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Executives

Carrie Traner – VP-Finance & Principal Financial Officer

Jennifer Cue – CEO

Analysts

David Cohen – Raymond James

Zoran Minic – Private Investor

Steven Schmitt – Wells Fargo

Walter Gee – Private Investor

Jones Soda Co. (OTCQB:JSDA) Q2 2012 Earnings Call August 9, 2012 4:30 PM ET

Operator

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to the Jones Soda Company’s Second Quarter Fiscal 2012 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 and instructions will be provided at that time. (Operator Instructions) I would like to remind everyone that this conference call is being recorded.

I would now turn the conference over to Carrie Traner, Vice President of Finance for Jones Soda. Please go ahead.

Carrie Traner

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 passages containing verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, will, may, project or targets and negatives of those words and similar words or expressions. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements.

Factors that could affect our actual results include among others those that are discussed under the heading “Risk Factors” in our most recently filed report with 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 would now turn the call over to Jennifer Cue, Chief Executive Officer of Jones Soda.

Jennifer Cue

Thank you, Carrie. Good afternoon everyone and thank you for joining us today. Before we begin reviewing the results for the quarter, I’d like to mention how thrilled I am to return to Jones Soda as CEO. Well I returned to the Board in April of this year, I’ve been at the helm about five weeks now and I am working to evaluate all operations with an eye towards generating sustainable top and bottom line growth in the future.

I was previously with Jones Soda from 1995 and basically its inception to 2005, returning last fall for a consulting role as an Interim CFO. One thing that has remained constant since I joined Jones over 15 years ago is that I am a strong believer in the power and potential of this brand and look forward to putting my passion for Jones and my knowledge of the specialty soda industry to work for the long-term future growth of the Company.

Since my return to Jones Soda, I have traveled around Canada and U.S. and personally met with distributors covering our 50% of our network. The level of excitement and enthusiasm from our distributor partners related to the Jones Soda brand is gratifying. We also have an amazing consumer base evidenced by our 960,000 Facebook fans. We witnessed daily the excitement and energy from our fan base from letters that we receive to the continued submissions of photos from our loyal fans to put on our label.

In addition, the continued stream of visitors to our headquarters in Seattle reaffirms the passion that we all feel towards the Jones brand. That said there is still much to be done. As we move forward, we will emphasize a more disciplined approach to growing revenue. At the moment, our primary focus is living within our means. To this end, since the first quarter of the year, our Board of Directors have implemented a comprehensive cost control strategy which is primarily responsible for the year-over-year improvement in our bottom line. I look forward to working with the Board as I further evaluate and implement measures to realize our potential and improve our long-term profitability.

Now I’ll provide a brief review of our second quarter performance, and then Carrie will detail the second quarter financial results. Afterwards, we’ll be happy to take questions.

We are pleased to announce year-over-year improvement in both our top and bottom lines for the quarter. Revenue was up 7% primarily due to increased case volumes. Additionally we had a $1.4 million improvement in net loss driven by our expense reduction initiatives. As I mentioned a few minutes ago, since the first quarter of 2012 we have put into place significant cost reductions, the results of which can be seen from the top line through to the bottom line.

We’ve reduced all of our expense line items by double-digits between the comparable quarters of 2012 and 2011 with an overall operating expense reduction of $1.2 million. This new overhead structures speaks to our commitment to align our cost structure with our available capital and reduce expense expenses that do not directly drive top line sales. I am continuing to assess all aspects of the business to formulate a longer term strategy that will harness the true potential of the Jones Soda brand and create a sustainable business model.

In the meantime, we are determined to execute day to day operations in a thoughtful way that will better enable us to capitalize on our strengths. We will maintain focus on our core products and markets as we continue to control expenses and work towards sustainable growth.

I’ll now turn the call over to Carrie, who is going to review the financial results for the quarter ended June 30, 2012.

