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JSDA > SEC Filings for JSDA > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for JONES SODA CO

Form 10-Q for JONES SODA CO


14-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report and the 2010 audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (SEC) on March 21, 2011.

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "believe," "expect," "intend," "anticipate," "estimate," "may," "will," "can," "plan," "predict," "could," "future," variations of such words, and similar expressions. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined at the beginning of this report under "Cautionary Notice Regarding Forward-Looking Statements" and in Item 1A of our most recent Annual Report on Form 10-K filed with the SEC. These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.


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Overview

We develop, produce, market and distribute premium beverages, including the following product lines and extensions:

• Jones Soda®, a premium carbonated soft drink;

• Jones Zilch™, with zero calories (and an extension of the Jones Soda® product line);

• WhoopAss Energy Drink®, an energy supplement drink; and

• WhoopAss Zero Energy Drink®, with zero sugar (and an extension of the WhoopAss Energy Drink® product line).

We sell and distribute our products primarily throughout the United States (U.S.) and Canada through our network of independent distributors, which we refer to as our direct store delivery (DSD) channel, and directly to national retail accounts, which we refer to as our direct to retail (DTR) channel. Additionally, in limited circumstances we sell concentrate for distribution or production of our products, which we refer to as our concentrate soda channel. We do not directly manufacture our products but instead outsource the manufacturing process to third-party contract manufacturers.

Our products are sold in 50 states in the U.S. and nine provinces in Canada, primarily in convenience stores, grocery stores, delicatessens, and sandwich shops, as well as through our national accounts with several large retailers. We also sell various products on-line, which we refer to as our interactive channel, including soda with customized labels, wearables, candy and other items. Our distribution landscape is evolving, with the majority of our case sales of our core products, including Jones Soda as well as our newly re-launched WhoopAss Energy Drink, sold through our DSD channel in recent years. We are strategically building our national and regional retailer network by focusing on the distribution system that will provide us the best top-line driver for our products and optimize availability of our products. We have focused our sales and marketing resources on the expansion and penetration of our products through our independent distributor network and national and regional retail accounts in our core markets throughout the U.S. and Canada. We also intend to initiate and enhance distributor relationships in international regions where we believe there may be appropriate demand for our products. Our international business outside of North America is comprised of Ireland, the United Kingdom and Australia.

Our business strategy is to increase sales by expanding distribution of our products in new and existing markets (primarily within North America). Our business strategy focuses on:

• expanding points of distribution of Jones Soda throughout the entire U.S. in the grocery, mass and club channels;

• growing our convenience and gas (C&G) distribution behind WhoopAss Energy Drink and our newly launched 16-ounce can format;

• expanding the stock-keeping unit (SKU) offerings in the grocery stores where we are already present; and

• developing innovative beverage brands that will allow us to capture share in the growing natural carbonated drink segment.

In order to compete effectively in the beverage industry, we believe that we must convince independent distributors that Jones Soda and WhoopAss Energy Drink are leading brands in the premium soda and energy drink segments of the sparkling beverage category. We believe our story is compelling as we perform well compared to our direct competitors in the premium soda segment in sales per point of distribution. Additionally, as a means of maintaining and expanding our distribution network, we introduce new products and product extensions, and when warranted, new brands. In October 2011, we announced our launch of a new format for Jones Soda specifically aimed at the convenience store channel-a 16-ounce can, emblazoned with the bold black and white fan-submitted photos associated with our Jones brand. Although we believe that we will be able to continue to create competitive and relevant brands to satisfy consumers' changing preferences, there can be no assurance that we will be able to do so or that other companies will not be more successful in this regard over the long term.

We believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs into the first quarter of 2012. In order to execute on our growth strategy in 2012, we will require additional financing to support our working capital needs. We have exited costly sponsorship arrangements to improve our working capital, as evidenced by our August 2011 announcement that we were able to terminate our sponsorship arrangement with the New Jersey Nets (see "Liquidity and Capital Resources") thereby reducing our sponsorship commitments by approximately $7.0 million through 2017 as we return our attention to grassroots marketing initiatives that focus on a nationwide audience.


