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JSDA > SEC Filings for JSDA > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for JONES SODA CO


8-Nov-2013

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 2012 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 27, 2013. 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.


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Overview
We develop, produce, market and distribute premium beverages which we sell and distribute primarily in North America through our network of independent distributors located throughout the U.S. and Canada and directly to our national and regional 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 throughout the U.S. and Canada and in select international markets, primarily in grocery stores, convenience and gas stores, up and down the street in independent accounts such as delicatessens and sandwich shops, as well as through our national accounts with several large retailers. We also sell various products on-line, including soda with customized labels, wearables, candy and other items.
Turnaround Plan
On June 27, 2012, we hired Jennifer Cue as our new Chief Executive Officer. Ms. Cue previously worked for the Company from 1995 to 2005, serving in various capacities including as our Chief Operating Officer and Chief Financial Officer. Ms. Cue developed and is implementing a comprehensive turnaround strategy geared to returning the Company to profitable operations. Key objectives of the turnaround strategy and the operating plan (Turnaround Plan) are outlined below, several of which have already been achieved, while others are in progress:
• Align our operating expenses with our capital resources;

• Hire and retain a team of employees who are highly entrepreneurial and aligned with our Turnaround Plan and long-term growth strategy;

• Focus our efforts on certain core geographic markets, distributor partners and product lines where we believe we can achieve profitable, long-term growth while maintaining a highly efficient, streamlined operating structure;

•             Refocus on core geographic markets, including the Western U.S.,
              Midwest U.S. and Canada;


•             Redirect resources to support our distributor network through
              increased promotion allowances at retail, the accounting impact of
              which is to offset gross revenues by the amount of promotional
              allowances;


•       Redeploy our marketing resources to initiatives that more directly drive
        sales growth while re-invigorating the Jones Soda brand with an emphasis
        on marketing initiatives that are viewed by consumers as highly creative,
        unique and fun; and


•       Launch and market lower calorie, yet full flavor and good tasting
        products in response to the growing demand for more healthful beverage
        options.

In order to compete effectively in the beverage industry, from time to time we introduce new products and product extensions, and when warranted, new brands. In February 2013, we selectively launched our new product offering, Natural Jones™ Soda, a natural ingredient and low-calorie product in California 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.

Results of Operations
The following selected 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:

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                                       Three Months Ended September 30,                            Nine Months Ended September 30,
                              2013       % of Revenue      2012       % of Revenue       2013       % of Revenue       2012       % of Revenue
Consolidated statements of
operations data:                                                (Dollars in thousands, except share data)
Revenue                    $  4,217         100.0  %     $ 4,165         100.0  %     $ 11,600         100.0  %     $ 13,295         100.0  %
Cost of goods sold           (3,203 )       (76.0 )%      (3,009 )       (72.2 )%       (8,592 )       (74.1 )%       (9,519 )       (71.6 )%
Gross profit                  1,014          24.0  %       1,156          27.8  %        3,008          25.9  %        3,776          28.4  %
Promotion and selling
expenses                       (646 )       (15.3 )%        (571 )       (13.7 )%       (1,744 )       (15.0 )%       (2,848 )       (21.4 )%
General and administrative
expenses                       (692 )       (16.4 )%        (893 )       (21.5 )%       (2,057 )       (17.8 )%       (3,303 )       (24.9 )%
Loss from operations           (324 )        (7.7 )%        (308 )        (7.4 )%         (793 )        (6.9 )%       (2,375 )       (17.9 )%
Other income (expense),
net                              14           0.3  %           9           0.2  %           18           0.2  %           (7 )        (0.1 )%
Loss before income taxes       (310 )        (7.4 )%        (299 )        (7.2 )%         (775 )        (6.7 )%       (2,382 )       (18.0 )%
Income tax expense, net         (20 )        (0.4 )%         (25 )        (0.6 )%          (49 )        (0.4 )%          (73 )        (0.5 )%
Net loss                       (330 )        (7.8 )%        (324 )        (7.8 )%         (824 )        (7.1 )%       (2,455 )       (18.5 )%
Net loss per share - basic
and diluted                $  (0.01 )                    $ (0.01 )                    $  (0.02 )                    $  (0.07 )


                                                              As of
                                         September 30, 2013           December 31, 2012
Balance sheet data:                                  (Dollars in thousands)
Cash and cash equivalents and
accounts receivable, net              $                 3,292     $                 3,396
Fixed assets, net                                         292                         497
Total assets                                            6,789                       7,020
Long-term liabilities                                     419                         485
Working capital                                         4,138                       4,132


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

Case sale data (288-ounce equivalent): 2013 2012 2013 2012 Finished product cases 327,000 292,900 858,000 965,100