Carrie Traner

Thanks, Jennifer. Revenue in the second quarter increased 7% to $5.3 million from $4.9 million in the prior year period. This improvement is primarily driven by increases in our DSD channel in the Western U.S. and international channel offset by softness in other markets due to ordering cycles. Additionally, revenue for the quarter last year included $53,000 from discontinued items liquidated in 2011 relating to the products line and few rationalization initiatives in the second half of 2010 for which there is no such revenue in 2012.

Revenue also reflected an $87,000 year-over-year decrease in promotional allowance business slotting fees due to our increased focus on cost of containment. Our gross profit margin this quarter increased to 30% from 29% in the second quarter of 2012. Operating expenses in the second quarter decreased 37%, $2.0 million from $3.2 million in the prior year periods reflecting a 51% decrease in promotion and selling expenses and an 18% decrease in general and administrative expenses related to our cost control measures.

The promotion and selling expense decrease was primarily due to the reduction of sponsorship costs as well as decreases in sales and marketing personnel. General and administrative expenses declined as a result of a public company costs associated with our Annual Shareholders Meeting, normally held in the second quarter being deferred to later this year.

We do anticipate lower fees for our 2012 meetings as we will not have proxy solicitation fees as we did in 2011. With these reductions, driven by our cost structure realignments, our operating loss decreased 76% to $431,000 from $1.8 million. Net loss for the quarter ended June 30, 2012 improved 75% to a loss of $459,000 or a loss of $0.01 per share from the loss of $1.8 million or a loss $0.06 per diluted share a year ago.

For the first six months of 2012, revenue increased 1% to $9.1 million from $9.0 million in the prior year periods. Throughout the first half of the year, the Western U.S. market was strong, while other markets were softer. Our gross profit margins for the period increased to 29% from 27% and was benefited from production in warehousing efficiencies. Operating expenses decreased 21% to $4.7 million from $5.9 million in the prior year period, reflecting our expense reduction initiatives.

The promotion and selling expense decrease was primarily due to reduction in sponsorship costs, as well as decreases in sales and marketing personnel. General and administrative expenses declined primarily due to decreases in salaries and benefits, driven by a decrease in stock-based compensation and a decrease in bad debt expense. Additionally, our Annual Shareholders Meeting deferral to later this year, benefited the first half of the year results.

Tighter expense control contributed to our operating loss decrease of 41% to $2.1 million from $3.5 million. Net loss for the first six months of this year improved to a loss of $2.1 million or loss of $0.06 per share from a loss of $3.5 million or a loss of $0.11 per diluted share a year ago. The 2011 period included a credit of an $114,000 recorded in other income and tax benefits primarily relating to interest and tax associated with our 2010 Canadian Tax refund.

Turning to our balance sheet, as of June 30, 2012, we had working capital of $4.6 million and cash and cash equivalence of approximately $2.5 million. Cash used by operations during the six months ended June 30, 2012 was $2.1 million compared to $2.8 million in the prior year. Going forward, we will continue to focus on operating at the lowest cost structure while continuing to focus on top line growth.

I’ll now turn the call back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions) We’ll take our first question from David Cohen with Raymond James.

David Cohen – Raymond James

Hello. Thank you very much for taking my questions. How are you guys doing today?

Jennifer Cue

Good, thanks David.

David Cohen – Raymond James

I just had a couple of questions that I wanted to go through. First of all with respect to the expense lines Jennifer, are these the expense levels we can anticipate for the last two quarters of the year?

Jennifer Cue

Well as you can imagine David, I am still continuing to evaluate the operations of the Company at this point in time and we are focusing very much on eliminating our expense that are not focused on sales and distribution activities. So I haven’t really – can’t really give guidance for the balance of the year, but just knowing that our number one priority is looking at all of our expense line items and eliminating those items that do not focus on sales and distribution.

David Cohen – Raymond James

Do you expect G&A expenses to go up in Q3?

