? 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 in North America through our network of independent distributors located throughout the U.S. and Canada and directly to our national retail accounts. We refer to our network of independent distributors as our direct store delivery (DSD) channel, and we refer to our national and regional accounts who receive shipments directly from us as our direct to retail (DTR) channel. Additionally, in limited circumstances we sell concentrate for distribution or production of our products. 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 in nine provinces in Canada, primarily in convenience stores, grocery stores and up and down the street in 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 has changed over the past few years with the majority of our case sales of our core products, including Jones Soda and our re-launched WhoopAss Energy Drink, sold through our DSD channel. We are strategically building our national and regional retailer network by focusing on the distribution system that we believe will provide us the best top-line driver for our business 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 currently 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) while maintaining a reduced overhead structure that will result in a sustainable business

model. 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 Jones Soda can format;

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

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

• operating at the lowest cost structure while continuing to focus on top-line growth.

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. In March 2012, we announced our new product offering, a natural ingredient and lower calorie product that we plan to selectively launch in natural food retailers in 2013 to enhance our sparkling portfolio. Although we believe that we will be able to continue to create competitive and relevant brands and products 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.
For purposes of the following Management's Discussion and Analysis, we use the following industry terms:
• We use the phrase "sales velocity" to refer to the number of "stock keeping units" or "SKUs" sold per point of distribution within a specific period of time.

• A SKU refers to individual variants of our products. For example, for our Jones Soda product line, each of our flavors is referred to as a different SKU.

Results of Operations
The following selected financial and operating data are derived from our
consolidated financial statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements:
                                       Three Months Ended June 30,                                Six Months Ended June 30,
                           2012       % of Revenue      2011       % of Revenue      2012       % of Revenue      2011       % of Revenue
Consolidated
statements of
operations data:                                             (Dollars in thousands, except share data)
Revenue                  $ 5,257         100.0  %     $ 4,914         100.0  %     $ 9,119         100.0  %     $ 9,001         100.0  %
Cost of goods sold        (3,696 )       (70.3 )%      (3,497 )       (71.2 )%      (6,510 )       (71.4 )%      (6,584 )       (73.1 )%
Gross profit               1,561          29.7  %       1,417          28.8  %       2,609          28.6  %       2,417          26.9  %
Licensing revenue              6           0.1  %           7           0.1  %          11           0.1  %          12           0.1  %
Promotion and selling
expenses                    (920 )       (17.5 )%      (1,873 )       (38.1 )%      (2,277 )       (25.0 )%      (3,153 )       (35.0 )%
General and
administrative
expenses                  (1,078 )       (20.5 )%      (1,313 )       (26.7 )%      (2,410 )       (26.4 )%      (2,793 )       (31.0 )%
Loss from operations        (431 )        (8.2 )%      (1,762 )       (35.9 )%      (2,067 )       (22.7 )%      (3,517 )       (39.0 )%
Other (expense)
income, net                   (5 )        (0.1 )%           6           0.1  %         (16 )        (0.2 )%          78           0.9  %
Loss before income
taxes                       (436 )        (8.3 )%      (1,756 )       (35.8 )%      (2,083 )       (22.9 )%      (3,439 )       (38.1 )%
Income tax expense,
net                          (23 )        (0.4 )%         (64 )        (1.3 )%         (48 )        (0.5 )%         (51 )        (0.6 )%
Net loss                    (459 )        (8.7 )%      (1,820 )       (37.1 )%      (2,131 )       (23.4 )%      (3,490 )       (38.7 )%
Basic and diluted net
loss per share           $ (0.01 )                    $ (0.06 )                    $ (0.06 )                    $ (0.11 )

receivable, net                                  $            5,651     $             3,675
Fixed assets, net                                               632                     844
Total assets                                                  9,270                   7,657
Long-term liabilities                                           514                     539
Working capital                                               4,579                   3,552


