Mark Miyata - Principal Financial Officer Jennifer Cue - President and CEO

Chris Smith - Daniel Baxter -

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Jones Soda Company Fourth Quarter and Year End Fiscal 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions) I would like to remind everyone that this conference is being recorded. I will now turn the call over to Mark Miyata, Vice President of Finance of 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 the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements containing verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, will, may, continue, projects or targets and negatives of these words and similar words or expressions. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. Factors that could affect our actual results include among others those that are discussed under the heading Risk Factors in our most recently filed reports with the SEC, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and current reports on Form 8-K. Listeners are cautioned not to place undue reliance upon these forward-looking statements that speak only as to the date of this earnings call. Except as required by law, we do not assume any obligation to update the forward-looking statements we make today. I will now turn the call over to Jennifer Cue, Chief Executive Officer of Jones Soda.

Good afternoon, everyone, and thank you for joining us today. We are happy to report continued improvement in operating results in our fourth quarter of 2014. During the fourth quarter of 2014 we were able to show growth in our sales through a combination of an increase in case sales, while at the same time reducing our per case trade spend which resulted in an overall 15% net revenue growth quarter-over-quarter. In addition, we have continued to bring down operating expenses and primarily in administrative expenses. Administrative expenses decreased quarter-over-quarter by 29% with sales and marketing expenses reduced by only 4%. Overall I am pleased with the combination of growth and reduced administrative expenses as we continue to build towards a profitable business model. Our growth in sales was realized in a number of regions in North America including Canada, the U.S Midwest and the U.S Eastern region. I am extremely proud of the results coming out of Canada from the AC Nielsen Company that outlines just how prominent our brand is. Their number show that the Jones is the number seven branded CSD in Canada, only behind Coke, Pepsi and DP/SU brands. Our goal is to translate this success in Canada to our other key markets in the same profitable way. I also want to highlight another initiative that our team undertook in the fourth quarter of 2014 that resulted in $334,000 of other income in the quarter. This relates to our headquarter office lease termination. The office location that we were operating out of was expensive and quite frankly inefficient for our operations. In December we negotiated an early termination of that lease and entered into a new lease for a new office space. We managed to create a win-win for our Company and our landlord by moving into another of their buildings located only a few minutes' drive from our former location and just a couple of blocks south of the Starbucks headquarters for those of you who know Seattle. Our new rent is approximately half the cost of our previous rent. The favorable lease termination resulted in non-cash income to us of $335,000 by eliminating deferred rent liability from our books. We moved into our new space on March 1st. We are still centrally located and have room to grow. We welcome shareholders to drop by to see the new space and I am confident you will agree that we did a fantastic job of getting Jones into an amazing space for now and the future. I will go over some of the initiatives for 2015 but in the meantime I will turn over the call to Mark to go over the numbers in more detail.

