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Executives

Hassan Natha - Chief Financial Officer

Stephen C. Jones - Chief Executive Officer and Director

Jonathon J. Ricci - Chief Operating Officer and Director

Analysts

[Julia Mend] - Piper Jaffray

Jones Soda Co. (OTCQB:JSDA) Q2 2008 Earnings Call August 7, 2008 4:30 PM ET

Operator

Welcome to the Jones Soda Co. second quarter fiscal 2008 earnings conference call. (Operator Instructions) I’d now like to turn the call over to Hassan Natha, Chief Financial Officer of Jones Soda.

Hassan Natha

Welcome to the Jones Soda 2008 second quarter earnings conference call.

Before we begin let me remind everyone of the company’s Safe Harbor language. Certain portions of our comments today concerning future expectations, plans and prospects of the company including without limitation the financial guidance we will provide constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include all the passages containing verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, projects, targets and 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 these forward-looking statements.

Factors that could affect our actual results include among those that are discussed under the heading of “Risk Factors” in our most recently-filed annual part on Form 10K and our quarterly reports on Form 10Q filed with the SEC. Listeners are cautioned not to place undue reliance upon these forward-looking statements that speak only as to the date of the earnings release and of this 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 in this call are non-GAAP financial measures such as gross revenues. The information provided 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 Section of our website.

I’ll turn the call over to Steve Jones, Chief Executive Officer of Jones Soda.

Stephen C. Jones

As I said at our June 5 annual meeting and some recently analyst conferences, we have a long way to go but we are pleased with much of our progress. We’re very pleased that we grew gross revenue, concentrate sales and the Jones brand this quarter.

I know that there are some new analysts covering us so for those who may be listening to a Jones call for the first time, let me set some context for you. I announced in the first quarter that Jones Soda was in a difficult transition period. In 2007 the company moved from a regional bottle business to a nationally available bottle and can business. The addition of cans added an important source of growth but along with it came some numerous complexities. Two of the biggest issues were the ability to merchandise all the new shelves we had acquired through our slotting fee investment and second, the ability to manage margins in a very competitively priced can soft drink aisle.

I also stated that we would invest in six key growth strategies to address the issues we encountered in 2007. The six areas are distribution infrastructure, sales execution, supply chain management, marketing, new products and internal systems. So as we have progressed through the first six months we’ve achieved some important successes with our go to market strategy and Jonathon will walk us through some of the specific details of that.

We continue to match trade spending to our corporate goals but as you’re going to see it’s an area where we overspent versus our plan and we will have alignment to our goals by the end of the year.

And thirdly, we’ve learned a lot about the changing consumer needs and the cost and pricing dynamics in the beverage industry. Over the first six months our perspective continues to sharpen. As we move forward we are focused on three goals: To improve the quality of our go to market capability by realigning some of the fundamental sales, distribution and supply chain elements; we will improve the margin of the existing business and add new higher margin brands; and make smart investments in sustainable infrastructure while retaining our strong cash position.

We remain in the transition period especially related to margin management but have succeeded in many areas that we want to walk you through. I remain optimistic that we are turning the business around and despite our losses this quarter are still moving towards a long-term profitable business. Jonathon is going to walk us through some of the detailed results of these six strategies now.

Jonathon J. Ricci

Our first goal was to extend and strengthen our distributor infrastructure as we’ve talked about in previous calls. As discussed we continue to focus on improving and expanding our distribution management, also improving our abilities as a business partner, and work to improve the total performance in all of our markets. We prioritized our efforts in the New York metro area and Southern California, and each has provided short-term results that we’re very pleased with. In New York City we launched in early May with Phoenix Distributing the Miller, Heineken, and Guinness distributor in New York. Their extensive network coverage in all parts of the New York metro area has already improved results and they’re using Jones to complement a very premium offering of brands that they have in the market place.

Our second major area of focus was the Southern California region and to re-establish what’s been a historically strong market for the Jones business. We’ve worked to retrench our sales team and establish new partnerships in Southern Cal. And our shipments in that region were positive for the first time since 2006 and we’re putting continued plans in place to continue that sustainable growth and momentum.

Through this effort we’ve seen improvements across many additional regions and there are two of note that I want to share with you. One is that we moved our business to Crescent Crown in New Orleans who is a strong Miller, Coors and Red Bull distributor throughout the Louisiana market, and in less than one month they tripled our business versus Q2 2007 in that region. We believe this move to Crescent Crown will place a foothold in Louisiana and also extend our business to other parts of the Gulf States and into Texas.