                                         Three Months Ended June 30,     Six Months Ended June 30,

Quarter Ended June 30, 2012 Compared to Quarter Ended June 30, 2011 Revenue
For the quarter ended June 30, 2012, revenue was approximately $5.3 million, an increase of $343,000, or 7.0% from $4.9 million in revenue for the quarter ended June 30, 2011. The increase in revenue was primarily attributable to an increase in Jones Soda through our DSD channel in the Western U.S. market due in part to our new 16-ounce can format of Jones Soda, as well as new authorizations. We also saw an increase in revenue in our International channel as a result of getting new distribution in Ireland. Offsetting these increases were decreases in other markets which were soft due to ordering cycles. In addition, revenue for the quarter last year included $53,000 from discontinued items liquidated in 2011 (relating to a product line and SKU rationalization initiated in the second half of 2010) for which there was no such revenue in 2012.
For the quarter ended June 30, 2012, promotion allowances and slotting fees, which are a reduction to revenue, totaled $486,000, a decrease of $87,000, or 15.2%, from $573,000 a year ago. The decrease in promotion allowances and slotting fees was primarily attributable to our increased focus on cost containment.
Gross Profit
For the quarter ended June 30, 2012, gross profit increased by approximately $144,000 or 10.2%, to $1.6 million compared to $1.4 million for the quarter ended June 30, 2011. The increase in gross profit was primarily due to the increase in revenue during the three months ended June 30, 2012 compared to the same period in 2011, and was offset by an increase in cost of goods sold relating to higher sales volumes as well as increased materials costs with respect to glass. For the quarter ended June 30, 2012, gross profit as a percentage of revenue increased to 29.7% from 28.8% for the quarter ended June 30, 2011.
Promotion and Selling Expenses
Promotion and selling expenses for the quarter ended June 30, 2012 were approximately $920,000, a decrease of $1.0 million, or 50.9%, from $1.9 million for the quarter ended June 30, 2011. Promotion and selling expenses as a percentage of revenue decreased to 17.5% for the quarter ended June 30, 2012, from 38.1% in 2011. The decrease in promotion and selling expenses was primarily due to a decrease in selling expenses for the comparable quarters of $310,000, to $654,000, or 12.4% of revenue, driven by reduced sales personnel versus a year ago. Additionally, this decrease in promotion and selling expenses was due to a reduction in trade promotion and marketing expenses of $643,000 from $909,000 to $266,000 (5.1% of revenue) for 2012 as a result of a reduction in sponsorship costs. We anticipate decreased promotion and selling expenses during 2012 based on our 2012 operating plan to reduce our operating expenses, as we scale back prior sales and marketing investments, including reductions that we have made in sales and marketing personnel, to support a cost structure aligned with our available capital.
General and Administrative Expenses
General and administrative expenses for the quarter ended June 30, 2012 were $1.1 million, a decrease of $235,000 or 17.9%, compared to $1.3 million for the quarter ended June 30, 2011. General and administrative expenses as a percentage of revenue decreased to 20.5% for the quarter ended June 30, 2012 from 26.7% in 2011. The decrease in general and administrative expenses was related to a decrease in public company costs, including reduced costs as a result of postponing our annual meeting normally held in the second quarter of 2012 to later in the year (we anticipate lower fees for our 2012 meeting as we will not have proxy solicitation fees as we did in 2011). In addition, there was a decrease in stock-based

compensation as a result of reductions in personnel including our former chief executive officer. We anticipate decreased general and administrative expenses for the full year compared to 2011 based on our 2012 operating plan to reduce our operating expenses, including reductions that we have made in general and administrative personnel, to support a cost structure aligned with our available capital.
Income Tax Expense, Net
We had income tax expense of $23,000 for the quarter ended June 30, 2012, compared to $64,000 for the quarter ended June 30, 2011. This tax expense relates primarily to our Canadian operations. We have not recorded any net tax benefit 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 June 30, 2012 decreased to $459,000 from a net loss of $1.8 million for the quarter ended June 30, 2011. This was primarily due to an increase in gross profit and a decrease in operating expenses due to the changes made to align our cost structure with our available capital.

