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JSDA > SEC Filings for JSDA > Form 10-Q/A on 13-Nov-2012All Recent SEC Filings

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Form 10-Q/A for JONES SODA CO


13-Nov-2012

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 2011 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 30, 2012. This Report contains 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," "continue," 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. Overview
We develop, produce, market and distribute premium beverages, which currently consist of 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 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 sold through our DSD channel. Part of our Company's turnaround strategy is to focus on our existing distributor partners as well as focus on core geographic markets that we believe will generate the highest return within our current available resources, including the Western U.S., Midwest U.S. and Canada. We believe these core geographic markets along with certain retail channels that are considered operating priorities will help us achieve sustainable operations and revenue growth over the longer term. Additionally, as part of our strategy, in the next year we intend to redirect resources to support our distributor network through increased promotion allowances at retail which we believe will drive more volume. These initiatives will be pursued within a lower cost structure that we believe will help lead the Company to sustainable business operations. Our business strategy focuses on:
• expanding points of distribution of Jones Soda in our core geographic regions in grocery, convenience and gas (C&G), and independent accounts in the U.S. and Canada;

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


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

In order to compete in the beverage industry, from time to time 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 West Coast 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:
• A "stock keeping units" or "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 September 30,                            Nine Months Ended September 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                $  4,160         100.0  %     $ 4,973         100.0  %     $ 13,279         100.0  %     $ 13,974         100.0  %
Cost of goods sold       (3,009 )       (72.3 )%      (3,802 )       (76.5 )%       (9,519 )       (71.7 )%      (10,386 )       (74.3 )%
Gross profit              1,151          27.7  %       1,171          23.5  %        3,760          28.3  %        3,588          25.7  %
Licensing revenue             5           0.1  %           7           0.1  %           16           0.1  %           19           0.1  %
Promotion and
selling expenses           (571 )       (13.7 )%      (1,557 )       (31.3 )%       (2,848 )       (21.4 )%       (4,710 )       (33.7 )%
General and
administrative
expenses                   (893 )       (21.5 )%      (1,282 )       (25.8 )%       (3,303 )       (24.9 )%       (4,075 )       (29.2 )%
Loss from operations       (308 )        (7.4 )%      (1,661 )       (33.5 )%       (2,375 )       (17.9 )%       (5,178 )       (37.1 )%
Other income
(expense) , net               9           0.2  %           1             -  %           (7 )        (0.1 )%           79           0.6  %
Loss before income
taxes                      (299 )        (7.2 )%      (1,660 )       (33.5 )%       (2,382 )       (18.0 )%       (5,099 )       (36.5 )%
Income tax expense,
net                         (25 )        (0.6 )%         (24 )        (0.5 )%          (73 )        (0.5 )%          (75 )        (0.5 )%
Net loss                   (324 )        (7.8 )%      (1,684 )       (34.0 )%       (2,455 )       (18.5 )%       (5,174 )       (37.0 )%
Basic and diluted
net loss per share     $  (0.01 )                    $ (0.05 )                    $  (0.07 )                    $  (0.16 )


                                                                     As of

September 30, 2012 December 31, 2011 Balance sheet data: (Dollars in thousands) Cash and cash equivalents and accounts
receivable, net                                  $             3,880     $             3,675
Fixed assets, net                                                562                     844
Total assets                                                   8,029                   7,657
Long-term liabilities                                            500                     539
Working capital                                                4,479                   3,552


                                            Three Months Ended        Nine Months Ended September
                                               September 30,                      30,

Case sale data (288-ounce equivalent): 2012 2011 2012 2011 Finished product cases 292,900 375,600 965,100 1,035,900


