e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number 000-28820
Jones Soda Co.
(Exact name of registrant as specified in its charter)
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| Washington
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91-1696175 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification Number) |
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| 234 Ninth Avenue North |
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| Seattle, Washington
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98109 |
| (Address of principal executive offices)
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(Zip Code) |
(206) 624-3357
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file for such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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| Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of October 30, 2009, there were 26,466,198 shares of the Company’s common stock issued and
outstanding.
JONES SODA CO.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
2
EXPLANATORY NOTE
Unless otherwise indicated or the context otherwise requires, all references in this Quarterly
Report on Form 10-Q to “we,” “us,” “our,” “Jones,” “Jones Soda,” and the “Company” are to Jones
Soda Co.®, a Washington corporation, and our wholly-owned subsidiaries Jones
Soda Co. (USA) Inc., Jones Soda (Canada) Inc., myJones.com Inc. and Whoopass USA Inc.
In addition, unless otherwise indicated or the context otherwise requires, all references in
this Quarterly Report to “Jones Soda” and “Jones Pure Cane Soda” refer to our premium soda sold
under the trademarked brand name “Jones Soda Co.”
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
We desire to take advantage of the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995. This Quarterly Report on Form 10-Q (Report) and the documents
incorporated herein by reference contain a number of forward-looking statements that reflect
management’s current views and expectations with respect to our business, strategies, products,
future results and events, and financial performance. All statements made in this Report other than
statements of historical fact, including statements that address operating performance, the
economy, events or developments that management expects or anticipates will or may occur in the
future, including statements related to distributor channels, volume growth, revenues,
profitability, new products, adequacy of funds from operations, cash flows and financing, our
ability to continue as a going concern, statements expressing general optimism about future
operating results and non-historical information, are forward-looking statements. In particular,
the words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” “can,”
“plan,” “predict,” “could,” “future,” variations of such words, and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such statements and
their absence does not mean that the statement is not forward-looking.
Readers should not place undue reliance on these forward-looking statements, which are based
on management’s current expectations and projections about future events, are not guarantees of
future performance, are subject to risks, uncertainties and assumptions and apply only as of the
date of this Report. Our actual results, performance or achievements could differ materially from
historical results as well as the results expressed in, anticipated or implied by these
forward-looking statements. In particular, our operating results may fluctuate due to a number of
factors, including, but not limited to, the following:
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Our ability to achieve levels of revenue and cost reductions that are adequate to support
our capital and operating requirements in order to continue as a going concern; |
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Our inability to generate sufficient cash flow from operations, or to obtain funds
through additional financing, to support our business plan, which may force us to delay,
curtail or eliminate some or all of our product development, marketing or distribution
programs or to pursue various other strategies and strategic alternatives to secure
additional financing; |
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Our ability to manage our resources and successfully execute our business plan; |
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Our ability to implement our business plan in the current global economic crisis, which
could adversely affect demand for our products and make it more difficult for us to secure
additional financing, if necessary; |
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Our inability to increase points of distribution for our existing Jones GABA product or
to successfully innovate new GABA products and product extensions, which could adversely
affect the valuation of our GABA raw materials inventory; |
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Our inability to regain compliance with the continued listing requirements of The Nasdaq
Capital Market, including the $1 minimum bid price requirement, which could result in
delisting of our common stock and adversely affect its market price and liquidity; |
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Our ability to carefully manage our inventory levels and to predict the timing and amount
of our sales; |
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Our ability to establish and maintain distribution arrangements with distributors,
retailers and national retail accounts, on which our business plan and future growth are
dependent in part; |
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The inability of our exclusive manufacturer and distributor (National Beverage Corp.) of
Jones Soda 8-ounce and 12-ounce cans and 1-liter PET bottles in the grocery and mass
merchant channel to perform adequately, which could impair our ability to meet demand in the
CSD industry;
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3
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Our ability to realize the benefits expected from our sponsorship agreements, to which we
have dedicated, and expect to continue to dedicate, significant resources; |
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Our reliance on third-party packers of our products, which could make management of our
marketing and distribution efforts inefficient or unprofitable; |
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Our ability to secure a continuous supply and availability of raw materials, as well as
other factors affecting our supply chain; |
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Our ability to source our flavors on acceptable terms from our key flavor suppliers; |
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Our ability to maintain brand image and product quality and the risk that we may suffer
other product issues such as product recalls; |
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Our ability to attract and retain key personnel, which would directly affect our
efficiency and results of operations; |
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Our inability to protect our trademarks, patents and trade secrets, which may prevent us
from successfully marketing our products and competing effectively; |
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Litigation or legal proceedings (including pending securities class actions), which could