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Although we are exploring debt and equity financing alternatives, there can be no assurance that any new debt or equity financing arrangement will be available to us when needed or on acceptable terms, if at all. In addition, there can be no assurance that these financing alternatives would provide us with sufficient funds to meet our long-term capital requirements. If we are able to secure additional financing, the alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. If necessary, we may explore strategic transactions in the best interest of the Company and our shareholders, which may include, without limitation, public or private offerings of debt or equity securities, joint ventures with one or more strategic partners, strategic acquisitions and other strategic alternatives, but there can be no assurance that we will enter into any agreements or transactions.

Our need to raise additional capital in a difficult financing environment to support our business, combined with the uncertainties relating to our ability to successfully execute our operating plan and our ability to implement further meaningful cost containment measures that do not jeopardize our growth plans, continue to raise substantial doubt about our ability to continue as a going concern (see "Liquidity and Capital Resources").

Results of Operations

The following selected unaudited financial and operating data are derived from
our condensed consolidated financial statements and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our condensed consolidated financial statements.



                                               Three Months Ended September 30,                         Nine Months Ended September 30,
                                                      % of                        % of                         % of                         % of
                                        2011        Revenue         2010        Revenue         2011         Revenue         2010         Revenue
                                                                       (Dollars in thousands, except share data)
Consolidated statements of
operation data:
Revenue                               $  4,973         100.0      $  5,125         100.0      $  13,974         100.0      $  14,383         100.0
Cost of goods sold                      (3,802 )       (76.5 )      (3,575 )       (69.8 )      (10,386 )       (74.3 )      (10,553 )       (73.4 )
Write-down of excess GABA inventory         -             -           (166 )        (3.2 )           -             -            (344 )        (2.4 )

Gross profit                             1,171          23.5         1,384          27.0          3,588          25.7          3,486          24.2
Licensing revenue                            7           0.1             7           0.1             19           0.1             25           0.2
Promotion and selling expenses          (1,557 )       (31.3 )      (1,109 )       (21.6 )       (4,710 )       (33.7 )       (3,411 )       (23.7 )
General and administrative expenses     (1,282 )       (25.8 )      (1,256 )       (24.5 )       (4,075 )       (29.2 )       (4,685 )       (32.6 )

Loss from operations                    (1,661 )       (33.5 )        (974 )       (19.0 )       (5,178 )       (37.1 )       (4,585 )       (31.9 )
Other income, net                            1           0.0            26           0.5             79           0.6             18           0.1

Loss before income taxes                (1,660 )       (33.5 )        (948 )       (18.5 )       (5,099 )       (36.5 )       (4,567 )       (31.8 )
Income tax (expense) benefit, net          (24 )        (0.5 )         370           7.2            (75 )        (0.5 )          303           2.1

Net loss                              $ (1,684 )       (34.0 )    $   (578 )       (11.3 )    $  (5,174 )       (37.0 )    $  (4,264 )       (29.7 )

Basic and diluted net loss per
share                                 $  (0.05 )                  $  (0.02 )                  $   (0.16 )                  $   (0.16 )




                                                                      As of
                                                  September 30, 2011           December 31, 2010
                                                              (Dollars in thousands)
Balance sheet data:
Cash and cash equivalents and accounts
receivable, net                                  $              5,656         $             7,668
Fixed assets, net                                                 897                         296
Total assets                                                   10,416                      11,463
Long-term liabilities                                             500                           2
Working capital                                                 5,233                       8,141


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                                            Three Months Ended September 30,             Nine Months Ended September 30,
                                               2011                   2010                 2011                   2010
Case sale data (288-ounce equivalent):
Finished products cases                           375,600                394,800            1,035,900              1,095,900
Concentrate cases                                      -                      -                    -                 110,800

Total cases                                       375,600                394,800            1,035,900              1,206,700