Finally, Lasand our distributor in Eastern Canada has been a fabulous partner in 2008 and established distribution for Jones Soda at Loblaws across the country. Our portfolio in Canada continues again with sustainable growth.

Our establishment of new distribution partners and reinventing some existing relationships is working well for us across many other regions.

Our second key strategy was to strengthen and reduce costs related to our supply chain system. The previous results as I shared earlier are important as we strengthen our supply chain systems in improving margins. With current bottling facilities in the Northwest, Los Angeles and Toronto, those regions are critical to profitable growth. The move in Louisiana was done in conjunction with announcing our recent bottling deal with Hardy Bottling in Memphis, Tennessee.

Earlier in the year we were dealt a blow when American Beverage in St. Louis went out of business and discontinued production of Jones Soda. This created many costly freight issues for us through the Midwest and the South since early March.

With Hardy we’re pleased with the customer service, their attention to detail and the accessible freight lanes that Hardy’s office with their Memphis location. They will begin producing Jones Soda in September and we expect a significant improvement of our freight costs as we are currently supporting that region from the Toronto market.

A third element of strategy was to strengthen our sales force and emphasize execution. We’ve made significant changes to our sales infrastructure in the second quarter in specifically three major sales initiatives which I’d like to walk you through.

First, we launched our model market program in Los Angeles, Chicago and Seattle, again improving regions where production is nearby. We have recruited between seven and 10 retail reps for each market, trained and deployed them in stores where we have invested incremental dollars into slotting, and improving our retail execution with our DSD partners. They are charged with model retail execution of our portfolio to include increased distribution, off-shelf execution of our can business, increased display locations, along with opening new Jones accounts. We will also flank these teams against specific market activity like our Seahawks retail program in Seattle or speed to market on new authorizations that are gained by our headquarter teams.

One example that we’ve already put in place was in June. We obtained four new authorizations of 24C in over 1,200 target stores the first week of June. In our model markets where we had our teams blitz all the stores for immediate placement, incremental activity and sampling, we achieved in those stores 10 times the volume that were sold in the model market stores versus our non-model target stores. We think this is a great key indicator of success and are realizing incremental successes every day with this program.

Secondly, we’ve reorganized our sales team. Previously we had a carbonated soft drink customer management team that was only focused on the can business and the balance of the portfolio was managed by a separate team. We’ve reorganized our team to now have one sales team accountable for all brands and packages at retail and with our customers. There is no more duplication of duties and we’ll provide a streamlined approach with the customer.

This restructure resulted in a reduction of several senior sales management and local management positions across the country. Their jobs have been absorbed into our current sales force. We felt that we were too top heavy and not providing the level of service that we should to the customer. We’ve managed to reverse that organization structure and in the process we reduced annual payroll by over $700,000. Those salaries alone paid for half the cost of the 28 model market sales reps. In addition to that we’ve improved our overall cost per head in sales by 25% with the reductions since March.

Our third key sales initiative is the management of our trade spend program dollars. This is investment we use to support activity to drive sales, increase distribution points, and gain incremental ad and display activity at retail. In March we instituted a process and investment guideline for our trade spend program. However the majority of our first half programs were negotiated prior to March so the effect of our guidelines are just now taking place. As a result, as Steve mentioned, we spent more than planned in the second quarter and that had a major impact on our net income and gross margin. We also exceeded our budget with Sam’s Club to work with Sam’s to make the VPI program very successful. While we’re not pleased with the overspend, we’ll have a better alignment over the third quarter spend and we feel complete alignment over the fourth quarter. As a result we will spend less per case and increase gross margins. We expect some impact on net revenue and will make adjustments to keep on track with our plan.

One last comment on sales is that we’re pleased with the total Jones brand grew over the quarter despite cycling significant inactivity from 2007 and our 24C business continues to show growth across many regions of the country.

Our fourth initiative was to adjust our approach to marketing, to increase not just love and buzz but also to drive purchases. Basically we’re trying to be more vocal in the brand’s core competencies with the things Jones does and introduce the brand to more people. We kicked off the second quarter by launching Jones soda on Alaska and Horizon Airlines, and hopefully many of you had a chance to enjoy that experience so far. This has provided Jones a new level of trial exposure to over 16 million soda drinkers a year. We have received excellent feedback from this program and are establishing a new group of consumers every day.

We also launched three online marketing programs geared to creating demand for our new cola flavor and our can business in new markets. You’ve probably seen our Canada cola program which we launched Jones Pure Cane Cola Bottles with initial photos of Barack Obama, John McCain and Hillary Clinton and the latest addition of Ron Paul on our Jones website. The purpose was to bring attention to our new cola flavor. The programs generated over $2.5 million of broadcast media since coverage started on June 1. We’ve exceeded all internal expectations with this program and will be taking a limited amount of this product to retail in select markets for the upcoming R&C and D&C conventions and through the election in November.