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Quarter Ended September 30, 2013 Compared to Quarter Ended September 30, 2012 Revenue
For the quarter ended September 30, 2013, revenue increased $52,000, or 1.2%, to $4.2 million, from the quarter ended September 30, 2012. The increase in revenue was primarily due to a seasonal program for Halloween during the third quarter of 2013 as well as improvement in our core markets which resulted in increased case sales of 11.6%.
For the quarter ended September 30, 2013, promotion allowances and slotting fees, which offset revenue, totaled $643,000, an increase of $292,000, or 83.2%, from $351,000, in 2012. The increase was due in part to promotional allowances for the seasonal program discussed above. As part of our Turnaround Plan, in 2013 we are redirecting resources to support our distributor network through increased and focused promotion allowances at retail. The accounting impact of these promotional allowances is a direct offset to gross revenues. We expect promotion allowances and slotting fees on a per case basis will be higher in 2013 compared to 2012 as we concentrate on traditional trade spend strategies to increase distribution.
Gross Profit
For the quarter ended September 30, 2013, gross profit decreased by approximately $142,000 or 12.3%, to $1.0 million compared to $1.2 million for the quarter ended September 30, 2012 due primarily to product mix which included our 8 ounce Halloween cans and promotional allowances for the seasonal program as well as the increases due to our focus on traditional trade spend strategies. For the quarter ended September 30, 2013, gross margin decreased to 24.0% from 27.8% for the quarter ended September 30, 2012. Promotion and Selling Expenses
Promotion and selling expenses for the quarter ended September 30, 2013 were approximately $646,000, an increase of $75,000, or 13.1%, from $571,000 for the quarter ended September 30, 2012. Promotion and selling expenses as a percentage of revenue increased to 15.3% for the quarter ended September 30, 2013, from 13.7% in 2012. Selling expenses remained flat, reflecting a 0.6% increase in selling expenses to $474,000 (11.2% of revenue) for 2013 from $471,000 in 2012. Contributing to this overall increase was a 72.0% increase in trade promotion and marketing expenses to $172,000 (4.1% of revenue) for 2013 from $100,000 in 2012 due in part to increased event and promotional activities. We anticipate increasing our investment in promotion and selling expenses within a more sustainable cost structure aligned with our working capital resources. General and Administrative Expenses
General and administrative expenses for the quarter ended September 30, 2013 were $692,000, a decrease of $201,000 or 22.5%, compared to $893,000 for the quarter ended September 30, 2012. General and administrative expenses as a percentage of revenue decreased to 16.4% for the quarter ended September 30, 2013 from 21.5% in 2012. The decrease in general and administrative expenses was primarily due to decreases in salaries and benefits including a reduction in stock based compensation from a year ago as well as decreased public company costs as a result of the timing of our annual meeting. Additionally, the third quarter of 2012 was favorably impacted by a bonus accrual release. We anticipate decreased general and administrative expenses as a percentage of revenue during 2013 as a result of the full year impact of our 2012 cost initiatives in conjunction with our Turnaround Plan. We will continue to balance general and administrative expenses within this more sustainable cost structure that is aligned with our working capital resources. Income Tax Expense
We had income tax expense of $20,000 for the quarter ended September 30, 2013, compared to $25,000 for the quarter ended September 30, 2012, primarily related to the tax provision on income from our Canadian operations. We have not recorded any 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, 2013 remained flat at $330,000, increasing by 1.9% from a net loss of $324,000 for the quarter ended September 30, 2012.


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Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
Revenue
For the nine months ended September 30, 2013, revenue was approximately $11.6 million, a decrease of $1.7 million, or 12.7% from $13.3 million in revenue for the nine months ended September 30, 2012. The decrease in revenue was primarily due to the implementation of our Turnaround Plan and the refocusing of our resources, and decline in case sales of 11.1%. Partially offsetting our decrease in case sales was a price increase effective in August 2012.
For the nine months ended September 30, 2013, promotion allowances and slotting fees totaled $1.5 million, an increase of $254,000, or 20.2%, from $1.3 million, in 2012. The increase was due in part to promotional allowances for a seasonal program. As part of our Turnaround Plan, in 2013 we are redirecting resources to support our distributor network through increased and focused promotion allowances at retail. The accounting impact of these slotting and promotional fees is a direct offset to gross revenues. We expect promotion allowances and slotting fees on a per case basis will be higher in 2013 compared to 2012 as we concentrate on traditional trade spend strategies to increase distribution. Gross Profit
For the nine months ended September 30, 2013, gross profit decreased by approximately $768,000 or 20.3%, to $3.0 million compared to $3.8 million for the nine months ended September 30, 2012 due primarily to the total case sales decrease of 11.1% and increased promotional allowances due to our focus on traditional trade spend strategies. For the nine months ended September 30, 2013, gross margin decreased to 25.9% from 28.4% for the nine months ended September 30, 2012 and was affected by a combination of product mix and production cycles.
Promotion and Selling Expenses
Promotion and selling expenses for the nine months ended September 30, 2013 were approximately $1.7 million, a decrease of $1.1 million, or 38.8%, from $2.8 million for the nine months ended September 30, 2012. Promotion and selling expenses as a percentage of revenue decreased to 15.0% for the nine months ended September 30, 2013, from 21.4% in 2012. The decrease reflects a 31.8% decrease in selling expenses to $1.4 million (11.8% of revenue) for 2013 from $2.0 million in 2012, driven by reduced sales personnel versus a year ago. Also contributing to this decrease was a 55.5% reduction in trade promotion and marketing expenses to $370,000 (3.2% of revenue) for 2013 from $832,000 in 2012 due in part to a reduction in sponsorship costs. We anticipate decreased promotion and selling expenses as a percentage of revenue during 2013 as a result of the full year impact of our 2012 cost initiatives in conjunction with our Turnaround Plan. We anticipate increasing our investment in promotion and selling expenses within a more sustainable cost structure aligned with our working capital resources.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2013 were $2.1 million, a decrease of $1.2 million or 37.7%, compared to $3.3 million for the nine months ended September 30, 2012. General and administrative expenses as a percentage of revenue decreased to 17.8% for the nine months ended September 30, 2013 from 24.9% in 2012. The decrease in general and administrative expenses was primarily due to decreases in salaries and benefits, driven by reductions in personnel and reduced executive salaries and decreases in director fees and professional fees. We anticipate decreased general and administrative expenses as a percentage of revenue during 2013 as a result of the full year impact of our 2012 cost initiatives in conjunction with our Turnaround Plan. We will continue to balance general and administrative expenses within this more sustainable cost structure that is aligned with our working capital resources.
Income Tax Expense
We had income tax expense of $49,000 for the nine months ended September 30, 2013, compared to $73,000 for the nine months ended September 30, 2012, primarily related to the tax provision on income from our Canadian operations. We have not recorded any 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.


