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JSDA > SEC Filings for JSDA > Form 10-Q on 13-Aug-2014All Recent SEC Filings

Show all filings for JONES SODA CO

Form 10-Q for JONES SODA CO


13-Aug-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

Since 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. We have achieved significant reductions in our operating expenses over this long-term period and are now shifting the Company's focus towards revenue growth and profitability.

Key components of this next phase of the turnaround strategy are the foundation of our focus on top-line growth:

Utilize the strategic distribution improvements implemented across North America and direct resources to support our distributor network through promotion allowances at retail;

Increase the focus on international expansion;

Launch nationwide Jones Stripped, our natural line, made with only 8 grams of sugar, containing 30 calories and no artificial preservatives colors or sweeteners;

Build upon partnerships with major retail chains in innovative ways, while continuing to build our base of independent accounts;

Deploy grass roots marketing campaigns to drive sales growth organically while reinvigorating the Jones Soda brand through initiatives that are highly creative, unique and fun for our consumers; and

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

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 June 30,                              Six months ended June 30,
                                  2014      % of Revenue      2013      % of Revenue      2014      % of Revenue      2013      % of Revenue

Consolidated statements of                                      (Dollars in thousands, except per share data)
operations data:
Revenue                         $  3,879         100.0  %   $  4,287         100.0  %   $  6,769         100.0  %   $  7,383         100.0  %
Cost of goods sold                (3,007)        (77.5) %     (3,053)        (71.2) %     (5,204)        (76.9) %     (5,389)        (73.0) %
Gross profit                         872          22.5  %      1,234          28.8  %      1,565          23.1  %      1,994          27.0  %
Selling and marketing expenses      (591)        (15.2) %       (625)        (14.6) %     (1,089)        (16.1) %     (1,098)        (14.9) %
General and administrative                              %                           %                           %                           %
expenses                            (683)        (17.6)         (690)        (16.1)       (1,388)        (20.5)       (1,365)        (18.5)
Loss from operations                (402)        (10.4) %        (81)         (1.9) %       (912)        (13.5) %       (469)         (6.4) %
Other income (expense), net            3           0.1  %         (9)         (0.2) %         (8)         (0.1) %          4           0.1  %
Loss before income taxes            (399)        (10.3) %        (90)         (2.1) %       (920)        (13.6) %       (465)         (6.3) %
Income tax expense, net              (30)         (0.8) %         (5)         (0.1) %        (48)         (0.7) %        (29)         (0.4) %
Net loss                            (429)        (11.1) %        (95)         (2.2) %       (968)        (14.3) %       (494)         (6.7) %
Basic and diluted net loss per
share                           $  (0.01)                   $   0.00                    $  (0.02)                   $  (0.01)


                                                                                                               As of
                                                                                            June 30, 2014              December 31, 2013
Balance sheet data:                                                                                   (Dollars in thousands)
Cash and cash equivalents and accounts receivable, net                                $                  3,167    $                    2,498
Fixed assets, net                                                                                          126                           232
Total assets                                                                                             6,934                         5,514
Long-term liabilities                                                                                      381                           406
Working capital                                                                                          2,893                         3,375


                                             Three months ended June 30,                              Six months ended June 30,
                                          2014                        2013                        2014                        2013
Case sale data (288-ounce
equivalent):
Finished product cases                           278,000                     306,000                     491,000                     531,000

Quarter Ended June 30, 2014 Compared to Quarter Ended June 30, 2013

Revenue

For the quarter ended June 30, 2014, revenue was approximately $3.9 million, a decrease of $400,000, or 9.5% from $4.3 million in revenue for the quarter ended June 30, 2013. The decrease in revenue was primarily due to key distributor transitions in certain regions implemented during the quarter, which contributed to the decline in case sales of 9.2%.

For the quarter ended June 30, 2014, trade spend and promotion allowances, which offset revenue, totaled $459,000, a decrease of $13,000 or 2.8%, from $472,000 in 2013 primarily due to the decline in sales offset by trade spend to incentivize new distributors to open new accounts for the Jones product line.

