1. Nature of Operations and Summary of Significant Accounting Policies
Jones Soda Co. develops, produces, markets and distributes premium beverages, including 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 are a Washington corporation and have three operating subsidiaries, Jones Soda Co. (USA)
Inc., Jones Soda (Canada) Inc., and myJones.com, Inc., as well as one non-operating subsidiary,
Whoopass USA Inc.
Basis of presentation and consolidation
The accompanying condensed consolidated balance sheet as of December 31, 2010, which has been
derived from audited consolidated financial statements and the unaudited interim condensed
consolidated financial statements as of June 30, 2011, have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) and the Securities
and Exchange Commission (SEC) rules and regulations applicable to interim financial reporting. The
condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany transactions between the Company and its subsidiaries
have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all material adjustments, consisting only of those of a normal recurring nature,
considered necessary for a fair presentation of our financial position, results of operations and
cash flows at the dates and for the periods presented. The operating results for the interim
periods presented are not necessarily indicative of the results expected for the full year. These
financial statements should be read in conjunction with the audited financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
Use of estimates
The preparation of the condensed consolidated financial statements requires management to make
a number of estimates and assumptions relating to the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenue and expenses during the reporting period.
Significant items subject to such estimates and assumptions include, but are not limited to,
inventory valuation, depreciable lives and valuation of fixed assets, valuation allowances for
receivables, trade promotion liabilities, stock-based compensation expense, valuation allowance for
deferred income tax assets, contingencies, and forecasts supporting the going concern assumption
and related disclosures. Actual results could differ from those estimates.
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.
As of June 30, 2011, we had cash and cash equivalents of approximately $4.6 million and
working capital of $7.0 million. Cash used in operations during the six months ended June 30, 2011
totaled $2.8 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 $1.8 million during the
three months ended June 30, 2011.
We believe that our current cash and cash equivalents, which includes net proceeds of
approximately $2.2 million received from our final draw down under the equity line of credit
facility on February 1, 2011 (see Note 2), will be sufficient to meet our anticipated cash needs at
least into the first half of 2012. This will depend, however, on our ability to successfully
execute our 2011 operating plan, which is based on our realigned higher-margin product portfolio,
including Jones Soda and our newly re-launched WhoopAss Energy Drink. The
introduction of new and re-launched products involves a number of risks, and there can be no
assurance that we will achieve the sales levels we expect or that justify the additional costs
associated with such product introductions. We also plan to continue our efforts to reinforce and
expand our distributor network by partnering with new distributors and replacing underperforming
distributors. It is critical that we meet our volume projections and continue to increase volume
going forward, as our operating plan already reflects prior significant general and administrative
cost containment measures, leaving us little room for further reductions in such costs that do not
jeopardize our growth plans.
Our operating plan factors in the use of cash to meet our contractual obligations. A
substantial portion of these contractual obligations consists of obligations to purchase raw
materials, including sugar and glass under our supply agreements. We enter into these supply
agreements in order to fix the cost of these key raw materials, which we expect will be used in the
ordinary course of our business. Our contractual obligations also relate to payments for
sponsorships, and have been reduced by approximately $7.0 million
through 2017 as the result of our termination of the
sponsorship arrangement with the New Jersey Nets (see Note 7).
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. Our current 2011 operating plan
does not require us to obtain additional financing; however, this will depend on our ability to
meet our sales volume goals and otherwise execute on our operating plan. We believe it is
imperative to meet these objectives and continue to expand our distribution network and increase
sales volume in order to lessen our reliance on external financing in the future. In order to
execute on our growth strategy beyond our 2011 operating plan, we will require additional financing to support our working capital
needs. The amount of additional capital we will require, and the timing of our capital needs, will depend on a number of factors, including the performance of our business for the remainder of 2011 and beyond and the market conditions for debt or equity financing. Although we believe we may have various debt and equity financing alternatives available to us, these alternatives may require significant cash payments for interest and other costs or
could be highly dilutive to our existing shareholders. We continue to monitor whether credit
facilities may be available to us on acceptable terms. There can be no assurance that any new debt
or equity financing arrangement will be available to us when needed on acceptable terms, if at all.
In addition, there can be no assurance that these financing alternatives would provide us with
sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic
transactions in the best interest of the Company and our shareholders, which may include, without
limitation, public or private offerings of debt or equity securities, joint ventures with one or
more strategic partners, strategic acquisitions and other strategic alternatives, but there can be
no assurance that we will enter into any agreements or transactions.
The uncertainties relating to our ability to successfully execute our 2011 operating plan,
combined with our inability to implement further meaningful cost containment measures that do not
jeopardize our growth plans and the difficult financing environment, continue to raise substantial
doubt about our ability to continue as a going concern. Our financial statements for the quarters
ended June 30, 2011 and 2010 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.