Carrie Traner - VP of Finance & Principal Financial Officer Jennifer Cue - CEO

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to the Jones Soda Company Third Quarter 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 for you to queue up for questions. (Operator Instructions) I would like to remind everyone that this conference call is being recorded. I would now turn the call over to Ms. Carrie Traner, Vice President of Finance for Jones Soda. Please go ahead.

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 purposes of the Safe Harbor provision 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, continue, project or targets and negatives of these words or similar words and 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 obligations to update the forward-looking statements we make today. I will now turn the call over to Jennifer Cue, Chief Executive Officer of Jones Soda.

Good afternoon everyone and thank you for joining us today. I am excited to report results to you and the progress we have continued to make at our company. My focus is returning at the end of June this year was on a turnaround strategy that would bring this company to sustainability and eventual profitability. I believe that we are on the right trajectory now with the third quarter results reflecting the hard work and dedication of every employee here at Jones Soda towards this goal. Through margin improvement and significant operating expense reductions we were able to improve our net loss by 81% to a net loss of $324,000. With the non cash items of $326,000 included in our third quarter net loss this essentially means we had a breakeven quarter on an operating cash basis and highlights that with a disciplined approach of a turnaround we can live within our means. While I have emphasized our need to return to a more sustainable company, we are balancing this with an eye to the future building and growth of our brand and our company. One thing I know is that we have the brand; that is for sure. However, we first needed to fix the operating cost structure of this company. With this in mind, we have taken a hard look and reduced significantly the top heavy overhead expenses bringing the SG&A level more in line with the revenues of the business at this point in time. My understanding of the business will guide the company at this stage of its development away from expensive corporate marketing programs and top heavy overhead expenses from the past several years back to supporting and working with our existing distributor network and retailers to get our brand on to more shelf. As we move forward, this refocusing of our resources includes supporting our distributor network through increased promotional allowances at retail and is a key part of our strategy that we believe will drive more volume. We also intend to focus on the core geographic markets that we believe will generate the highest return with inner available resources at this time including the U.S. West, the U.S. Midwest and Canada. So for the third quarter, the reduction in overhead expenses as well as the strategy to remove sales resources away from non-core markets, in combination with the price increase that went into effect in August, all combines to reduce volume during the third quarter. In addition, trade spend and promotional activities that were cutback in the earlier part of the year had an impact on our ability to maintain or grow volume with our distributor network and at retail. We were however able to mitigate this reduction in volume and improve our gross margin percentage to 28% from 24% last year and we were able to show gross profit reduction of only 2% from the comparable quarter last year. Since my return in late June, I have been accessing all aspects of the business with a big focus on our SG&A line item, and in my opinion, the one area that needed the most attention. For the third quarter, we have continued to make inroads on expense reductions and we were able to reduce our total SG&A level by 48% for the quarter. As mentioned, the area of focus per review has been extensive corporate marketing programs and top heavy overhead expenses and other company expenses that do not directly drive sales growth. This significant reduction in SG&A combined with our gross profit improvement have had a very positive effect for the third quarter resulting in reduced losses from operations and reduced overall net loss in the company by $1.4 million or 81% as I mentioned earlier. Again to reiterate, we have a great brand and with the overhead structure at a more reasonable level, we are beginning to have a stabilized operational model as well. In the third quarter, we achieved what we believe is a momentous occasion with our Facebook page; we achieved our 1 millionth Facebook fan who we honored with what most of our fans asks for the most Jones Soda with their own Jones Cooler. We continue to interact with our consumers through our Facebook page and website and we will be launching some interesting consumer contests in the New Year. We continue to assess all aspects of the business to formulate and implement a longer-term strategy to harness the true potential of the Jones Soda brand and at the same time create a sustainable business model. One of the biggest complaints that we hear from consumers is they cannot find Jones in enough locations. It is with this in mind that we will be driving forward to getting more product on to shelves with a refocus back at the distributor level now until 2013. 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 strength. We will maintain focus on our core of the Jones products, our core markets and our current distributor partnerships. And with a more functional business model, we will look to add sales personnel and sales spending in a more disciplined way as we gear the company back to a growth model, but one based on the ability to be profitable as well. I will now turn the call over to Carrie who is going to review the financial results for the quarter ended September 30th.