Finally we continued to leverage Jones’ wealth of online relationships in Youth Buzz surrounding the brand. We ran two very targeted online My Jones programs on Facebook’s Graffiti application along with the very popular I Can Has Cheezburger site. These programs along with increased awareness of My Jones drove our online sales to double versus the same period a year ago.

Finally in the second quarter we activated our partnership with the Tony Hawk Boom Boom HuckJam Tour. This relationship allows us to get to our core consumers in a very targeted manner across 24 cities. We are featuring a fully integrated program that includes the consumer, the retailer, sampling and plenty of Jones style buzz in each city, and hopefully you’ll have a chance to get to one of those tour stops to enjoy. Sales from that program will fall into the third quarter and we look forward to providing you an update with those results on the next call.

Our fifth point was that we are refocusing the company to true beverage innovation and the delivery of unique products that we believe will capture the consumer’s emerging beverage needs as well as add higher margin products into the mix. While we didn’t introduce any new items this quarter, we did spend considerable time and effort developing and planning for our revolutionary [Gabba] drink and planning for introduction for that later in the year. We’re planning for fourth quarter shipments on that product and first quarter 2009 distribution in limited markets and focus. In addition to Gabba we’re currently developing several other and exciting innovative new ideas that drive the margin that Steve discussed for 2009 introductions.

Sixth and finally we’re developing skills, systems and tools that make our team more efficient, more effective and successful at their jobs. Much of this activity is scheduled for the third and fourth quarters and we look forward to sharing with you our progress in creating a truly first class Jones Soda organization.

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

Stephen C. Jones

A lot of what Jonathon has walked us through is critical to giving this business sustainable competitive advantages going forward. They are necessary investments that will enable us to increase sales of higher margin products. These investments are also necessary to leverage and realize return on our 2007 investment in our can rollout. We are balancing the costs of developing Jones team and our presence on and off the shelf, necessary infrastructure capability, investments in relevant and unique revenue generators, and our goal to maintain a healthy cash position.

We are a long way off from giving you any direction into our 09 plan but you will see us continue to narrow our focus, efforts and resources to only those initiatives that generate revenue and margin. We will continue to rationalize and optimize flavors and product lines focusing only on those that add significant value to our brand. We will reduce and focus trade spend to profitable accounts. We will accelerate product innovations with controlled and disciplined launches of only those that increase the equity in our brand as well as add acceptable margin. In 2009 we will continue to focus on our most profitable markets where we have the greatest ability to manage costs and drive margins.

Hassan will now walk us through the financials.

Hassan Natha

For the second quarter gross revenue before deduction of promotion allowances and slotting fees increased 5.6% to $14 million compared to $13.2 million in the second quarter of 2008. This was due primarily to an increase in revenues in our DSD channel and sales of concentrate to National Beverage.

Revenues in the DSD channel were up compared to the same period in prior year driven by increased case sales in Canada, the Northeast and the Southeast regions of the US partially offset by decreased case sales in the Midwest, the Northwest and the Southwest regions. Revenue in the second quarter of 2007 also included the now discontinued 16-ounce cans for which we had no comparable sales in 2008. So you need to take that into consideration when you’re looking at key sales growth from one year over the other. The increase in case sales in the Northeast and Southeast was as the result of new distributors that we added in those regions while the increase in Canada was due to the placement of Jones products with the national grocery chain Loblaws.

We did experience a decline in sales of our 12-ounce bottles in the Midwest and the West which we believe is attributable partially to the introduction of the 12-ounce cans. So while we are experiencing total growth in our Jones Soda business in the West due to the increased brand development, we believe we’re also seeing the 12-ounce can negatively impact bottle volumes in this region. In addition, performance of the 12-ounce bottles in the Northwest and Southwest were also affected by lack of strong presence in the grocery chain distribution which we are looking at improving over the next two quarters.

Importantly, during the quarter we shipped 24C to over 124 distributors across the country. This represented significant growth for 24C over the prior year second quarter and we expect future shipments to have meaningful impact on revenues going forward.

Revenues in the DTR channel decreased compared to the second quarter 2007 as sales in the 2007 quarter included initial shipments of 12-ounce bottles to Wal-Mart which have now been discontinued by Wal-Mart.

On a positive note, as you’re aware, we were selected as the exclusive beverage supplier to Alaska Airlines and we started shipping Jones Soda cans to Alaska under that agreement during this current quarter.