expose us to significant liabilities and damage our reputation; |
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Our inability to build and sustain proper information technology infrastructure; |
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Our inability to create and maintain brand name recognition and acceptance of our
products, which are critical to our success in our competitive, brand-conscious industry; |
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Our ability to compete successfully against much larger, well-funded, established
companies currently operating in the beverage industry; |
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Our inability to continue developing new products to satisfy our consumers’ changing
preferences; and |
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Our ability to comply with the many regulations to which our business is subject. |
For a more detailed discussion of some of the factors that may affect our business, results
and prospects, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the Securities and Exchange Commission on March 16, 2009. Readers are
also urged to carefully review and consider the various disclosures made by us in this Report and
in our other reports we file with the Securities and Exchange Commission, including our periodic
reports on Form 10-Q and current reports on Form 8-K, and those described from time to time in our
press releases and other communications, which attempt to advise interested parties of the risks
and factors that may affect our business, prospects and results of operations. Except
as required by law, we undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
4
PART I — FINANCIAL INFORMATION
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| ITEM 1. |
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FINANCIAL STATEMENTS |
JONES
SODA CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
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September 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
6,081 |
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$ |
11,736 |
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Restricted cash and cash equivalents |
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125 |
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— |
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Short-term investments |
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— |
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890 |
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Accounts receivable, net of allowance of $123 and $330 |
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3,622 |
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2,428 |
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Inventory |
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3,929 |
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5,654 |
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Prepaid expenses and other current assets |
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974 |
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1,410 |
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Total current asset |
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14,731 |
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22,118 |
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Deferred income tax asset |
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112 |
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98 |
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Fixed assets, net of accumulated depreciation of $3,894 and $3,364 |
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1,443 |
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2,099 |
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Other assets |
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1,884 |
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— |
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Total assets |
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$ |
18,170 |
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$ |
24,315 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,183 |
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$ |
1,469 |
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Accrued liabilities |
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2,034 |
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2,788 |
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Taxes payable |
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60 |
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34 |
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Note payable, current portion |
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125 |
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— |
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Capital lease obligations, current portion |
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— |
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153 |
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Total current liabilities |
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3,402 |
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4,444 |
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Note payable |
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235 |
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— |
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Capital lease obligations |
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— |
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321 |
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Long term liabilities — other |
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59 |
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75 |
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Commitments and contingencies |
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Shareholders’ equity: |
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Common stock, no par value: |
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Authorized - 100,000,000 issued and outstanding
shares — 26,454,949 and 26,460,409 at September 30,
2009 and December 31, 2008, respectively |
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43,925 |
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43,924 |
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Additional paid-in capital |
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5,631 |
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5,044 |
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Accumulated other comprehensive income (loss) |
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382 |
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(79 |
) |
Accumulated deficit |
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(35,464 |
) |
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(29,414 |
) |
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Total shareholders’ equity |
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14,474 |
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19,475 |
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Total liabilities and shareholders’ equity |
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$ |
18,170 |
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$ |
24,315 |
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See accompanying notes to condensed consolidated financial statements.