Thanks Jennifer. For the comparative quarters, revenue in the fourth quarter of 2014 increased by $315,000 or 15% to $2.4 million as a result of the 7.3% increase in case sales volume combined with reduced promotional spend. Promotional allowances decreased $213,000 to $411,000 for the quarter due to tighter management of promotional programming. The accounting impact of these promotional allowances is a direct offset to gross revenues. Gross profit margin for the fourth quarter increased to 16.5% from 12.2% in the fourth quarter of 2013. Operating expenses in the fourth quarter decreased to $1.1 million from $1.3 million in the prior year period due to an 18% decrease in compensation expenses and professional fees. These operating expenses as a percentage of revenue decrease to 44% for the quarter down from 62% in 2013. Net loss for the quarter ended December 31, 2014 improved 69% to a loss of $339,000 or $0.01 per share compared to a loss of $1.1 million or $0.03 per share a year ago. This is a result of the increase in revenues combined with reduced operating expenses and the $334,000 favorable deferred rent adjustment recognized as other income. Operating expenses also include non-cash expenses including depreciation, amortization and stock based compensation which totaled $87,000 compared to $155,000 last year. For the year ended 2014, revenue decreased 1% to $13.6 million from $13.7 million in the prior year period due to decline in case sales of 2%. However, we were negatively impacted by the weakening Canadian dollar in the second half of the year, which is approximately $316,000 translation loss in revenues when compared to 2013 exchange rates. Without this impact we estimate that revenues would have resulted in 1.3% increase from prior year based on 2013 exchange rates. Our gross profit margin for the period decreased to 22% from 24% due to the case sales decline and combined with increased cost of production which was mostly impacted in the second quarter of this year. Operating expenses decreased to $4.8 million from $5.1 million in 2014 due to a 6.5% decrease in compensation expenses and professional fees. Operating expenses as a percentage of revenue decreased to 35% for the period, down from 37% in 2013. Net loss for 2014 of this year improved 19% to a loss of $1.5 million or $0.04 per share from a loss of $1.9 million or $0.05 per share a year ago. This included non-cash expenses totaling $499,000 compared to $578,000 last year. Now turning to our balance sheet. As of December 31, 2014 we had working capital of $2.6 million and cash and cash equivalents of approximately $857,000. At this time we believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through December 31, 2015. Cash used in operations during the 12 months ended December 31, 2014 was $1.2 million compared to $317,000 in the prior year, primarily due to increase in accounts receivable from higher sales in the latter half of the fourth quarter and increase in inventory due to the timing of production and favorable write-off of our long-term deferred rent liability. We also have an asset-based credit facility available for our working capital needs. During the third quarter, we made draws on our credit facility, which was fully paid down as of December 31, 2014. Our eligible borrowing base as of that date was approximately $1 million. I’ll now turn the call back to Jennifer to give an update on our sales and marketing highlights for the quarter.

Thanks Mark. Over the past few years we’ve done a lot in terms of reengineering our business and creating an appropriate operating expense level for the size of our business. In addition we have reestablished a more disciplined way of spending in our business that focuses much more on ensuring there is an appropriate ROI analysis done on all forms of spending in sales and marketing. While we continue to emphasize efficiency in our operations I feel comfortable that we are now in a place where we do not have to seek further large reductions in expenses. Our turnaround is complete. Our task at hand and our goal in 2015 is to focus on growth of the business and profitability. The size of growth that we need to become profitable is not as significant as it was just two plus years ago, barring any unforeseen increases in our cost of goods or other such items. With the ability to grow our business with a more variable compensation model and with a much reduced overhead we are looking forward to experiencing some great operating leverage on this business with more growth in sales volume. At Jones we currently have a platform of better products that are diverse and allow us to offer multiple offerings to our consumers. While we operate in an industry, which is exciting, it is also extremely competitive and we have to constantly seek ways to be different and offer the consumer an interesting and great tasting beverage. And while we have much opportunity we also, will continue to have challenges as we look to get our products under more shelves and in front of more potential consumers. This is not always an easy task. We have a great portfolio of products. With Jones soda, our core product offering we offer a premium soda sweetened with cane sugar in glass bottles and cans. We have much opportunity with this core brand of ours and we will continue to pursue these opportunities. Again however, I need to emphasize getting listings and filling independent account shelves takes time. Within the past several weeks we announced a new initiative for our core product which Jones cane sugar soda on fountain. We have been working over the course of the past two years to understand this potential and create a model where we can offer Jones Soda on fountain. This is a big differentiator for us. We are working with a group of fountain distributors in select regions where we have seen demand for our brand on fountain in the food service arena. This is currently a very tiny part of our business but we are very encouraged with the response that we've had today. Jones on fountain was truly unique. The graphics on our fountain equipment are amazing and commonly display our consumer submitted photos. Our fountain offerings are sweetened with cane sugar and we are offering sodas in traditional flavors such as cola and diet cola and ginger ale and lemon lime while also offering some of the Jones unique and fun flavors such as berry lemonade, a huge fan favorite. But being on fountain we're providing a great third option on fountain to retailers and are developing an alternative distribution and revenue model. We are fortunate to have some great initial partners in our fountain program. Glaze Teriyaki is our new quick-service restaurant concept that is a rapidly expanding chain in various cities in the U.S. In addition we have partnered with a large grocery chain in Western Canada called Ceylon Foods who are placing Jones fountain machines into their newly renovated and beautiful grocery stores. This chain of approximately 140 locations sees the value of providing fountain to their consumers that is truly unique and offers some better quality ingredients. Jones Stripped, our natural sparkling beverage allows us the opportunity to sell a Jones product to retailers in the natural food category while also providing a new option for the traditional grocery channel as trends change in the industry. Lightly sweetened with a blend of natural sweeteners and with only 30 calories and 8 grams of sugar, we have focused the sales of this product mostly into the natural food channel and mostly into the Western region of the U.S., and just recently into Canada. Jones Sparkling Water is another all natural offering that is just beginning to connect with consumers and we look forward to continuing to build this product line out. While we continue to build our portfolio of diversified beverages in the North American market, we are also nurturing two international markets that have embraced the Jones brand. We are extremely encouraged by our partnerships there and look to expanding these partnerships in the future. We will continually work on our Jones portfolio of beverages and at the same time look at opportunities that present themselves to us outside of the Jones brand. We have a wealth of beverage expertise within our team and leveraging this unique expertise will always be a part of our strategic plan. This innovation will be managed in light of the many initiatives that we currently have on the go. Finally we will always do the things that make the Jones brand truly unique. Marketing has been our strong suite and when we do it in a unique grassroots way this is where we shine. We recently announced a partnership with an organization called the Young Audiences that speaks to our consumer base. Through Young Audiences we are creating a unique Jones Soda Photography Curriculum that will be offered in the public school system in North America. Bringing in partners such as GoPro, we are working towards creating a truly unique program that allows us to partner with organization that makes sense for our brand. Young Audiences provides art education to public schools that have lots of funding to support these. The Jones Soda Photography Curriculum was tested in both Oakland and Cleveland in 2014 and we look forward to expanding the offering of this unique program to more cities in North America in 2015. Other marketing initiatives happening in 2015 include our enhanced [indiscernible] consumer contest that includes brighter and more captivating POS and partnerships with great brands such as GoPro, Diamondback, BMX bikes and now Spy Eyewear. This line up continues to speak to our fan base for Jones Soda. Our partnership with Fiat has been successful and is continuing. We expect to continue this partnership for the third year in a row by creating another contest to give away a Fiat 500X in conjunction with the promotion of our Jones Stripped brand. And you can be assured we will do more strategic marketing throughout the year that will create the buzz for our brands along the way. Finally to reiterate, I am personally invested in Jones for the long haul. Last summer I invested my own funds into this business which quite frankly is rarely heard of in public company leadership today. But this is how much I believe in this brand and our team's ability to take this brand and business to new and higher levels. I am satisfied with what we have done over the past two years. However in no way have we reached the goal I set out for when I first came back. Our next stage is to focus on profitable growth. I believe we have a great platform to move into this next stage and I am excited for the future of this great lifestyle brand and ongoing new initiatives. I will now open up the call for questions.