Thanks Jennifer. Revenue in the third quarter decreased 16% to $4.2 million from $5.0 million in the prior year period. The decrease in revenue was the result of the decrease in volume due to an August 2012 price increase that was announced to distributors on June 1st, and may have affected ordering cycles between the second and third quarters, as well as the implementation of our turnaround strategy which refocuses resources to markets that we believe will generate the highest return within our available resources including the West and Midwest and Canada. Volume was also affected by the decrease in promotional allowances which decreased to $185,000 to $351,000 for the quarter due to our cost containment measures. As Jennifer mentioned, as part of our turnaround strategy in the next year, we intend to redirect resources to support our distributor network to increase promotional allowances to the retail which we believe will drive more volumes. As the result in the decreased in promotional allowances and the price increase, we saw an improvement in our gross profit margin this quarter which increased to 28% from 24% in the third quarter of 2011. More importantly, our gross profit for the quarter was $1.2 million essentially flat from the previous year which had higher sales level. Operating expenses in the third quarter decreased to 48% to $1.5 million from $2.8 million in the prior year period reflecting a 63% decrease in promotion and selling expenses and 30% decrease in general and administrative expenses related to our cost control measures. The promotional and selling expense decrease was primarily due to reduction in the sponsorship costs as well as decreases in sales and marketing personnel. General and administrative expenses also declined as a result to decreases in salaries and benefits due to reductions and personnel and our real line cost structure as well as reduced professional fees. Net loss for the quarter ended September 30, 2012 improves 81% to a loss of $324,000 or a loss of $0.01 per share from a loss of $1.7 million or a loss of $0.05 per share a year ago and included non-cash expenses to find as depreciation amortization and stock based compensations totaling $326,000 compared to a total non-cash expense of $159,000 in the prior year period. For the first nine months of 2012, revenue decreased 5% to $13.3 million from $14.0 million from the prior year period. Throughout the first half of the year, the Western US market was strong while the Eastern US and Canada markets were softer. We also believe that revenue was affected by the price increase in August this year which may have affected ordering cycles as well as the decrease in promotional allowances resulting from our cost containment measures. Our gross profit margin for the period increased to 28% from 26% and benefited from a decrease in promotional allowances. The August price increase and from production and warehousing efficiencies offset by increased material costs with respect to (inaudible). Again, I want to emphasize that while sales decreased year-over-year, gross profit levels have increased to $3.8 million from $3.6 million in the prior year period. Operating expenses decreased 30% to $6.2 million from $8.8 million in the prior year period reflecting our expense reduction initiatives. The promotional and selling expense decrease was primarily due to the 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 reductions in personnel and a decrease in professional fees and bad debt expense. Net loss for the first nine months of this year improved by 53% to a loss of $2.5 million or a loss of $0.07 per share from the loss of $5.2 million or a loss of $0.16 per share a year ago and included a $613,000 in non-cash expenses compared to $540,000 in the prior year period. Also, the 2011 period included a credit of $114,000 reported in other income tax benefit primarily relating to interest and tax associated with our 2010 Canadian tax refunds. Turning to our balance sheet, as of September 30, 2012; we had working capital of $4.5 million and cash and cash equivalents of approximately $1.5 million. At this time, we believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs into the first half of 2013 given our progress made in reducing operating expenses and slowing our cash burns. We also have our asset based credit facility available for working capital needs. Back on September 20, we began trading on OTC markets, OTCQB marketplace. Our delisting from NASDAQ came after a year of our stock trading below their required $1 minimum bid price and after our careful evaluation of our available options to maintain our listing. The move to the OTCQB was seamless and it did not change our public company reporting obligations with the SEC. Going forward, we will continue to focus on operating with an efficient and cost effective structure while continuing to focus on top line growth by supporting our distributor network and retailers with a more appropriate level of trades and promotional allowances. We believe it is this focus that will help us achieve our goal of sustainable profitability and growth in the future. I will now turn the call back to the operator for questions.

(Operator Instructions) We will take our first question from (inaudible), private investor.

I want to first of all; I wanted to commend you on the cost reduction and its impact in really reducing your net loss. So congratulations on that. Now my question is looking forward, roughly when do you expect to see some sort of top line growth quarter-to-quarter?

Well, we're, we've just been in the process of building our 2013 plan over the past several months and we're working towards that and definitely we don’t give guidance at this point in time but rest assured that is our goal again. I think, coming into this, our focus has been on, as you said, reducing our operating cost structure and we really feel we spent a lot of time focusing on that. We're out talking to our distributors all the time and we're presenting our 2013 plan. We're going to be supporting our distributor network in a much larger way and they are getting excited that we're back. So I can’t say exactly when that will happen but just be assured that after this time period of focusing on bringing our cost structure into more reasonable level, we will be back to a growth model again.