5
JONES
SODA CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
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Three Month Ended September 30, |
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Nine Months Ended September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue |
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$ |
7,156 |
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$ |
8,684 |
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$ |
21,710 |
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$ |
29,787 |
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Cost of goods sold |
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5,643 |
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7,718 |
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16,696 |
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23,918 |
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Gross profit |
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1,513 |
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966 |
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5,014 |
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5,869 |
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Licensing revenue |
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19 |
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43 |
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70 |
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152 |
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Operating expenses: |
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Promotion and selling |
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1,590 |
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3,481 |
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6,151 |
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|
9,967 |
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General and administrative |
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1,446 |
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2,724 |
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5,006 |
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7,809 |
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|
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|
|
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|
|
|
|
|
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3,036 |
|
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|
6,205 |
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11,157 |
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17,776 |
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Loss from operations |
|
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(1,504 |
) |
|
|
(5,196 |
) |
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(6,073 |
) |
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(11,755 |
) |
Other (expense) income, net: |
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(65 |
) |
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66 |
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(65 |
) |
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301 |
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Loss before income tax |
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(1,569 |
) |
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(5,130 |
) |
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(6,138 |
) |
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(11,454 |
) |
Income tax benefit (expense) |
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87 |
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|
(130 |
) |
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88 |
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(392 |
) |
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Net loss |
|
$ |
(1,482 |
) |
|
$ |
(5,260 |
) |
|
$ |
(6,050 |
) |
|
$ |
(11,846 |
) |
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Net loss per share: |
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Basic and diluted |
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$ |
(0.06 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.45 |
) |
Weighted average basic and
diluted common shares
outstanding: |
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26,454,729 |
|
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26,354,177 |
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26,455,293 |
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26,324,270 |
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See accompanying notes to condensed consolidated financial statements.
6
JONES
SODA CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Nine months ended September 30, |
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2009 |
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2008 |
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OPERATING ACTIVITIES: |
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Net loss |
|
$ |
(6,050 |
) |
|
$ |
(11,846 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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621 |
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531 |
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Stock-based compensation |
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587 |
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673 |
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Change in allowance for doubtful accounts |
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(207 |
) |
|
|
(78 |
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Loss on disposal of fixed assets |
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127 |
|
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— |
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Deferred income tax |
|
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34 |
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— |
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Other |
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39 |
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|
278 |
|
Changes in operating assets & liabilities: |
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Accounts receivable |
|
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(732 |
) |
|
|
(119 |
) |
Inventory |
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1,791 |
|
|
|
(1,077 |
) |
Prepaid expenses and other current assets |
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|
415 |
|
|
|
(39 |
) |
Other assets |
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(1,649 |
) |
|
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— |
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Accounts payable |
|
|
(381 |
) |
|
|
(165 |
) |
Accrued liabilities |
|
|
(768 |
) |
|
|
500 |
|
Taxes payable |
|
|
23 |
|
|
|
(203 |
) |
|
|
|
|
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Net cash used in operating activities |
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(6,150 |
) |
|
|
(11,545 |
) |
INVESTING ACTIVITIES: |
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Purchase of certificates of deposit, restricted |
|
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(360 |
) |
|
|
— |
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Sales of investments |
|
|
890 |
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|
|
9,914 |
|
Purchase of fixed assets |
|
|
(97 |
) |
|
|
(528 |
) |
Sales of fixed assets |
|
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5 |
|
|
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— |
|
|
|
|
|
|
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Net cash provided by investing activities |
|
|
438 |
|
|
|
9,386 |
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
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Proceeds from note payable |
|
|
360 |
|
|
|
— |
|
Payment of capital lease obligations |
|
|
(474 |
) |
|
|
(120 |
) |
Proceeds from exercise of options |
|
|
1 |
|
|
|
69 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(113 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(5,825 |
) |
|
|
(2,210 |
) |
Effect of exchange rate changes on cash |
|
|
170 |
|
|
|
— |
|
Cash and cash equivalents, beginning of period |
|
|
11,736 |
|
|
|
17,858 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
6,081 |
|
|
$ |
15,648 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
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|
|
|
|
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Cash paid (received) during period for: |
|
|
|
|
|
|
|
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Interest |
|
$ |
(5 |
) |
|
$ |
(430 |
) |
Income taxes |
|
$ |
1 |
|
|
$ |
327 |
|
See accompanying notes to condensed consolidated financial statements.
7
JONES
SODA CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature and Operations and Summary of Significant Accounting Policies
Jones Soda Co.® develops, produces, markets, licenses and distributes
premium beverages and related products. Our primary product lines include the brands Jones Pure
Cane Soda™;, a premium soda; Jones 24C™, an enhanced water beverage; Jones
GABA®, a functional tea juice blend launched in February 2009, Jones Organics™, a ready to drink
organic tea; Jones Naturals®, a non-carbonated juice and tea drink; and
WhoopAss Energy Drink® , a high energy drink. 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, 2008, which has been
derived from audited consolidated financial statements, and the unaudited interim condensed
consolidated financial statements as of September 30, 2009, 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. We have
evaluated subsequent events through November 9, 2009, which is the
date that these condensed consolidated financial statements were
issued. 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,
2008.