Thank you. (Operator Instructions) And we will take our first question from Chris Smith. Please go ahead.

Interested certainly with you moving in to fountain. I guess questions I had -- you mentioned Glaze Teriyaki. How many domestic U.S locations do they have currently? Also for the fountain product, is it natural? Do you have any preservatives? Are you offering also the Jones Soda Stripped on fountain?

Thanks Chris. With respect to your first question Glaze Teriyaki, it is a startup business that was launched a couple of Seattlites actually. It started in Manhattan and then it expanded in San Francisco. It started really with three and I don’t want to give away their plans, but they are expanding this year -- at least doubling the size of their business. It’s small chain. I’m a big believer in them in the long-term. I’m convinced that they’re going to do some great things moving forward. This was actually the first restaurant concept that we put a fountain machine into to test this concept. So it was just a complete startup. And that was a type of restaurant chain that we have partnering with the small independent ones and there were small chains where we’ve been able to work with our fountain distributors get the equipment in place and test this model out. Trust me tough, I look forward to the day when a large restaurant chain come calling and we will be looking forward to creating a fountain program for one of these as well. The fountain that we offer I believe you asked, it was

Ingredients and how natural it was?

Right, yes. And this is our core Jones Soda line which includes cane sugar. However in fountain it is a necessity for food safety standards to have artificial preservatives. So it's not 100% natural in terms of the preservatives and I wouldn’t want to take that chance. For example we have our technical services person right now looking at the possibility and the future of what we, if we and when we can possibly offer our Jones Stripped line on fountain. But yes, it’s a good question Chris because that is the next development of the fountain.