Our concentrate sales to National Beverage increased 34% over the comparable three-month period in 2007 in preparation for the new product introductions of Jones coal, Jones Sugar Free Cola, and Jones Lemon Lime. We also had shipments of our traditional flavors to National Beverage during the current quarter.

For the three-month period ended June 30, 2008 gross revenue was reduced by $2.3 million of promotion allowances and slotting fees compared to a total reduction of $250,000 for the comparable period in 2007. We incurred increased promotion allowances and slotting fees in our CSD and DTR channels to activate placement and increase promotions related to new product introductions of Jones Cola, Sugar Free Cola and Lemon Lime and 24C. In Canada, in the Southeast and in the Northeast we also incurred slotting fees that increased distribution and placement and shelf space for Jones Soda during the quarter. We do not expect to incur any further material slotting fees in the next two quarters of 2008.

Net revenue after the deduction of promotion allowances and slotting fees decreased 10.1% to $11.7 million compared to $13 million in the second quarter of 2007.

Beginning this year we are presenting our case sales of Jones Soda beverage products directly by us through our DSD and DST channels and indirectly by National Beverage through the CSD channel to various retailers. Case sales of concentrate to National Beverage and total cases of finished products sold by National Beverage to retailers are not necessarily equal to any given period so factors such as seasonality, National Beverage inventory practices, and timing of increases and new product introductions can create differences between sales of concentrate by us and sales of finished products to retailers by National Beverage.

Total case sales or finished products sold in our DTR and DSD channel by Jones directly to retailers and distributors for the second quarter was 940,000 cases compared to 947,000 cases for the same period in 2007, a decrease of 0.7%. Case sales in the second quarter of 2008 consisted of primarily the 12-ounce bottles, the 24C 20-ounce bottles, and sales of Jones Naturals, Jones Organics and Whoopass. Total case sales of finished products primarily 12-ounce cans sold by National Beverage directly to retailers during the second quarter were 679,000 cases compared to 1.1 million cases for the same period in 2007, a decrease of 41%. You need to note that during the second quarter of 2007 we had acquired a significant number of new listings and retailers for our 12-ounce cans and during the second quarter of 2007 we were seeing initial shipments to those retailers. As such the 1.1 million case sales number for 2007 includes this initial load-in to the retailers.

Gross profit after the deduction of promotion allowances, before licensing fee, for the second quarter was $2.9 million versus $4.4 million in the prior year, a decrease of $1.5 million. Gross profit in the second quarter was negatively impacted by provision of $130,000 due to discontinued inventory related to specialty packs and packaging costs. Gross profit in the quarter was also impacted by the $2.3 million of promotion allowances as I discussed earlier. Our gross profit was also impacted by incremental freight costs as we moved production from our now-closed St. Louis co-packer to Toronto for this quarter. Gross Margin after the deduction of promotion allowances for the quarter was 25.5% compared to 34.2% in 2007.

For the second quarter our licensing revenue was $58,000, an increase of 21% over the same period last year.

Total promotion and selling expenses for the quarter were $3.5 million, which was flat compared to the second quarter of 2007. Total general and admin expenses for the quarter increased $700,000 or 45.8% to $2.2 million compared to last year’s second quarter expenses of $1.5 million. The increase in general and admin expenses is due primarily to an increase in legal fees, audit fees, salaries due to increased head count, and other benefits. The increased expenses in G&A were offset partially by a reduction in stock comp expense, a credit resulting from a re-estimate of our forfeiture rate of our stock comp expense calculation.

Interest and other income for the quarter was $87,000 due to interest income on cash balances. A decrease in cash balances compared to the prior year was due to lower interest rates and decreased cash balances in the quarter itself. For the second quarter 2008 we reported a loss before interest and income taxes of $2.7 million versus a loss of $500,000 for the comparable quarter in 2007. Provision for taxes was $150,000 for the three months ended June 30, 2008 compared to a recovery of taxes of $128,000 for the same period in 2007. The tax provision for the three months ended June 30, 2008 relates to the tax provision on our income from our Canadian operations. No recovery of taxes was recorded for the losses in our US operations as we have reported a full valuation allowance on our net US deferred tax assets.

The company reported a net loss of $2.7 million or $0.10 a share loss for fully diluted shares compared to a net income of $40,000 or $0.00 per fully diluted share for the comparable period in 2007.

Now turning to the balance sheet. Cash, cash equivalents and short-term investments as of June 30, 2008 were approximately $19.7 million with zero borrowings against the company’s $15 million line of credit. This compares to cash and cash equivalents of approximately $27.7 million and zero borrowings as of December 31, 2007. The decrease in cash is due to the use of $8 million in operating activities and a net increase in working capital items such as accounts receivable, inventory and prepaid expenses during this quarter. Accounts receivable at the end of the quarter were 55 days, an increase of 14 days over a year ago. Accounts payable and accruals increased to 68 days compared to 45 days for the same period last year. Average days of inventory in stock increased to 85 days compared to 84 days for the same period last year.