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.
Actual results could differ from those estimates.
Seasonality
Our sales are seasonal and we experience significant 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.
Recently issued accounting pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 168, which is incorporated in Accounting
Standards Codification (ASC) Topic 105, Generally Accepted Accounting Principles, identifies the
ASC as the authoritative source of generally accepted accounting principles in the United States
superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging
Issues Task Force (EITF) and related accounting literature. SFAS 168 reorganizes the thousands of
GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent
structure. Also included is relevant Securities and Exchange Commission (SEC) guidance organized
using the same topical structure in separate sections. We adopted SFAS No. 168 effective September
30, 2009 and have included references to the ASC within our condensed consolidated financial
statements.
Liquidity
As of September 30, 2009, we had cash and cash-equivalents of approximately $6.1 million and
working capital of $11.3 million. Cash used in operations during the nine months ended September
30, 2009 totaled $6.2 million, of which approximately $823,000 was used during the quarter ended
September 30, 2009. 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
8
receivables generated during our stronger shipping months. In addition, the cash used in the
first half of 2009 included approximately $1.6 million to purchase raw materials under the terms of
our amended Pharma GABA supply agreement, and no GABA purchase requirements remain as of September
30, 2009. We have incurred a net loss of $6.1 million year to date, and our accumulated deficit
increased to $35.5 million as of September 30, 2009.
Our ability to execute on our operating plan and to manage our costs in light of developing
economic conditions and the performance of our business continues to be critical to the success of
our Company. We took into account several factors in developing our operating plan for the next
twelve months and beyond (which we refer to in this section as our operating plan or our plan). We
gave careful consideration to the macroeconomic factors stemming from the global economic downturn
understanding that the current economic conditions are likely to persist as the year progresses.
The beverage industry, and particularly those companies selling premium beverages like us, can be
affected by macroeconomic factors, including changes in national, regional, and local economic
conditions, unemployment levels and consumer spending patterns, which together may impact the
willingness of consumers to purchase our products as they adjust their discretionary spending.
Although we believe we had made conservative assumptions regarding our case sales volumes in our
original operating plan, we have had to further refine our estimated case sales as discussed below.
In addition, our plan factored in a modest launch of our new product, Jones GABA, both in terms
of expected case sales and costs relating to promotion allowances and slotting fees and other
promotional expenses. A portion of our cash used in operating activities during the year was the
result of our launch of Jones GABA in February 2009. These costs, contemplated in our operating
plan, of approximately $1.6 million were used to purchase raw materials under the terms of our
amended Pharma GABA supply agreement, with the final payment made in July 2009 of $149,000. We
believe we purchased sufficient GABA raw materials to supply our needs for the foreseeable future.
Moreover, under our plan, we do not believe we are dependent on sales of Jones GABA to
generate sufficient cash flow from operations.
Our operating plan also takes into account a change in our strategic direction with an
emphasis on our higher-margin core products, including our Jones Pure Cane Soda glass bottle
business, and less emphasis on our canned soda (or CSD) business, which is a lower margin business
for us. In the prior year, we incurred significant promotional allowances and slotting fees in
building our CSD business, but our CSD business did not generate sales volumes commensurate with
these costs. We believe using promotional allowances as a way to promote our core products, while
judiciously using slotting fees to gain access on new products, is a more balanced strategy in this
economy. As a result, our plan provides for an overall reduction in our promotional allowances and
slotting fees and the re-allocation of a portion of our promotional allowance and slotting fee
costs from our CSD business to our core glass bottle business and the rollout of our new product,
Jones GABA.
With respect to our operating expenses, our original operating plan also takes into account
the cost containment measures we implemented in the fourth quarter of 2008 and early 2009,
including reductions in workforce resulting in a combined 40% headcount reduction. Additionally,
our executive level positions were reduced as a result of the departure of our former Chief
Executive Officer, Stephen Jones, effective May 1, 2009, and our former Executive Vice President of
Sales, Thomas O’Neill, who resigned in April 2009. We believe these cost containment measures, our
decision to proceed with fewer executive level positions, and additional cost containment measures
including an additional reduction in workforce in the third quarter of 2009 resulting in an
additional 30% headcount reduction further align our cost structure with our revised revenue
expectations. Our operating expenses year to date in 2009 are 37% lower, a reduction of $6.6
million compared to the same period a year ago, and we expect to achieve similar results for the
remainder of this year in comparison to the prior year periods.