(Operator Instructions) We’ll now take our next question from Daniel Baxter. Please go ahead.

I just got a question, how is the cane sugar, the prices on it? Is it staying stable?

Is that what? Sorry.

He is asking, how is the prices on cane sugar?

Mark will answer that one.

It’s a funny type question. We were just ending -- we buy sugar in contracts and our contract was coming up and we’ve been watching it like a hawk and we held out till few weeks ago and we just locked our next sugar contract and it's at a savings to what we were at. So without giving the specific numbers we are locked in for our next sugar contract at least for another year. So sugar did come down in the last few weeks. So it was a good play on our part to hold out for a few more weeks and we just locked that in.

And we’ll now take our next question from Ted [indiscernible]. Please go ahead.

I’m calling out to you from Toronto, Canada. I’ve been on a few conference over the past two years. I'm a long term investor, like many people have been with Jones, ridden it up and down like a big rollercoaster. My concern is that, being in the Canadian marketplace and having first-hand knowledge, Ontario in terms of where I can or cannot see the brand, I still don’t see the impact of the [indiscernible] in this territory and I’m curious to know what is your plan to roll out with your new fountain program as well as what's the plan on the marketing side that help promote the brand. Even with colleagues and friends who have had rub with it, I just let them know about it. It’s been well over a decade. So, I hope you answer that question.

Yes, I’m sure you’ve been with us over the last couple of years. Understand that we’ve been focused on a turnaround instead of managing our expense levels. We were not doing the kind of spend that the previous administrations were doing that in my belief were unsustainable. We are focused -- we were focused on reengineering this business and with Toronto -- Toronto is a good market, but we still have a lot of work to do and a lot of development that we can do there. Last year I think you would have seen the Jones brand in a variety pack in Costco go and that was the first time that we managed to land Costco in Eastern Canada ever. So we are continuing to work with our distributor in getting Jones back in a better way in the independent account channels as well as maintaining the listings that we have as well as growing new listings. So Toronto is big market. It is having lot of opportunities. So in terms of fountain, we have not launched fountain yet in Toronto. That is one market we want to get into. Right now with fountain it’s not a quick overnight success. It’s something that we are building with various relationships and independent restaurants and our chains that frankly see the difference in differentiating factors from a Coke or Pepsi and will love to do Jones. So a lot of these restaurants are locked into multiyear contracts that we do not have an ability to break into at this point in time. So it’s going to be going after some of the independent accounts and then just the light going on in some of these chains saying you know what, there is an alternative to Coke and Pepsi for fountain.

If I may add another question, if that's okay. Has your distribution -- aside from fountain obviously being a test and rolling out into the programs in stores that you have, in terms of your core business, has your distribution gone up aside from Costco. I've hit four or five Costco stores here to check out the brand. Some carry it long-term, some move out of it and bring it to their other stores. I have done my part to actually buy up a 100 cases and help promote the brand vocally believe it or not within the contact base that I have just to help it give a little bit of an extra boost, but has your distribution went up overall in Canada over the last couple of years during the turnaround program?

Well, when I first came back we put -- there was a price increase that was put into place and that's kind of pissed off a lot of retailers in Canada. We had lost a lot of [indiscernible] for a time being. We came back into [indiscernible]. It's been a challenge. There is no question. We have grown our business in Canada without the Costco listing but it is a challenging environment. However it's still -- Canada represents one of our better markets believe it or not and we will discontinue to block and tackle and get more accounts in each of the markets that we're in and Canada being a focus market. So.

And we've got one of our strongest partners in Canada. Our distributor in Canada could not be more aligned with us?

Yes Leyson [ph] Industries is our distributor in their base -- actually in regional [ph], Quebec and they are the manufacturer and distributors of Oasis and other brands that they -- we are one of their two allied brands. So we have their attention and their -- they treat us like one of their own. So we have gone through this turnover around with them. They totally understood it. They want us to get strong and we are now in a build and grow mode. So it just takes time.

And we will now take our next question from Mark Sopherman [ph]. Please go ahead.

