 that are going away? We know about the slots, but what about in cogs and SG&A?

Hassan N. Natha

Let’s walk this one through, you’ve got the slotting number, you’ve got the $1.7 million inventory number, you have the $1.2 million of severance costs, the other thing that would go away also would be a more efficient spending on some of the G&A items and marketing which we can’t quantify per se but in terms of a better investment of the dollars that we have. And then obviously in 08 you will not see any kind of an impact of the tax coming through as well. If you bleed out those big four items you start to get a sense of where the business would be in 08 and then obviously with increased revenues for 08 coming through at call at normalized historical levels you start seeing gross margin levels all the way through 08.

Jeff Kanter - UBS O’Connor

And did I hear you correctly, no concentrate shipments in 1Q?

Hassan N. Natha

Minimal concentrate shipments in Q1.

Jeff Kanter - UBS O’Connor

Do you still plan on holding onto your cash? Or is that cash balance going to start to be drawn down?

Hassan N. Natha

Our anticipation on the cash flow right now as I said is we expect probably cash to be around the same levels throughout the year. We’ve managed our working capital items quite well throughout 07 with the exception of inventory being one area of not working as well as we thought it would be. In 08 there’s going to be, again you look at our receivable, payable, inventory, very strong management over that. Cash, I don’t expect to have a significant deterioration in cash balances.

Stephen C. Jones

I think I would add to that, and this is for everybody, is as we go through the year and we see some real serious good growth opportunities we are still in an investment phase, we are still building up this infrastructure, we are still creating consumer demand and if we see an opportunity for increasing that, anything that is sustainable, long term infrastructure or creating new users and creating more momentum going into 2009 you could see us dip into some of that cash and make an investment to keep the momentum up.

Jeff Kanter - UBS O’Connor

Last question, should I anticipate seeing management buy stock?

Stephen C. Jones

Yes, you should.

Operator

At this time, I’d like to turn the conference back to your speakers for any additional or closing remarks.

Stephen C. Jones

There was a good question asked, I forget who asked it, what is take to succeed? And I would just wrap up by saying we have some important parameters of success, one is we’re going to sell 7 million cases. We’re going to generate $52 million in revenue. That will be responsible sustainable growth. We will promise and deliver on a quarterly basis and I promise to introduce some very exciting innovations before the end of the year. So those are the four or five parameters of success that we’ve set up with the Board and we intend to deliver on that.

Thank you for tuning in and having a conversation with us today. Thank you and have a nice day.

Operator

Ladies and gentlemen, this concludes today’s conference. We appreciate your participation and you may disconnect at this time.

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