Finally, our operating plan factors in the use of our cash to meet our contractual obligations
for 2009 totaling approximately $8.8 million. A substantial portion of these contractual
obligations (approximately 82% of the total for 2009) consist of obligations to purchase raw
materials, including approximately $5 million in sugar under our supply agreements with our three
pure cane sugar suppliers and approximately $1.8 million in glass under our supply agreement with
our glass supplier. 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 in 2009 and
beyond. Our purchase obligations also included a commitment under our amended Pharma GABA supply
agreement to order approximately $1.8 million of Pharma GABA by December 31, 2008 and, on or before
January 31, 2009, to pay 50% of that amount, with the remaining portion to be paid in six equal
monthly installments commencing on February 24, 2009 and ending July 26, 2009. We have satisfied
this commitment.
Our current operating plan does not depend upon obtaining financing. However, if our sales
volumes further decline in a material way from our expectations, as a result of worsening economic
conditions or otherwise, and we are not able to further reduce our costs by a sufficient amount, we
may be unable to generate enough cash flow from operations to cover our working capital and capital
expenditure requirements. If that happens, we would need to seek to obtain funds through
additional financing or by securing a credit facility, which may not be available to us on
acceptable terms, if at all. In this regard, in November 2008, our $15 million line of credit was
terminated and is no longer available to us. We have explored different borrowing alternatives
with Key Bank, the lender under that facility, and other parties, but to date determined that the
terms of these alternatives were not acceptable. We continue to
9
monitor whether credit facilities may be available to us on acceptable terms. We may also
pursue various other strategies to secure any necessary additional financing, which may include,
without limitation, public or private offerings of debt or equity securities, joint ventures with
one or more strategic partners and other strategic alternatives, though there can be no assurance
that our efforts in this regard will result in any agreements or transactions.
As we have moved through the historically seasonally-stronger shipping months of April to
September, we have gained insight into developing economic conditions and the severity of the
impact of those conditions on our business. As a result, as of the date of our quarterly report
for the first quarter of 2009, we had refined our operating plan to contemplate lower case sales
through the remainder of 2009 than we had anticipated at the beginning of the year. However, case
sales in the second quarter of 2009, and again in the third quarter of 2009, have been even lower
than our revised expectations. Therefore, as of the date of this report, we have further refined
our operating plan from last quarter to contemplate slightly lower case sales through the remainder
of 2009. With these further adjustments, and the additional cost containment measures including an
additional reduction in workforce implemented during the third quarter, we believe that our revised
12-month operating plan, with its foundation built upon the broader macroeconomic factors, allows
us to meet our anticipated cash needs for the next 12 months and beyond.
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. However, despite the further
refinements we have made to our operating plan and the additional cost containment measures we
implemented in the third quarter, we may no longer have sufficient margin in our plan to absorb
further material declines against our expectations with regard to the economy or our business. We
believe our revised operating plan already includes the majority of attainable cost cutting
measures, which places greater emphasis on the need to meet our case sales projections in order to
effectively operate our business. The economic conditions so far in 2009 have made forecasting
demand for our products much more difficult, so there is uncertainty regarding our ability to meet
our revised case sales projections. This uncertainty, together with our inability to implement
further meaningful cost containment measures beyond those we undertook in the third quarter and the
extremely difficult environment in which to obtain additional equity or debt financing, raise
substantial doubt about our ability to continue as a going concern. Our financial statements for
the quarter ended September 30, 2009 were prepared assuming we would continue as a going concern,
which contemplates the realization of assets and the settlement of liabilities and commitments in
the normal course of business. The accompanying consolidated 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.
Reclassifications
Certain reclassifications have been made to the prior period balances to conform to the
current period presentation.
2.