I have some questions regarding the brand identity. I'm a big personal fan of craft and kind of follow the industry kind of carefully. I -- what I struggle with sometimes with Jones is understanding what the differentiating features of the product are as to what makes it a unique product or a premier product or a craft product? And I think you've used all three descriptives to describe Jones. I was given today for example a can of Pepsi Cola with real sugar as a gift and I'm not sure if I see a distinction between the can of Pepsi and the bottle of Jones. And I was wondering if you can kind of comment on that, as there's a lot of growth within craft but I don't know how Jones fits into that category?

Yes I mean, we have produced Jones out of cane sugar for -- since 2006

Yes, 2006.

Yes, so close to 10 years. I'm excited to see the large companies get into craft or premium soda. It just further reinforces use of cane sugar versus high fructose corn syrup. I think our uniqueness -- we're not claiming to be the artisanal little brand that's out of Seattle and focused in Seattle. Our uniqueness came when we launched this brand and just utilized our consumer's photos and creation of the brand together. It's -- we used good quality ingredients in cane sugar. We've done that for many years. We have a unique offering in involving our consumers in the creation of the brand. I'm not trying to be Caleb's Kola. We are not trying to be Caleb's Kola. We're not trying to be sentiment. We are our own unique little brand and either you can understand it or not, our fans understand it and that's my most biggest concern. Our fans who drove the millennial generation get our brand. So that's where I see we have a very big difference our future is with cane sugared soda, uniquely created with the huge involvement and personal connection is a huge thing especially today. And I give credit to Peter van Stolk who started this company way back when we did this. It is bigger today than ever and we see this as a huge differentiating feature in our brand.

Yes, and so like Jennifer just mentioned, as much as we -- since 2006 when we were using cane sugar, long before this recent trend, we're just as much about a lifestyle brand as we're about the product, right. We are focused on offering better ingredients in cane sugar and each year newer offerings Jones Stripped, Jones Sparkling Water, but you got to keep in mind, like when we were early 2000s the huge success is because -- every single bottle or can has a customer photo on it and we're just as much about a lifestyle brand as we're a beverage.

What I would ask is since you had this success, higher sales maybe profitability, I’m not looking at financials from 2000-2006; that generation, the brand has to stay fresh for every generation in terms of appealing to someone saying why should I drink this soda? Why should I choose this soda over another soda? You kind of said you have to get the brand and I would argue, if you look at sales trends, sales trends are down. The people in fact aren’t getting the brand and that’s my concern as an investor, having seen the incredibly long-term trend downward, its tracking south and now you’ve kind of right sized as you've said expenses, but I don’t see if was trying to tell someone hey, you should try this soda and I’m trying to explain why, I’m left with look at the picture and it’s got better quality ingredients, I’m quoting you, but I’m not sure what those better quality ingredients are? Is there any quality difference between the can of Pepsi with sugar and the bottle of Jones with sugar? I’m not trying to be argumentative but I would like to be able to come off the call and say, wow I am so excited to try these lines. You’ve used the word unique maybe 20 times in the course of the call. But I’m struggling.

Yes. If you’re talking about the new Coke Like and the Caleb's Kola that Pepsi brought out, that compared to our traditional Jones is probably pretty similar now that they’ve gone to cane sugar. But in the last year or two we’ve also -- and recognizing that we need these other platforms just listening to our consumers, that’s why we came out with Jones Stripped which is -- that's only natural sweeteners includes, organic Agave. Its 8 grams of sugar. Its 30 calories. We’ve test launched in whole foods. And we have sparkling water. So we feel that we created the right portfolio.

Yes. And I will just add on that, Pepsi with cane sugar, Jones with cane sugar is about brand preferences and you either can embrace our brand and I’m excited to see the kids that come in here that really get excited by the brand. We -- our target market is 12 to 24. Maybe Pepsi's a larger demographic. But again its brand preferences. Not all brands appeal to all people. We're not expecting to appeal to everyone. We definitely connect with the millennial generation though and we still new to this day. The new millennials are still excited by our brand but we also want to be able to offer them something with less sugar too with our Jones Stripped eventually. So that’s all I would have to say about that.

(Operator Instructions) At this time we have no further questions in the queue.

Thank you again for interest in Jones Soda. We’ll speak -- we’ll next speak when we report our first quarter results in May.

This does conclude today’s conference. Thank you for your participation.