Jennifer Cue

Again, I can’t really give guidance but we – again I am focused on those G&A items that I don’t believe will help drive our sales. So our goal is to continue look at G&A items and reduce those where we can.

David Cohen – Raymond James

How about promotion and selling, they’re down rather significantly year-over-year and sequentially?

Jennifer Cue

Yes, there was a lot of corporate sponsorship and corporate marketing activities that were in the prior year of 2011. So that was what was contributing to the 2011 numbers. Again in a more focused approach on sales and distribution, I believe the better way to build the brand at this stage of development is to work with our distributors to getting more and more accounts opened for Jones Soda. So it’s a different type of promotion and selling expense as opposed to corporate marketing expenditures and corporate sponsorship.

David Cohen – Raymond James

So is the $920,000 for Q2 more representative than the $1,357,000 that you had in Q1?

Jennifer Cue

Yes, that’s definitely more where we’re looking towards to go, yes.

David Cohen – Raymond James

Okay. There has been no growth in the top line. There has been virtually no growth in the case sales. The breakeven has come down significantly at least in the strongest quarter of your year, but you still have some significant issues going forward. And you know what the statistics are and companies that are trading under $2 whether or not they ultimately are successful, I think the number is like 85% of them go away. I recognized that you’ve made some good stride on the expense side, but you haven’t mentioned anything about the previous administration’s initiatives particularly with the 16-ounce cans that were going into the convenience markets. So could you give us some update there?

Jennifer Cue

Yes. And again David, as you can imagine I’ve just jumped in to this role. I am looking at all of the product lines and 16-ounce can is definitely one that our distributors are interested in carrying. And we’re excited by the potential for this particular line of Jones Soda, especially in the convenience and gas channel. So again it’s definitely an important part of our products profile moving forward.

David Cohen – Raymond James

All right. I had a couple of more questions, but I think I’ll see if there was anybody else and then I’ll hop back in the queue?

Jennifer Cue

Okay, thank you.

Operator

(Operator Instructions) We’ll go to Zoran Minic [ph] who is a Private Investor.

Zoran Minic – Private Investor

Hi Jennifer, great quarter. I just want to say congratulations on your new position.

Jennifer Cue

Thank you very much.

Zoran Minic – Private Investor

I’ve got a couple of questions, they are pretty simple and nothing too crazy, but I just wanted to ask, is Jones under your regime going to look at expanding the assortment as far as flavor-wise. There is a lot of fans on Facebook that are looking for a couple of particular flavor that come back like Crushed Melon, (inaudible) stuff like that. Are we looking to try to get those flavors to come back? And then also as far as WhoopAss goes, I am just curious as to find out, are we going to start focusing really pushing WhoopAss onto the market. It seems that that’s one of our higher margin product, so that would – I also think would help both top line and bottom line growth?

Jennifer Cue

Yes. For your first question related to Jones Soda, the flavors and you mentioned a few flavors that I definitely remember from when I was at Jones Soda, the Grape and the Crushed Melon. We are right now evaluating our entire line up and looking up flavors and are going to be asking our fans for ideas. But we want to maintain a certain number that’s manageable especially with focusing our resources. So we will definitely look to new flavors in the future, but just maintaining a line up that’s manageable moving forward.

And with respect to WhoopAss. Yes, WhoopAss, again I had a soft spot for WhoopAss. We brought it out in ‘99 originally and again we brought it out just a few years ago. So we definitely are continuing to present this, focus more on the convenience and gas channel which seems to best suit the target market of WhoopAss. And we’ve been looking at ways to improve our results of WhoopAss going forward. The team is right now focused on looking at creating a good plan for 2013, looking Jones Soda WhoopAss and the Natural line.

Zoran Minic – Private Investor

And then that leads me to my two another question, is the Au Naturel. I know that you are fairly new to this position, so you haven’t had a change to look at that category, but is that something that you’re interested in moving forward with, I mean it seems that that’s something that the market is really trying to go after just looking at Monster and its outlets, but say they are really getting it to the energy tea market.