Restricted Cash and Cash equivalents
As
of September 30, 2009, our financial assets, included
certificates of deposit (CD) in a restricted reserve account to
secure our promissory note (note) with Key Bank (Note 5). Such assets
have been measured at
fair value under Level 1 of the fair value hierarchy, which means that
we determine the value based on quoted market prices
in active markets for identical assets. The CD for the short term
portion of the note, $125,000, is classified as restricted cash and
cash equivalents, and the CD for the long
term portion of the note, $235,000, is recorded in other assets.
3. Inventory
Inventory consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2009 |
|
|
2008 |
|
Finished goods |
|
$ |
2,587 |
|
|
$ |
3,709 |
|
Raw materials |
|
|
1,342 |
|
|
|
1,945 |
|
|
|
|
|
|
|
|
|
|
$ |
3,929 |
|
|
$ |
5,654 |
|
|
|
|
|
|
|
|
4. Other Assets
Other assets as of September 30, 2009, totaling $1.9 million, primarily consists of $1.6 million of GABA
raw materials inventory purchased in conjunction with our Pharma GABA supply agreement and
represents the amount of inventory in excess of our forecasted inventory demands for the next
twelve months. We believe we purchased sufficient GABA raw materials to supply our needs for the
foreseeable future, and we are currently assessing other potential opportunities for using the GABA
ingredient. The carrying value reflects the lower of cost or market value. The potential of an
adjustment to reflect a decline in the lower of cost or market value is dependent upon our ability
to continue to increase points of distribution of Jones GABA, as well as successfully realizing
other opportunities for using the GABA ingredient.
5. Note Payable
In
September 2009, we entered into a financing agreement with Key
Bank for $376,000 for the purpose of consolidating our capital leases
with Key Bank, into one promissory note for a lower interest rate.
Although our fixed assets are no longer secured, we were required,
as a term of the financing, to place $376,000 in an interest bearing
restricted reserve account, invested in certificates of deposit, to
secure the note. The terms of the arrangement include monthly
payments of principal and interest for 35 months and an annual percentage rate
of prime which was 3.25%, at September 30, 2009. The carrying value of
the note at September 30, 2009 approximates fair value.
The
future minimum principal payments relating to this note as of
September 30, 2009, are as follows (in thousands):
| |
|
|
|
|
| 2009 |
|
|
$ 32 |
|
| 2010 |
|
|
125 |
|
| 2011 |
|
|
125 |
|
| 2012 |
|
|
94 |
|
| |
|
|
$376 |
|
| 6. |
|
Stock-Based Compensation |
Under the terms of our 2002 Stock Option and Restricted Stock Plan (the Plan), our Board
of Directors may grant restricted stock or options awards, which are typically granted at the
closing price of our stock on the date of grant for a five-year or ten-year term, to employees,
officers, directors and consultants. Options generally vest over a period of forty-two months,
with the first 1/7th vesting
10
six months from the grant date and the balance vesting in equal amounts every six months
thereafter. Restricted stock vests over a period of forty-two months in equal amounts every six
months. At September 30, 2009, there were 1,338,687 shares of unissued common stock authorized and
available for issuance under the Plan.
(a) Stock options:
A summary of our stock option activity is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
|
|
|
|
average |
|
| |
|
|
|
|
|
Weighted-Average |
|
|
remaining |
|
| |
|
Number of |
|
|
exercise |
|
|
contractual |
|
| |
|
shares |
|
|
price |
|
|
life (years) |
|
Outstanding balance at December 31, 2008 |
|
|
1,459,358 |
|
|
$ |
4.90 |
|
|
|
|
|
Options granted |
|
|
744,250 |
|
|
|
0.80 |
|
|
|
|
|
Options exercised |
|
|
(1,786 |
) |
|
|
0.37 |
|
|
|
|
|
Options cancelled/expired |
|
|
(904,559 |
) |
|
|
4.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance at September 30, 2009 |
|
|
1,297,263 |
|
|
$ |
3.18 |
|
|
|
7.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2009 |
|
|
486,611 |
|
|
$ |
5.50 |
|
|
|
4.82 |
|
Vested and expected to vest |
|
|
1,192,216 |
|
|
$ |
3.30 |
|
|
|
|
|
For the three and nine months ended September 30, 2009, we received $132 and $661 in cash
proceeds from stock option exercises, respectively. We received $0 and $69,000 for the three and
nine months ended September 30, 2008, respectively.