Quarter Ended September 30, 2011 Compared to Quarter Ended September 30, 2010

Revenue

For the quarter ended September 30, 2011, revenue was approximately $5.0 million, a decrease of $152,000, or 3.0%, from $5.1 million in revenue for the three months ended September 30, 2010. This decrease is in part attributable to a 6.6% decline in revenue due to the discontinuation of underperforming product lines, Jones Naturals®, Jones Organics TM, Jones 24C® and Jones GABA ®, and certain underperforming Jones Soda flavors (which we refer to as stock keeping units, or SKUs) totaling $339,000 compared to the same period in 2010. This product line and SKU rationalization was initiated in the second half of 2010, after the arrival of our new Chief Executive Officer in April of that year, as part of our strategic decision to focus our business on our higher-margin, core products, including Jones Soda SKUs that we believe have demonstrated strong sales performance at retail (measured by the number of units of a particular SKU sold per point of distribution within a specific period of time, referred to as sales velocity) and our newly re-launched WhoopAss Energy Drink. As a result, for the third quarter of 2011 we earned no revenue from these discontinued products and SKUs and expect similar results for the remainder of 2011 as we no longer have inventory relating to these discontinued products and SKUs. The following table summarizes the case sales and revenue for the three months ended September 30:

                                           Case Sales (288-ounce equivalent)           Revenue (in thousands)
                                              2011                   2010              2011              2010
Core products - North America                    357,000                326,800     $     4,828       $     4,513
Core products - International                     18,600                 24,000             145               273
Discontinued products                                 -                  26,000              -                214
Discontinued SKUs                                     -                  18,000              -                125

Total                                            375,600                394,800     $     4,973       $     5,125

Also contributing to the decrease in revenue was a decline of $128,000 in our international market. During the third quarter of 2011, we transitioned to a new distributor to serve the Ireland market to replace our previous underperforming distributor who ultimately sought bankruptcy protection. This distributor issue was the primary driver behind this 2.5% decrease in revenue in the third quarter of 2011 compared to the same period in 2010.

The decrease in revenue for the quarter ended September 30, 2011 compared to the same period of 2010 was offset, in part, by a 6.1% increase in revenue compared to the prior year period driven by revenue growth of our continuing core product offerings in North America, Jones Soda and WhoopAss Energy Drink, which increased by $315,000. We believe our efforts with respect to reinforcing and expanding our distribution network by partnering with new distributors and replacing underperforming distributors, coupled with our strategic refocus to emphasize our higher-margin core products, are beginning to positively impact our core products and are expected to further contribute to revenue growth in our core products for the remainder of the year.

For the quarter ended September 30, 2011, promotion allowances and slotting fees, which are a reduction to revenue, totaled $536,000, an increase of $30,000, or 5.9%, from $506,000 a year ago. The increase in promotion allowances and slotting fees was primarily attributable to the growth of our core products through our DSD channel due to our expanding distribution network, and is likely to continue for the remainder of 2011.

Gross Profit

For the quarter ended September 30, 2011, gross profit decreased by approximately $213,000, or 15.4%, to $1.2 million as compared to $1.4 million in gross profit for the quarter ended September 30, 2010. Gross profit was negatively impacted by a rise in


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fuel and logistics costs during the third quarter of 2011 compared to the same period in the prior year, as well as a decrease in revenue during the quarter for the factors outlined above under "Revenue." Additionally, the prior year gross profit was negatively impacted by a $166,000 write-down of excess GABA inventory. For the quarter ended September 30, 2011, gross profit as a percentage of revenue decreased to 23.5% from 27.0% for the third quarter of 2010.