We will take our next question from Henry Dillon with Founders Finance.

Hello Jennifer, congratulations on the improvement in the bottom line. Just a couple of questions, one I noticed after looking at the financial statements there is a drop in revenue in case sales, however there is an increase in the accounts receivable and I just wanted to know if you could comment on that what’s driving that and is there a difficulty in collecting this likely to impact future cash flows and also just address the overall cash flow scenario if you would.

Yeah sure and I will have Carrie jump in here, but you are comparing the accounts receivable line item showed an increase because it’s the summer period versus the December 30th, numbers of the winter month. So every year we show a much higher increase in our accounts receivable as of September 30th, compared to December 30th. So we have the same systems in place for collecting our accounts receivable field, same days outstanding so we feel fairly very strong with our current accounts receivable.

If you would address the rebuilding of a distribution, how do you go about that without bloating the SG&A and the permission on selling expenses? It’s been it sounds kind of familiar at this point as far as rebuilding the distribution network that’s out there. It’s been said before time or two that by previous CEOs that this would be done and it would be executed without ballooning expenses, but what’s been done differently at this time and if you can provide some specifics on that?

Yeah. No, that's a very good question. We are not intending to change our distributor network at this point in time, we’ve got a good distribution network in place, so we are not focused on expanding our distributor network. What we are focused on doing is we have taken our resources and going back really and spending at distributor level. In the past we were doing more of events sponsorships and more of a corporate marketing spend, where as this spend that we are going back toward which. In my opinion history with Jones Soda really worked well at getting the product onto the show, and that is really assisting and supporting our distributor network with various promotions at weekend where our price comes in, there is temporary price reductions at grocery. We offer special promotions to help open up independent accounts. And it’s really getting, focusing on resources, not increasing our resources but refocusing on resources at that part of the expense line. And our SG&A is really, it’s a reduction to revenue and that’s where it goes as oppose to increasing our SG&A line items specifically. So again that’s my experience is when we are building Jones Soda regularly, we really had a lot of success by really aligning and partnering with our distributors directly, and we didn't spend the lot of money around big corporate marketing events. So it’s really about sampling and partnering with our distributors and making sure that the price of Jones Soda is right at retail level.

Okay, so would you say that, we could look forward to seeing higher slotting fees in the future or is that something that's not going to be as big as a portion of the promotional and the selling.

No that’s not going to be a large increase year-over-year. Again how we built the brand in the past and been successful in the past was focusing on the independent account and we are going to go back towards more of the independent account focus and then accompanying our site can pay the slotting dollars that Coke and Pepsi can and we are not trying to compete directly on those levels. We are going to go back to unique ways that allow our distributors to focus on the brand and open up their independent accounts as well to the Jones Soda brand, and quite frankly that's where our brand sells the best. The kids go to the independent shops and we need to get back on to more independent shops that you know when I mentioned sales personnel hiring, we will hire junior sales people in 2013 but more variable compensation program that's not been done in the past, over the last few several years we had a variable comp program way back then. So more things like that. There are unique ways and ways that I have found success or we have found success with Jones in the past and getting Jones on to more shelves.

Okay, so that sounds like back to the basics and back to what drove the original expansion in Soda back in the day as well.

Yeah, you said it.

(Operator Instructions) we will take our next question Randy Colsen, private investor.

My question is what were the losses per share in the last quarter, and also would like to see more of the product since the product’s already in Wal-Mart I would like to some of the energy drinks introduced to Wal-Mart. So what are your feelings on that.

This is Carrie. I will take the first part of your question regarding our loss per share. So for the quarter ended it was a loss of $0.01 per share versus the year ago, it was $0.05 per share. On the nine months basis it was $0.07 per share loss versus $0.16 in the prior year. And then with respect to the energy drink, as I mentioned before on our strategy, we have evaluated all of our product lines and we are definitely focusing our resources back on to the Jones product line in its various forms. We will be supporting our past brand as well. At this point in time, I do not believe focusing on getting it into Wal-Mart is the right move. It would be more focused on bringing it into independent accounts where the energy drink is where we launch a brand and an energy drink. So that would be a more effective focus with where that’s from.

It appears there are no further questions at this time. Ms. Carrie I would like to turn the conference back over to you for any additional or closing remarks.

Okay, thank you very much Joyce and thank you everyone for your interest in Jones Soda. We will again speak with you when we report our year-end results next year in early 2013.

That concludes today's conference. We thank you for your participation.