(b) Restricted stock awards:
A summary of our restricted stock activity is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Weighted-Average |
|
|
Average |
|
| |
|
Restricted |
|
|
Grant Date |
|
|
Contractual |
|
| |
|
Shares |
|
|
Fair Value |
|
|
Life |
|
Non-vested restricted stock at December 31, 2008 |
|
|
80,978 |
|
|
$ |
6.48 |
|
|
8.97 yrs |
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
Vested |
|
|
(16,447 |
) |
|
|
6.92 |
|
|
|
|
|
Cancelled/forfeited |
|
|
(28,197 |
) |
|
|
6.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at September 30, 2009 |
|
|
36,334 |
|
|
$ |
6.02 |
|
|
8.28 yrs |
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2009, a total of 2,677 shares and 5,707
shares, with an average market value per share of $2.82 and $2.78, respectively, were withheld by the Company as payment
for withholding taxes due in connection with the vesting of restricted stock awards issued under
the Plan.
(c) Stock-based compensation expense:
Stock-based compensation expense is recognized using the straight-line attribution method
over the employees’ requisite service period.
The following table summarizes the stock-based compensation expense, which includes reversal
of unamortized compensation for terminated employees and changes in forfeiture rate estimates (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Type of awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
115 |
|
|
$ |
208 |
|
|
$ |
479 |
|
|
$ |
572 |
|
Restricted stock |
|
|
31 |
|
|
|
135 |
|
|
|
108 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
146 |
|
|
$ |
343 |
|
|
$ |
587 |
|
|
$ |
673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement account: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promotion and selling |
|
$ |
44 |
|
|
$ |
105 |
|
|
$ |
142 |
|
|
$ |
222 |
|
General and administrative |
|
|
102 |
|
|
|
238 |
|
|
|
445 |
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
146 |
|
|
$ |
343 |
|
|
$ |
587 |
|
|
$ |
673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
We employ the following key weighted-average assumptions in determining the fair value of
stock options, using the Black-Scholes option pricing model:
| |
|
|
|
|
|
|
|
|
| |
|
Nine months ended September 30, |
| |
|
2009 |
|
2008 |
Expected stock price volatility |
|
|
87.4 |
% |
|
|
71.1 |
% |
Risk free interest rate |
|
|
2.2 |
% |
|
|
2.7 |
% |
Expected term (in years) |
|
|
5.9 |
|
|
|
4.5 |
|
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value |
|
$ |
0.59 |
|
|
$ |
1.97 |
|
The aggregate intrinsic value of stock options outstanding at September 30, 2009 and 2008
was $53,100 and $0 and for options exercisable was $19,000 and $0 respectively. The intrinsic value
of outstanding and exercisable stock options is calculated as the quoted closing market price of
the stock at the balance sheet date ($0.81) less the exercise price of the option.
At September 30, 2009, the unrecognized compensation expense related to stock options and
non-vested restricted stock was $678,000 and $167,000, respectively, which is to be recognized over
weighted-average periods of 2.3 years and 1.8 years, respectively.
7. Commitments and contingencies
Legal proceedings
On September 4, 2007, a putative class action complaint was filed against us, our then serving
chief executive officer, and our then serving chief financial officer in the U.S. District Court
for the Western District of Washington, alleging claims under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The case was
entitled Saltzman v. Jones Soda Company, et al., Case No. 07-cv-1366-RSL, and purported to be
brought on behalf of a class of purchasers of our common stock during the period March 9, 2007 to
August 2, 2007. Six substantially similar complaints subsequently were filed in the same court,
some of which alleged claims on behalf of a class of purchasers of our common stock during the
period November 1, 2006 to August 2, 2007. Some of the subsequently filed complaints added as
defendants certain current and former directors and another former officer of the Company. The
complaints generally alleged violations of federal securities laws based on, among other things,
false and misleading statements and omissions about our financial results and business prospects.