Promotion and Selling Expenses

Promotion and selling expenses for the quarter ended September 30, 2011 were $1.6 million, an increase of $448,000, or 40.4%, from $1.1 million for the quarter ended September 30, 2010. Promotion and selling expenses as a percentage of revenue increased to 31.3% for the quarter ended September 30, 2011, from 21.6% in the same period in 2010. The increase in promotion and selling expenses was primarily due to an increase in selling expenses year over year of $370,000, to $1.0 million, or 20.7% of revenue driven by added sales personnel to support our growth strategy. Also contributing to the increase was trade promotion and marketing expenses, which grew from $450,000 to $528,000, or 10.6% of revenue for the quarter ended September 30, 2011 compared to the same period in the prior year, in conjunction with summer sampling programs throughout the U.S. and Canada. We anticipate increased promotion and selling expenses for the remainder of the year compared to prior year periods due to our hiring of additional sales personnel to support our strategy of securing and growing larger distributor and national retail accounts, as well as our efforts to grow our Jones Soda and WhoopAss Energy Drink core product lines.

General and Administrative Expenses

General and administrative expenses for the quarter ended September 30, 2011 were $1.3 million, an increase of $26,000, or 2.1%, compared to $1.3 million for the quarter ended September 30, 2010. General and administrative expenses as a percentage of revenue increased to 25.8% for the three months ended September 30, 2011 from 24.5% in the same period of 2010. The increase in general and administrative expenses during the third quarter of 2011 was primarily due to increases in professional fees and was offset by a decrease in public company costs for the third quarter of 2011 compared to the prior year due to the fact that we held our 2010 shareholder meeting in September rather than in May as is our normal practice (including for 2011).

Income Tax Expense, Net

Provision for income taxes for the quarters ended September 30, 2011 and 2010 was an expense of $24,000 and a benefit of $370,000, respectively. The tax provision relates primarily to the tax on income from our Canadian operations and for the 2010 period, also reflects a non-recurring credit due to a tax refund allowed. No tax benefit is recorded for the loss in our U.S. operations as we have recorded a full valuation allowance on our U.S. net deferred tax assets. We expect to continue to record a full valuation allowance on our U.S. net deferred tax assets until we sustain an appropriate level of taxable income through improved U.S. operations. Our effective tax rate is based on recurring factors, including the forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a full valuation allowance on our U.S. net deferred tax assets.

Net Loss

Net loss for the quarter ended September 30, 2011 increased to $1.7 million from a net loss of $578,000 for the quarter ended September 30, 2010. This was primarily due to an increase in promotion and selling expenses of $448,000, a decrease in gross margin for the reasons discussed above and a $392,000 tax refund allowed in 2010 resulting from our Canadian operations which reduced the net loss in the prior year.

Nine Month Period Ended September 30, 2011 Compared to Nine Month Period Ended September 30, 2010

Revenue

For the nine months ended September 30, 2011, revenue was approximately $14.0 million, a decrease of $409,000, or 2.8%, from $14.4 million in revenue for the nine months ended September 30, 2010. This decrease is primarily attributable to an 8.0% decline in revenue due to the discontinuation of underperforming products lines, Jones Naturals ®, Jones Organics TM, Jones 24C ® and Jones GABA®, and certain underperforming Jones Soda flavors (which we refer to as stock keeping units, or SKUs) of $1.2 million compared to the prior year period. This product line and SKU rationalization was initiated in the second half of 2010, after the arrival of our new Chief Executive Officer in April of that year, as part of our strategic decision to focus our business on our higher-margin, core products, including Jones Soda SKUs that we believe have demonstrated strong sales performance at retail (measured by the number of units of a particular SKU sold per point of distribution within a specific period of time, referred to as sales velocity) and our newly re-launched WhoopAss Energy Drink. As a


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result, for the first nine months of 2011 we earned significantly less revenue from these discontinued products and SKUs compared to the same period in the prior year. We expect revenue related to these discontinued products and SKUs to continue to decline in 2011 compared to the same period in 2010 as we no longer have inventory relating to these discontinued products and SKUs. The following table summarizes the case sales and revenue for the nine months ended September 30:

                                            Case Sales (288-ounce equivalent)           Revenue (in thousands)
                                              2011                    2010                2011             2010
Core products - North America                     999,600                 886,100     $     13,727       $ 12,368
Core products - International                      22,300                  59,500              198            712
Discontinued products                              12,700                 102,700               39            763
Discontinued SKUs                                   1,300                  47,600               10            439
Concentrate                                            -                  110,800               -             101

Total 1,035,900 1,206,700 $ 13,974 $ 14,383

Also contributing to the decrease in revenue was a significant decline of $514,000 in our international market. During the third quarter of 2011, we transitioned to a new distributor to serve the Ireland market to replace our previous underperforming distributor who ultimately sought bankruptcy protection. This distributor issue was the primary driver behind this 3.6% decrease in revenue in the first nine months of 2011 compared to the prior year period. We expect our international revenues to continue to be negatively impacted for 2011 compared to a year ago. In addition, there were no case sales of concentrate during the first nine months of 2011 compared to 110,800 cases during the same period a year ago.

The decrease in revenue for the nine months ended September 30, 2011 compared to the same period of 2010 was offset, in part, by a 9.4% increase in revenue compared to the prior year period driven by revenue growth of our continuing core product offerings in North America, Jones Soda and WhoopAss Energy Drink, which increased by $1.4 million. We believe this was the direct result of our efforts, beginning in the latter part of 2010, to reinforce and expand our distributor network by partnering with new distributors and replacing underperforming distributors, in addition to our transition out of underperforming products and SKUs as we focus on our core product lines. Additionally, we expect our efforts and our strategic refocus on our core products will result in revenue growth in our core products for the full year as compared to a year ago.

For the nine months ended September 30, 2011, promotion allowances and slotting fees, which are a reduction to revenue, totaled $1.4 million, an increase of $178,000, or 14.1%, from $1.2 million a year ago. The increase in promotion allowances and slotting fees was primarily attributable to a focus on more traditional trade spend strategies for core products through our DSD channel in order to increase sales velocity, coupled with our expanding distribution network. We expect promotional allowances and slotting fees to be higher in 2011 compared to 2010 as we concentrate on these traditional trade spend strategies and continue to increase distribution.

Gross Profit

For the nine months ended September 30, 2011, gross profit increased by approximately $102,000, or 2.9%, to $3.6 million as compared to $3.5 million in gross profit for the nine months ended September 30, 2010. Despite the overall decrease in revenue during the nine months ended September 30, 2011 compared to the same period in the prior year for the reasons outlined above under "Revenue", this increase in gross profit was primarily a result of a reduction in cost of goods sold for the first nine months of 2011 compared to the same period in the prior year as a result of our transition out of underperforming product lines which had a higher cost to produce. Additionally, gross profit was negatively impacted by rising fuel costs in 2011 compared to 2010, and in 2010, it was negatively impacted by a $344,000 write-down of excess GABA inventory. For the nine months ended September 30, 2011, gross profit as a percentage of revenue increased to 25.7% from 24.2% for the nine months of 2010.

Promotion and Selling Expenses

Promotion and selling expenses for the nine months ended September 30, 2011 were $4.7 million, an increase of $1.3 million, or 38.1%, from $3.4 million for the nine months ended September 30, 2010. Promotion and selling expenses as a percentage of revenue increased to 33.7% for the nine months ended September 30, 2011, from 23.7% in the same period in 2010. The increase in promotion and selling expenses was primarily due to an increase in selling expenses year over year of $931,000, to $2.8 million, or 19.7% of revenue, driven by added sales and marketing personnel to support our growth strategy. Also contributing to the increase was trade promotion and marketing expenses which grew from $1.6 million, to $1.9 million, or 14.0% of revenue for the nine months ended September 30, 2011, due primarily to a $350,000 charge accrued to the second quarter in connection with the termination of our New Jersey Nets sponsorship agreement in August 2011. We anticipate increased promotion and selling expenses for the full year compared to 2010 due to our hiring of additional sales and marketing personnel to support our strategy of securing and growing larger distributor and national retail accounts, as well as our efforts to grow our Jones Soda and WhoopAss Energy Drink core product lines.


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