Gross Profit

For the quarter ended June 30, 2014, gross profit decreased by approximately $362,000 or 29.3%, to $872,000 compared to $1.2 million for the quarter ended June 30, 2013 due to the case sales decrease noted above combined with higher costs of commodity glass and special packaging for a major retail chain. For the quarter ended June 30, 2014, gross margin decreased to 22.5% from 28.8% for the quarter ended June 30, 2013.

Selling and Marketing Expenses

Selling and marketing expenses for the quarter ended June 30, 2014 were approximately $591,000, a decrease of $34,000, or 5.4%, from $625,000 for the quarter ended June 30, 2013. Selling and marketing expenses as a percentage of revenue increased to 15.2% for the quarter ended June 30, 2014, from 14.6% in 2013. We will continue to balance selling and marketing expenses with our working capital resources.


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General and Administrative Expenses

General and administrative expenses for the quarter ended June 30, 2014 were $683,000, a slight decrease of $7,000 or 1.0%, compared to $690,000 for the quarter ended June 30, 2013. General and administrative expenses as a percentage of revenue increased to 17.6% for the quarter ended June 30, 2014 from 16.1% 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 $30,000 for the quarter ended June 30, 2014, compared to $5,000 for the quarter ended June 30, 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 June 30, 2014 increased to $429,000 from a net loss of $95,000 for the quarter ended June 30, 2013 due to the decline in our gross profit discussed above.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenue

For the six months ended June 30, 2014, revenue was approximately $6.8 million, a decrease of $600,000, or 8.3% from $7.4 million in revenue for the six months ended June 30, 2013. The decrease in revenue was primarily due to adverse winter weather in several markets in the first quarter and key distributor transitions in certain regions implemented during the second quarter, which contributed to the decline in case sales of 7.5%.

For the six months ended June 30, 2014, trade spend and promotion allowances, which offset revenue, totaled $740,000, a decrease of $126,000 or 14.5%, from $866,000, in 2013 primarily due to the decline in sales and the timing of promotional programming.

Gross Profit

For the six months ended June 30, 2014, gross profit decreased by approximately $429,000 or 21.5%, to $1.6 million compared to $2.0 million for the six months ended June 30, 2013 due to the case sales decrease noted above combined with higher costs of commodity glass and special packaging for a major retail chain. For the six months ended June 30, 2014, gross margin decreased to 23.1% from 27.0% for the six months ended June 30, 2013.

Selling and Marketing Expenses

Selling and marketing expenses for the six months ended June 30, 2014 were approximately $1.1 million, a slight decrease of $9,000, or 0.8%, from $1.1 million for the six months ended June 30, 2013. Selling and marketing expenses as a percentage of revenue increased to 16.1% for the six months ended June 30, 2014, from 14.9% 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 six months ended June 30, 2014 were $1.4 million a slight increase of $23,000 or 1.7%, compared to $1.4 million for the six months ended June 30, 2013 due primarily to a favorable adjustment to the allowance for bad debt recognized in the prior year period. General and administrative expenses as a percentage of revenue increased to 20.5% for the six months ended June 30, 2014 from 18.5% 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 $48,000 for the six months ended June 30, 2014, compared to $29,000 for the six months ended June 30, 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


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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, 2014 increased to $1.0 million from a net loss of $494,000 for the six months ended June 30, 2013 primarily due to the decline in our gross profit discussed above.

Liquidity and Capital Resources

As of June 30, 2014, we had cash and cash-equivalents of approximately $519,000 and working capital of $2.9 million. Cash used in operations during the six months ended June 30, 2014 totaled $1.1 million compared to $321,000 for the same period a year ago. The increase in cash used in operations compared to the same period a year ago is primarily driven by the ramping up of production to meet increased summer sales volume compared to the prior year period. In addition, 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. We incurred a net loss of $429,000 for the quarter ended June 30, 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.

We have a revolving 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. As of June 30, 2014, our eligible borrowing base was approximately $1.3 million. (The Loan Facility is described in Note 3 in this Report.) We may use the Loan Facility for our working capital needs. Subsequent to June 30, 2014, we made initial draws on our Loan Facility, which is discussed further in Note 3.

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. 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 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. 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 operating plan and the performance of our business, 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


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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 June 30, 2014.

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