Six Month Period Ended June 30, 2012 Compared to Six Month Period Ended June 30, 2011
Revenue
For the six months ended June 30, 2012, revenue was approximately $9.1 million, an increase of $118,000, or 1.3% from $9.0 million in revenue for the six months ended June 30, 2011. The increase in revenue was primarily attributable to an increase in Jones Soda through our DSD channel in the Western U.S. market due in part to our new 16-ounce can format of Jones Soda, as well new authorizations. We also saw an increase in revenue in our International channel as a result of getting new distribution in Ireland. Offsetting these increases were decreases in the other markets which continued to be soft due to ordering cycles. In addition, revenue for the six months last year included $49,000 from discontinued items liquidated in 2011 (relating to a product line and SKU rationalization initiated in the second half of 2010) for which there was no such revenue in 2012.
For the six months ended June 30, 2012, promotion allowances and slotting fees, which are a reduction to revenue, totaled $904,000, an increase of $3,000, or 0.3%, from $901,000 a year ago. As part of our focus on a cost structure that is aligned with our available capital, we will continue to judiciously use promotional allowances and slotting fees where we believe they will be most effective.
Gross Profit
For the six months ended June 30, 2012, gross profit increased by approximately $192,000 or 7.9%, to $2.6 million compared to $2.4 million for the six months ended June 30, 2011. The increase in gross profit was primarily due to the increase in revenue during the six months ended June 30, 2012 compared to the same period in 2011, with a related decrease in cost of goods sold due to production and warehousing efficiencies offset by increased materials costs with respect to glass. For the six months ended June 30, 2012, gross profit as a percentage of revenue increased to 28.6% from 26.9% for the six months ended June 30, 2011.
Promotion and Selling Expenses
Promotion and selling expenses for the six months ended June 30, 2012 were approximately $2.3 million, a decrease of $876,000, or 27.8%, from $3.2 million for the six months ended June 30, 2011. Promotion and selling expenses as a percentage of revenue decreased to 25.0% for the six months ended June 30, 2012, from 35.0% in 2011. The decrease in promotion and selling expenses was primarily due to a decrease in selling expenses year over year of $180,000, to $1.5 million, or 17.0% of revenue, driven by reduced sales personnel versus a year ago. Also contributing to this decrease was a reduction in trade promotion and marketing expenses of $696,000 from $1.4 million to $731,000 (8.0% of revenue) for 2012 largely due to a reduction in sponsorship costs. We anticipate decreased promotion and selling expenses during 2012 based on our 2012 operating plan to reduce our operating expenses, as we scale back the sales and marketing investments made over the past year, including reductions in sales and marketing personnel, to support a cost structure aligned with our available capital.

General and Administrative Expenses
General and administrative expenses for the six months ended June 30, 2012 were $2.4 million, a decrease of $383,000 or 13.7%, compared to $2.8 million for the six months ended June 30, 2011. General and administrative expenses as a percentage of revenue decreased to 26.4% for the six months ended June 30, 2012 from 31.0% in 2011. The decrease in general and administrative expenses was primarily due to decreases in salaries and benefits, driven by a decrease in stock-based compensation and a decrease in bad debt expense. Additionally, the decrease in general and administrative expenses was related to a decrease in public company costs, including reduced costs as a result of postponing our annual meeting normally held in the second quarter of 2012 to later in the year (we anticipate lower fees for our 2012 meeting as we will not have proxy solicitation fees as we did in 2011). We anticipate decreased general and administrative expenses for the full year compared to 2011 based on our 2012 operating plan to reduce our operating expenses, including reductions in general and administrative personnel, to support a cost structure aligned with our available capital.
Income Tax Expense, Net
We had income tax expense of $48,000 for the six months ended June 30, 2012, compared to $51,000 for the six months ended June 30, 2011. This tax expense relates primarily to our Canadian operations. We have not recorded any net tax benefit 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 six months ended June 30, 2012 decreased to $2.1 million from a net loss of $3.5 million for the six months ended June 30, 2011. For the six months ended June 30, 2012, this reflects an increase in gross profit and a decrease in operating expenses due to the changes made to align our cost structure with our available capital. The 2011 period included a credit of $114,000 recorded in other income and tax benefit primarily relating to interest and tax relating to our 2010 Canadian tax refund.