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Quarter Ended September 30, 2012 Compared to Quarter Ended September 30, 2011 Revenue
For the quarter ended September 30, 2012, revenue was approximately $4.2 million, a decrease of $813,000, or 16.3% from $5.0 million in revenue for the quarter ended September 30, 2011. The decrease in revenue was the result of a decrease in volume due to an August 2012 price increase announced to distributors in June which may have effected ordering cycles between the second and third quarters. Additionally, the decrease was the result of 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, Midwest and Canada.
We also believe that revenue was affected by the decrease in promotion allowances which was primarily attributable to our focus on cost containment. For the quarter ended September 30, 2012, promotion allowances and slotting fees, which offset revenue, totaled $351,000, a decrease of $185,000, or 34.5%, from $536,000 a year ago. As part of our turnaround strategy, in the next year we intend to redirect resources to support our distributor network through increased promotion allowances at retail which we believe will drive more volume.
Gross Profit
For the quarter ended September 30, 2012, gross profit decreased by approximately $20,000 or 1.7%, to $1.2 million compared to the quarter ended September 30, 2011. Although volume decreased by 22.0% for the quarter ended September 30, 2012 compared to the same period a year ago, gross profit was essentially flat due to the decrease in promotional allowances as well as the price increase. For the quarter ended September 30, 2012, gross margin increased to 27.7% from 23.5% for the quarter ended September 30, 2011. Promotion and Selling Expenses
Promotion and selling expenses for the quarter ended September 30, 2012 were approximately $571,000, a decrease of $1.0 million, or 63.3%, compared to $1.6 million for the quarter ended September 30, 2011. Promotion and selling expenses as a percentage of revenue decreased to 13.7% for the quarter ended September 30, 2012, from 31.3% in 2011. The decrease in promotion and selling expenses reflects a decrease in selling expenses for the comparable quarters of $558,000, to $471,000, or 11.3% 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 $428,000 from $528,000 to $100,000 (2.4% of revenue) for the third quarter of 2012 as a result of a reduction in sponsorship costs. We anticipate decreased promotion and selling expenses for the full year of 2012 compared to 2011 based on our ongoing priority to balance promotion and selling expenses to a more sustainable cost structure that is aligned with our working capital resources. General and Administrative Expenses
General and administrative expenses for the quarter ended September 30, 2012 were $893,000, a decrease of $389,000 or 30.3%, compared to $1.3 million for the quarter ended September 30, 2011. General and administrative expenses as a percentage of revenue decreased to 21.5% for the quarter ended September 30, 2012 from 25.8% in 2011. The decrease in general and administrative expenses reflects a decrease in salaries and benefits due to reductions in personnel and our realigned cost structure. We anticipate decreased general and administrative expenses for the full year of 2012 compared to 2011 based on our ongoing priority to balance general and administrative expenses to a more sustainable cost structure that is aligned with our working capital resources. Income Tax Expense, Net
We had income tax expense of $25,000 for the quarter ended September 30, 2012, compared to $24,000 for the quarter ended September 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 September 30, 2012 improved by 80.8% to $324,000 from a net loss of $1.7 million for the quarter ended September 30, 2011, including non-cash expenses (depreciation, amortization and stock-based compensation) totaling $326,000 compared to $159,000 in the prior year period. This improvement in our net loss was primarily due to a gross