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Net Loss
Net loss for the nine months ended September 30, 2013 improved by 66.4% to $824,000 from a net loss of $2.5 million for the nine months ended September 30, 2012. This improvement in net loss reflects a decrease in operating expenses due to the changes made to align our cost structure with our available capital.

Liquidity and Capital Resources
As of September 30, 2013, we had cash and cash-equivalents of approximately $1.2 million and working capital of $4.1 million. Cash used in operations during the nine months ended September 30, 2013 totaled $623,000 compared to $3.1 million for the same period a year ago. 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.
For the nine months ended September 30, 2013, net cash provided by investing activities totaled approximately $38,000 due to the sale of fixed assets. For the nine months ended September 30, 2012, net cash provided by investing activities totaled approximately $61,000 due to the sale of fixed assets, partially offset by the purchase of fixed assets. Net cash provided by financing activities for the nine months ended September 30, 2013 totaled approximately $55,000 due to the exercise of warrants in the third quarter, offset by the payoff on the capital lease obligation for the vehicle sold during the first quarter. This compares to net cash provided by financing activities for the nine months ended September 30, 2012, which totaled approximately $2.8 million, due to the net proceeds from our registered offering in February 2012. We incurred a net loss of $330,000 for the quarter ended September 30, 2013 and our accumulated deficit increased to $56.9 million as of September 30, 2013. 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 2014. During 2012, we made significant reductions in operating expenses and personnel, primarily in the second half of 2012, to better align our operations with available capital and slow our cash used for operations. We have continued these reduced operating expenses into 2013. We believe that these cost controls and realigned expenses are strategically important to ensure our long-term viability. However, these significant cost containment measures may negatively impact our sales and may make it difficult to achieve top-line growth.
We have a secured credit facility with Access Business Finance LLC (Access), pursuant to which we may borrow up to 75% of our eligible accounts receivable for our working capital needs, up to $2.0 million. (The credit facility is described in Note 4 in this Report.) To date, we have not drawn on the facility and we had approximately $631,000 available for borrowing based on eligible accounts receivable as of September 30, 2013. Our operating plan for 2013 does not factor in the use of our Credit Facility.
During the three months ended September 30, 2013, we received $105,000 from the cash exercise of certain outstanding warrants. We may receive cash through the exercise of the remaining balance of 3,057,500 warrants outstanding. However, we cannot predict the timing or amount of cash proceeds we may receive from exercise, if at all, of any of the other outstanding warrants. We do not consider the potential for future cash exercises of the warrants as a dependable source of financing for the company.
We may require additional financing to support our working capital needs in the future. 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 our strategic initiatives and operating plans, 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 case 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. Part of our Turnaround Plan is to focus on core geographic markets and retail channels that we consider operating priorities and to 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 case sales goals and increase case sales 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. 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 us and our


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shareholders, which may include, without limitation, public or private offerings of debt or equity securities, a rights offering, and other strategic alternatives; however, these options may not ultimately be available or feasible.
The uncertainties relating to our ability to successfully execute our 2013 Turnaround Plan, combined with the difficult financing environment, continue to raise substantial doubt about our ability to continue as a going concern. Our financial statements for the periods presented 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 normal course of business. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that could result should we be unable to continue as a going concern.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements. Seasonality
Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. We historically have generated a greater percentage of our revenues during the warm weather months of April through September. Timing of customer purchases will vary each year and sales can be expected to shift from one quarter to another. As a result, management believes that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the fiscal year. Critical Accounting Policies
See the information concerning our critical accounting policies included under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 27, 2013. There have been no material changes in our critical accounting policies during the three months ended September 30, 2013.

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