Liquidity and Capital Resources

As of June 30, 2012, we had cash and cash-equivalents of approximately $2.5 million and working capital of $4.6 million. Cash used in operations during the six months ended June 30, 2012 totaled $2.1 million. Our cash flows vary throughout the year based on seasonality. We traditionally use more cash in the first half of the year as we build inventory to support our historically seasonally-stronger shipping months of April through September, and expect cash used by operating activities to decrease in the second half of the year as we collect receivables generated during our stronger shipping months. We incurred a net loss of $459,000 during the three months ended June 30, 2012. On December 27, 2011, we entered into a secured credit facility (Credit Facility) with Access Business Finance LLC (Access), pursuant to which we, through two of our wholly owned subsidiaries, Jones Soda (Canada) Inc. and Jones Soda Co. (USA) Inc., may borrow a maximum aggregate amount of up to $2.0 million, subject to satisfaction of certain conditions. Under this Credit Facility, we may periodically request advances for up to 75% of our eligible accounts receivable, bearing interest at the prime rate plus 2%, but not less than 5.25% per annum, with a minimum payment of $5,000 per month. As of June 30, 2012, we had approximately $1.2 million available for borrowing based on eligible accounts receivable. The Credit Facility has an initial one-year term, which will be automatically extended unless either party gives notice of non-renewal. The Credit Facility is guaranteed by us and is secured by a first priority security interest in all of our assets. The Credit Facility contains customary representations and warranties as well as affirmative and negative covenants. We may use the Credit Facility for our working capital needs. As of the date of this Report, we are in compliance with all debt covenants and we have not drawn on the facility.
In February 2012, we entered into a Securities Purchase Agreement with certain purchasers (Purchasers), arranged by Rodman & Renshaw, pursuant to which we sold to the Purchasers in a registered offering 6,415,000 shares of our common stock and warrants to purchase up to 3,207,500 shares of common stock (Warrants). The securities were sold in units, consisting of one share of common stock and a Warrant to purchase 0.5 of a share of common stock, at a price of $0.50 per unit, for gross proceeds of $3,207,500 (Offering). The Offering closed on February 7, 2012. The Warrants are exercisable at any time on or after August 7, 2012, six months following their issuance. The Warrants are exercisable for cash, or solely in the absence of an effective registration statement, by cashless exercise. After deducting the placement agent fee and our estimated offering

expenses (and excluding any potential future proceeds from the exercise of the Warrants) the net proceeds from the Offering were approximately $2.8 million. (See Note 2). As of June 30, 2012, none of the Warrants were exercisable and all remain outstanding. There are no assurances that any of the Warrants will be exercised or that we will receive any cash proceeds from any such exercise. As of the date of this Report, we believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through December 31, 2012. Under our 2012 operating plan, we have significantly reduced operating expenses, including personnel reductions, compared to 2011, to align our cost structure with our available capital while reducing and slowing our cash used for operations. Our Board of Directors believes that recent cost controls and reduced expenses are strategically important to ensure the Company's long-term viability, to maintain our business within existing resources. As part of these cost saving measures, the Board of Directors approved the elimination of the Chief Financial Officer position, a reduced cash compensation structure for the new Chief Executive Officer, and other cost reductions.
Our 2012 operating plan does not factor in the use of our Credit Facility, which we may use for working capital needs. However, we may require additional financing to support our working capital needs beyond 2012. The amount of additional capital we may require, the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including the performance of our business and the market conditions for debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our sales goals and otherwise successfully execute our operating plan. We believe it is imperative to meet these sales objectives and continue to expand our distribution network and increase sales volume in order to lessen our reliance on external financing in the future. We also plan to continue our efforts to reinforce and expand our distributor network by partnering with new distributors and replacing underperforming distributors. It is critical that we meet our volume projections and continue to increase volume going forward, as our operating plan already reflects prior significant cost containment measures and may make it difficult to achieve top-line growth if further significant reductions become necessary.
We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. As stated above, we may require additional financing to support our working capital needs beyond 2012. Although we believe various debt and equity financing alternatives will be available to us to support our working capital needs, new debt or equity financing arrangements may not be available to us when needed on acceptable terms, if at all. Additionally, these alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic transactions that we consider to be in the best interest of the Company and our shareholders, which may include, without limitation, public or private offerings of debt or equity securities, rights offering, joint ventures with one or more strategic partners, strategic acquisitions and other strategic alternatives; however, we may not enter into any such agreements or transactions.
Further, our ability to access the capital markets for equity financing may be . . .