Jennifer Cue

Right.

Zoran Minic – Private Investor

So they kind of cut their sugary assorted flavors now, so Au Naturel it’s similar to that where we are soda where we don’t have the sugar intake of your traditional sodas. So is there something that we’re looking forward to still pursue?

Jennifer Cue

Definitely. I am really excited about the natural soda product and especially given the trends in the industry, we are definitely going to have a natural soda in our line up, fully ready to launch by the beginning of 2013.

Zoran Minic – Private Investor

Okay, great. And that leads to another question. Mr. Meissner previous to you alluded to an incubation stage as far as Au Naturel goes.

Jennifer Cue

Yes.

Zoran Minic – Private Investor

So I wasn’t sure if you were going to speed up the timeframe or if we were still going to stay in that stage for the foreseeable future?

Jennifer Cue

No, I think the incubation stage is the right way to go right now with that product to determine what’s working, what’s not before we fully launch it in a larger way. So we will be doing this incubation stage for the balance of the year, ready to go a bit more in 2013.

Zoran Minic – Private Investor

And one last question and I’ll let other caller take over. Had there been any type of interest or any type of communication with the distributors and/or vendors as far Au Naturel goes, so that when 2013 comes, I mean everyone is excited about it, stuff like that?

Jennifer Cue

Yes, it’s been definitely presented to select number of distributors and some retailers and just getting feedback at this point, but we will definitely work to getting our entire network excited about it when we’re ready to launch in a bigger way.

Zoran Minic – Private Investor

Okay, great. Sounds awesome. Thank you.

Jennifer Cue

Okay, thank you.

Operator

And we’ll take our next question from Steven Schmitt with Wells Fargo.

Steven Schmitt – Wells Fargo

Yes, you talked about international growth as a component of earnings, can you talk a little bit about that? And then the plan going forward as far as press releases with progress for the Company and how are we going to get the stock break above a $1 by the time the deadline nears?

Jennifer Cue

Yes, sure. On international, we had some growth in our international category primarily from our Ireland distributor and I am going to let Carrie run with this one because she is pretty knowledgeable about the growth in our Ireland business.

Carrie Traner

Yes, international is not a huge portion of our business at this point but Ireland is one of the more developing markets, where we see a lot of potential. But it’s not as a steady source of revenue base at this point, I mean our North American markets have been developed for – since Jennifer was here back from the inception. And the international markets, we’re analyzing them and we want to put our time and our energy into markets that will have the greatest return with not spreading ourselves to them. Ireland is a great market for us for that.

And on your second question regarding just our stock price. We are up against the September 10 deadline for the NASDAQ delisting. And that was our final extension. We’re not here to manage the stock price. The stock is going to do what the stock is going to do. We would hope that it would go above a $1, but if it doesn’t the Board and management is prepared to just let it right and if we come off of the NASDAQ listing and we’re on the OTC, we’re okay with that for now. That’s not ruling out a reverse stock split in the future, but at this time our main focus is day to day operations and execution and just getting this business where we know is sustainable.

Steven Schmitt – Wells Fargo

Okay. Do you plan on doing additional press release is to keep the shareholders updated between quarterly reports?

Carrie Traner

Well we will definitely give an update once we get notification – if and when we get notification from NASDAQ, we will certainly do that. And we intend going forward for our third quarter also to do an earnings call, I believe and we always send our press release out about a week or two before. So you can – and then obviously with – if there something material in the business, we would obviously be reporting that in the interim.

Steven Schmitt – Wells Fargo

Okay, great. Thank you.

Carrie Traner

You’re welcome. Thank you.

Operator

And we’ll take our next question from Walter Gee [ph], who is a Private Investor.

Walter Gee – Private Investor

Well, hi Jennifer.