With regard to our outlook, as Steve has mentioned earlier, we have made the strategic decision to reduce our trade account spending in the back half of the year, which will impact gross and net revenue for the balance of 2008. Therefore we now expect 2008 net revenues to increase approximately 10%+ over 2007 levels versus our previous expectation of 20%. Importantly, the reduction in trade spend will result in improved gross margin during both the third and fourth quarters of 2008.

I will now turn the call over to Steve.

Stephen C. Jones

Just before we take questions, I think just my own reflection on the past six months. The most important thing that we have here is a remarkable Jones brand. It is a powerful brand. It’s got a very relevant voice and a very relevant attitude. Consumers love this brand. We are learning more about the economics of it and we are getting that in line. But we’re going to grow this by concentrating on the core values of the brand in our most profitable markets.

Just to remind you what we said our goals are. They’re to improve the quality of our go to market system, improve margins of the existing Jones business and add new higher margin brands, and make smart investments in our infrastructure while retaining our strong cash position.

With that if anybody would like to ask any questions, we’re open.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Julia Mend] - Piper Jaffray.

[Julia Mend] - Piper Jaffray

I just have a couple questions on the case sales. You said it was for I think concentrate; it was 1.1 million in 2007?

Hassan Natha

This was not the concentrate; it was sales by National Beverage to retailers.

[Julia Mend] - Piper Jaffray

I’m just trying to reconcile this versus 07 last year where we were showing 780,000. Did you change these numbers and can you give us comparables just so we can look at this going forward?

Hassan Natha

Sure. I don’t have the comparables on me right now but we plan on filing our 10Q tomorrow morning and we’ll have all that information in the 10Q.

[Julia Mend] - Piper Jaffray

So we can’t get it till tomorrow?

Hassan Natha

I don’t have it on me right now.

[Julia Mend] - Piper Jaffray

With your Miller distribution, you have Miller distribution in New York and California. Where else do you have Miller distribution?

Jonathon J. Ricci

We are lined up with several Miller distributors around the country. We are specifically in the Northwest, we are aligned with Miller distributor in New Orleans now, in New York, and then we have other Miller distributors in other smaller markets and we have some Anheuser-Busch distributors also in other markets.

[Julia Mend] - Piper Jaffray

And then is the goal just further penetration of the doors you already have or increased doors?

Jonathon J. Ricci

It’s always to increase doors.

[Julia Mend] - Piper Jaffray

The sell-through at the existing doors, you’ve seen improvements there?

Stephen C. Jones

We have seen some improvements in markets. I think that we came out of the gate on this and said, “Let’s not try to get a mile wide and an inch deep. Let’s get real focused on some core areas and make sure we know what it is that we need to do to be successful, and then go take that model to other market places.”

[Julia Mend] - Piper Jaffray

With your model market that you’ve put in in California, when do you expect to see leverage from that? And when do you see rollout to other markets?

Stephen C. Jones

We are evaluating the results of the Northwest, Los Angeles and Chicago. We’ll evaluate those in mid-September when we get full results in. We’re measuring those markets on new points of distribution, display goals and just overall execution at retail including sales obviously. We have seen some initial very good sales results that have come through but we won’t have a full evaluation until we get to September. If that evaluation comes through, our initial plan was to roll another set of markets in 2008. But our thought right now is that due to the financial situation we’ll hold off and build those into our 09 plan.

[Julia Mend] - Piper Jaffray

Can you restate what you said about Gabba rollout? I know you said it, but can you just repeat it?

Jonathon J. Ricci

Shipments are planned in the fourth quarter with focus on distribution in January.

[Julia Mend] - Piper Jaffray

Inventory levels were slightly up this quarter. Is that correct?

Hassan Natha

Yes, they were.

[Julia Mend] - Piper Jaffray

And going out for third quarter and fourth quarter, are you feeling those will come down?

Hassan Natha

I think basically the inventory and the receivables reflect basically the seasonal cycle of the business itself and we usually see the inventory and receivables come down at the end of the third quarter and then they come down further by the end of the fourth quarter. It’s part of our normal receivables and inventory management process.

Operator

Gentlemen, at this point no one else has signaled with a question.

Stephen C. Jones

Thank you everybody for coming in and listening, and we have a few one-on-ones planned for later in the afternoon. Thank you everybody.

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