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profit that remained flat despite the decrease in sales volume, for the reasons discussed above, as well as a decrease in operating expenses due to the changes made to align our cost structure with our available capital.
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
Revenue
For the nine months ended September 30, 2012, revenue was approximately $13.3 million, a decrease of $695,000, or 5.0% from $14.0 million in revenue for the nine months ended September 30, 2011. The decrease in revenue was primarily due to lower volume in the Eastern U.S. and Canadian markets and the timing of an August 2012 price increase which may have impacted ordering cycles. Partially offsetting these decreases was higher volume in the Western U.S. market due to our new 16-ounce can format, as well new authorizations. We also saw an increase in revenue in our International channel during the nine months of 2012 as a result of getting new distribution in Ireland. In addition, revenue for the nine 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.
We also believe that revenue was affected by the decrease in promotion allowances which was primarily attributable to our focus on cost containment. For the nine months ended September 30, 2012, promotion allowances and slotting fees, which offset revenue, totaled $1.3 million, a decrease of $182,000, or 12.7%, from $1.4 million a year ago. As part of our turnaround strategy, in the next year we intend to redirect resources to support our distributor network through promotion allowances at retail which we believe will drive more volume. Gross Profit
For the nine months ended September 30, 2012, gross profit increased by approximately $172,000 or 4.8%, to $3.8 million compared to $3.6 million for the nine months ended September 30, 2011. Although volume decreased by 6.8% for the nine months ended September 30, 2012 compared to the same period a year ago, gross profit benefited due to the decrease in promotional allowances as well as the price increase. The increase in gross profit was primarily due to the decreases in cost of goods sold due to production, freight and warehousing efficiencies offset by increased materials costs with respect to glass. For the nine months ended September 30, 2012, gross margin increased to 28.3% from 25.7% for the nine months ended September 30, 2011. Promotion and Selling Expenses
Promotion and selling expenses for the nine months ended September 30, 2012 were approximately $2.8 million, a decrease of $1.9 million, or 39.5%, from $4.7 million for the nine months ended September 30, 2011. Promotion and selling expenses as a percentage of revenue decreased to 21.4% for the nine months ended September 30, 2012, from 33.7% in 2011. The decrease in promotion and selling expenses reflects a decrease in selling expenses year over year of $740,000, to $2.0 million, or 15.2% 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 $1.1 million from $1.9 million to $832,000 (6.3% of revenue) for 2012 largely due to a reduction in sponsorship costs. We anticipate decreased promotion and selling expenses for the full year of 2012 compared to 2011 based on our ongoing priority to balance promotion and selling expenses to a more sustainable cost structure that is aligned with our working capital resources.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2012 were $3.3 million, a decrease of $772,000 or 18.9%, compared to $4.1 million for the nine months ended September 30, 2011. General and administrative expenses as a percentage of revenue decreased to 24.9% for the nine months ended September 30, 2012 from 29.2% in 2011. The decrease in general and administrative expenses was primarily due to decreases in salaries and benefits, driven by reductions in personnel and a decrease in professional fees and bad debt expense. We anticipate decreased general and administrative expenses for the full year of 2012 compared to 2011 based on our ongoing priority to balance general and administrative expenses to a more sustainable cost structure that is aligned with our working capital resources.
Income Tax Expense, Net
We had income tax expense of $73,000 for the nine months ended September 30, 2012, compared to $75,000 for the nine months ended September 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,


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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 nine months ended September 30, 2012 improved by 52.6% to $2.5 million from a net loss of $5.2 million for the nine months ended September 30, 2011, including $613,000 in non-cash expenses (depreciation, amortization and stock-based compensation) compared to $540,000 in the prior year period. For the nine months ended September 30, 2012, this improvement in net loss reflects an increase in gross profit, for the reasons discussed above, and a decrease in operating expenses due to the changes made to align our cost structure with our available capital. The 2011 period was also benefited by 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 September 30, 2012, we had cash and cash-equivalents of approximately $1.5 million and working capital of $4.5 million. Cash used in operations during the nine months ended September 30, 2012 totaled $3.1 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 $324,000 during the three months ended September 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 facility payment of $5,000 per month. As of September 30, 2012, we had approximately $856,000 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 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 September 30, 2012, none of the Warrants had been exercised 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 into the first half of 2013. Our 2012 operating plan does not factor in the use of our Credit Facility, which we may use for working capital needs in the future. Under our 2012 operating plan, we have significantly reduced operating expenses and personnel in order to align our operations with available capital. In addition, we have been reducing and slowing our cash used for operations. We believe that recent cost controls and reduced expenses are strategically important to ensure the Company's long-term viability. The significant cost containment measures taken throughout the year plus any additional cost containment measures that may need to be taken may make it difficult to achieve top-line growth.
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 in order to lessen our reliance on external financing in the future.


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Part of the Company's turnaround strategy is to focus on core geographic markets and retail channels that are considered operating priorities for the Company, and in the next year, redirect resources to support our distributor network through increased promotion allowances at retail which we believe will drive more volume. It is critical that we meet our volume projections and 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, these financing options may not ultimately be available to the Company.
Further, our ability to access the capital markets for equity financing may be negatively impacted by the recent delisting of our common stock from the Nasdaq Capital Market. Effective September 20, 2012, we transitioned to the OTCQB Marketplace. We expect that the level of trading activity and market liquidity of our common stock could decline since it is no longer listed on the Nasdaq Capital Market.
The uncertainties relating to our ability to successfully execute our operating plans for the balance of 2012 and into 2013 and to implement operating expense reductions that do not jeopardize our operating performance, and the difficult financing environment, continue to raise substantial doubt about our ability to continue as a going concern. Our financial statements for the quarter ended September 30, 2012 were prepared assuming we would continue as a going concern, which contemplates that we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the . . .

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