Jennifer Cue

Hi Walter.

Walter Gee – Private Investor

A question for you is, could you please explain whether or not, if any efforts are being made to further increase the expansion of the brands of the Jones Soda in the Caribbean and Canada, I know you already got a presence there, I mean what are the efforts are being made to further increase the bottom line and improve revenue?

Jennifer Cue

Well again Canada is a focus market for us. That’s where we started. I am Canadian. So again it’s a focus market, a core part of our business. So we are working with our distributor partners up in Canada to continue to build that business up there. In terms of the Caribbean market, I think you mentioned.

Walter Gee – Private Investor

Go ahead.

Jennifer Cue

Not a significant amount of product down to the Caribbean. Again as Carrie alluded to, our focus of building a brand is in our North American market with a real close eye on Canada, the Western U.S., and the Midwest. So those areas still represent a huge growth potential for the Company. And I believe it’s very important to focus our resources on the areas where we can make the most impact.

Walter Gee – Private Investor

Okay. And again I do congratulate you on the very strong second quarter but I know we thought [ph] providing any kind of looking forward statement, do you foresee kind of the Company getting into the black by the third quarter there?

Jennifer Cue

Again it’s a little early at this stage and we generally cannot and do not give guidance on where the business will be at, but we do – we are obviously – I am strong believer as a team and the Board or the leaders in getting this business to sustainability as quickly as we can. So we’re in that process of evaluating everything and working towards building the brands and keeping them cost structure at a place that makes sense for where the business is at now.

Walter Gee – Private Investor

And again the deadlines for the NASDAQ delisting is what? September 10, is that correct?

Jennifer Cue

That is correct.

Walter Gee – Private Investor

Okay. All right, that’s all I have. Thank you.

Jennifer Cue

Thank you.

Operator

(Operator Instructions) And now we’ll go back to Zoran Minic, a Private Investor.

Zoran Minic – Private Investor

Hi Jennifer, I’ve got another quick question for you.

Jennifer Cue

Sure.

Zoran Minic – Private Investor

Now as far as getting accounts for Jones, the Safeway was in my mind a big deal I mean they have 1,700 stores across U.S. and Canada. Are there any other major accounts that we’re looking at obtaining sometime in the near future? Have we been in contact with some of the bigger players like let’s say CVS, Walgreens, Target stores like that?

Jennifer Cue

Well yes, as part of our daily day to day operations we’re always looking at focusing on securing chains for our business. Again Safeway chain was been just really went into effect in the second quarter of 2012, so we’ve been rolling that out. And yes, we’ll be looking at mainly as we are everyday presenting our product to a number of different chains. So you will hear if there is something significant, you would hear.

Zoran Minic – Private Investor

Okay, great because what my concerns was that, I mean we had the great accomplishment with obtaining Safeway and we did a press release that if anything else to keep the market informed of that. And I mean the second quarter numbers were phenomenal, I mean I am looking forward to a great third quarter as well. And another question is as far as WhoopAss is concerned, are we going to come up with any kind of 4-packs as far as trying to get into the those grocery channel instead of just trying to get them into the convenience stores or gas stations?

Jennifer Cue

Our strategy with WhoopAss has been to keep it in a single sort of package and go mostly in a convenience and gas channel. It should not really where a 4-pack would do well. We’re looking at the WhoopAss brand and see how we can continue to promote it and build it and I should be able to report on that a bit more in the next quarter.

Zoran Minic – Private Investor

Okay, great. Sounds good. Thank you.

Jennifer Cue

Okay, thank you.

Operator

That concludes today’s question and answer session. At this time, I’ll turn the conference back to management for any additional or closing remarks.

Jennifer Cue

Okay, great. I just – we both, Carrie and I would like to thank you for listening today and we really look forward to speaking with you in November when we review our third quarter results.

Operator

And ladies and gentlemen, that does conclude today’s conference call. Thank you for your participation.

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