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JSDA > SEC Filings for JSDA > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for JONES SODA CO

Form 10-Q for JONES SODA CO


15-May-2014

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 2013 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 31, 2014.

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 we sell and distribute primarily in North America through our network of independent distributors located throughout the United States and Canada and directly to our national and regional retail accounts. We also sell products in select international markets. Our products are sold 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 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. We do not directly manufacture our products but instead outsource the manufacturing process to third-party contract manufacturers. We also sell various products online, including soda with customized labels, wearables, candy and other items, and we license our trademarks for use on products sold by other manufacturers.

Turnaround Plan

Beginning in the second half of 2012, under the leadership of Jennifer Cue, our Chief Executive Officer, we developed and implemented a comprehensive turnaround strategy geared to returning the Company to future profitable operations.

Key components of the turnaround strategy and the operating plan (Turnaround Plan) which are the foundation of our strategy as we focus on our top-line growth are:

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;

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

Direct resources to support our distributor network through promotion allowances at retail;

Deploy 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

Develop and market lower calorie, yet full flavor and good tasting products to answer the growing demand for more healthful beverage options.

In order to compete effectively in the beverage industry, we evaluate and pursue innovative opportunities in product and market development.. In February 2013, we selectively launched our new natural line of Jones Soda, a natural ingredient and low-calorie product in California to enhance our sparkling portfolio and plan to roll out Jones Stripped to other select markets in 2014. 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.


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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.




                                                             Three months ended March 31,
                                                  2014        % of Revenue      2013       % of Revenue
                                                     (Dollars in thousands, except per share data)
Consolidated statements of operations data:
Revenue                                        $    2,890         100.0  %    $  3,096         100.0  %
Cost of goods sold                                 (2,197)        (76.0) %      (2,336)        (75.5) %
Gross profit                                          693          24.0  %         760          24.5  %
Selling and marketing expenses                       (498)        (17.2) %        (473)        (15.3) %
General and administrative expenses                  (705)        (24.4) %        (675)        (21.8) %
Loss from operations                                 (510)        (17.6) %        (388)        (12.6) %
Other (expense) income , net                          (11)         (0.4) %          13           0.4  %
Loss before income taxes                             (521)        (18.0) %        (375)        (12.2) %
Income tax expense, net                               (18)         (0.6) %         (24)         (0.8) %
Net loss                                             (539)        (18.6) %        (399)        (13.0) %
Basic and diluted net loss per share           $    (0.01)                    $  (0.01)


                                                                         As of
                                                      March 31, 2014              December 31, 2013
                                                                (Dollars in thousands)
Balance sheet data:
Cash and cash equivalents and accounts
receivable, net                                $                     2,793    $                   2,498
Fixed assets, net                                                      179                          232
Total assets                                                         6,278                        5,514
Long-term liabilities                                                  394                          406
Working capital                                                      2,945                        3,375


                                                             Three months ended March 31,
                                                           2014                          2013
Case sale data (288-ounce equivalent):
Finished product cases                                             213,000                      225,000


Quarter Ended March 31, 2014 Compared to Quarter Ended 2013

Revenue

For the quarter ended March 31, 2014, revenue was approximately $2.9 million, a decrease of $206,000, or 6.7% from $3.1 million in revenue for the quarter ended March 31, 2013. The decrease in revenue was primarily due to softer sales in several markets affected in part by adverse winter weather, which resulted in the decline in case sales of 5.3%.

For the quarter ended March 31, 2014, trade spend and promotion allowances, which offset revenue, totaled $281,000, a decrease of $113,000 or 28.7%, from $394,000, in 2013 primarily due to the timing of promotional programming.

Gross Profit

For the quarter ended March 31, 2014, gross profit decreased by approximately $67,000 or 8.8%, to $693,000 compared to $760,000 for the quarter ended March 31, 2013 due primarily to the total case sales decrease impacted by the adverse winter weather discussed above, partially offset by decreased trade spend and promotional allowances. For the quarter ended March 31, 2014, gross margin remained relatively flat at 24.0% compared to 24.5% for the quarter ended March 31, 2013.


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Selling and Marketing Expenses

Selling and marketing expenses for the quarter ended March 31, 2014 were approximately $498,000, a slight increase of $25,000, or 5.3%, from $473,000 for the quarter ended March 31, 2013 due primarily to increased retail sampling and demonstrations. Selling and marketing expenses as a percentage of revenue increased to 17.2% for the quarter ended March 31, 2014, from 15.3% in 2013. We will continue to balance selling and marketing expenses with our working capital resources.

General and Administrative Expenses

General and administrative expenses for the quarter ended March 31, 2014 were $705,000, a slight increase of $30,000 or 4.4%, compared to $675,000 for the quarter ended March 31, 2013 due primarily to increased professional fees. General and administrative expenses as a percentage of revenue increased to 24.4% for the quarter ended March 31, 2014 from 21.8% in 2013. We will continue to balance general and administrative expenses with our working capital resources.

Income Tax Expense

We had income tax expense of $18,000 for the quarter ended March 31, 2014, compared to $24,000 for the quarter ended March 31, 2013, 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 March 31, 2014 increased by 35.1% to $539,000 from a net loss of $399,000 for the quarter ended March 31, 2013 primarily due to the decline in our gross profit combined with a slight increase in operating expenses for the reasons discussed above.

Liquidity and Capital Resources

As of March 31, 2014, we had cash and cash-equivalents of approximately $1.2 million and working capital of $2.9 million. Cash used in operations during the three months ended March 31, 2014 totaled $264,000 compared to $415,000 for the same period a year ago. The decrease in cash used in operations compared to the same period a year ago is due to timing of settlement for outstanding payables. 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 $539,000 for the three months ended March 31, 2014.

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, 2014. Additionally, our Loan Facility (described below), is available for our working capital needs. Beginning in 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 in operations. We have continued at these reduced operating expense levels and anticipate a similar overhead structure this year. We believe that these cost controls and realigned expenses are strategically important to further the Company's 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 (Loan Facility) with BFI Business Finance (BFI). The Loan Facility allows us to borrow a maximum aggregate amount of up to $2.0 million based on eligible accounts receivable and inventory. (The Loan Facility is described in Note 3 in this Report.) We may use the Loan Facility for our working capital needs. To date, we have not drawn on the facility, but it is available for our working capital needs should the need arise.

On April 1, 2014, we received $124,000 in cash from the exercise by several of our directors and officers of stock options for a total of 385,833 shares of common stock, as described in Note 1 and Note 5. We may receive additional cash through the exercise of stock options or warrants in the future. However, we cannot predict the timing or amount of cash proceeds we may receive from exercise, if at all, of any of the outstanding stock options or warrants. We do not consider the potential for future cash exercises of the stock options or 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


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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 are considered operating priorities and to redirect resources to support our distributor network through promotion allowances at retail. 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, financing arrangements on acceptable terms may not be available to us when needed. 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, 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 on our 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.

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.

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements.

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 Operation - Critical Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities Exchange Commission on March 31, 2014. There have been no material changes in our critical accounting policies during the three months ended March 31, 2014.

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