The complaints sought unspecified damages, interest, attorneys’ fees, costs, and expenses. On
October 26, 2007, these seven lawsuits were consolidated as a single action entitled In re Jones
Soda Company Securities Litigation, Case No. 07-cv-1366-RSL. On March 5, 2008, the Court appointed
Robert Burrell lead plaintiff in the consolidated securities case. On May 5, 2008, the lead
plaintiff filed a First Amended Consolidated Complaint, which purports to allege claims on behalf
of a class of purchasers of our common stock during the period of January 10, 2007, to May 1, 2008,
against the Company and Peter van Stolk, our former Chief Executive Officer, former Chairman of the
Board, and former director. The First Amended Consolidated Complaint generally alleges violations
of federal securities laws based on, among other things, false and misleading statements and
omissions about our agreements with retailers, allocation of resources, and business prospects.
Defendants filed a motion to dismiss the amended complaint on July 7, 2008. After hearing oral
argument on February 3, 2009, the Court granted the motion to dismiss in its entirety on February
9, 2009. Plaintiffs filed a motion for leave to file an amended complaint on March 25, 2009. On
June 22, 2009, the Court issued an order denying plaintiffs’ motion for leave to amend and
dismissed the case with prejudice. On July 7, 2009, the Court entered judgment in favor of the
Company and Mr. van Stolk. On August 5, 2009, plaintiffs filed a notice of
appeal of the Court’s orders dismissing the complaint and denying plaintiffs’ motion for leave to
amend, and the resulting July 7, 2009 judgment. Briefing for the appeal is currently scheduled to
be completed in early 2010.
12
In addition, on September 5, 2007, a shareholder derivative action was filed in the Superior
Court for King County, Washington, allegedly on behalf of and for the benefit of the Company,
against certain of our former officers and current and former directors. The case is entitled
Cramer v. van Stolk, et al., Case No. 07-2-29187-3 SEA (Cramer Action). The Company also was named
as a nominal defendant. Four other shareholders filed substantially similar derivative cases. Two
of these actions were filed in Superior Court for King County, Washington. One of these two
Superior Court actions has been voluntarily dismissed and the other has been consolidated with the
Cramer Action under the caption In re Jones Soda Co. Derivative Litigation, Lead Case No.
07-2-31254-4 SEA. On April 28, 2008, plaintiffs in the consolidated action filed an amended
complaint based on the same basic allegations of fact as in the federal securities class actions
and alleging, among other things, that certain of our current and former officers and directors
breached their fiduciary duties to the Company and were unjustly enriched in connection with the
public disclosures that are the subject of the federal securities class actions. On May 2, 2008,
the Court signed a stipulation and order staying the proceedings in the consolidated Cramer Action
until all motions to dismiss in the consolidated federal securities class action have been
adjudicated.
The two remaining shareholder derivative actions were filed in the U.S. District Court for the
Western District of Washington. On April 10, 2008, the Court presiding over the federal derivative
cases consolidated them under the caption Sexton v. van Stolk, et al., Case No. 07-1782RSL (Sexton
Action), and appointed Bryan P. Sexton lead plaintiff. The Court also established a case schedule,
which, among other things, set the close of fact discovery as January 4, 2009, and set a trial date
of May 4, 2009. The actions comprising the consolidated Sexton Action are based on the same basic
allegations of fact as in the securities class actions filed in the U.S. District Court for the
Western District of Washington and the Cramer Action, filed in the Superior Court for King County.
The actions comprising the Sexton Action allege, among other things, that certain of our current
and former directors and officers breached their fiduciary duties to the Company and were unjustly
enriched in connection with the public disclosures that are the subject of the federal securities
class actions. The complaints seek unspecified damages, restitution, disgorgement of profits,
equitable and injunctive relief, attorneys’ fees, costs, and expenses. On June 3, 2008, the parties
filed a joint motion to stay the Sexton Action until all motions to dismiss in the federal
securities class action have been adjudicated. On June 5, 2008, the Court granted the motion and
stayed the Sexton action.
The Cramer Action and Sexton Action are derivative in nature and do not seek monetary damages
from the Company. However, the Company may be required, throughout the pendency of the action, to
advance payment of legal fees and costs incurred by the defendants and the litigation may result in
significant obligations for payment of defense costs and indemnification.
We are unable to predict the outcome of the actions described above. However, we do not
anticipate these actions will result in significant liability or will have a material adverse
effect on our business, results of operations, or financial condition.
On August 27, 2008, Advanced Business Strategies (“ABS”) filed a Complaint for Damages against
the Company in the Circuit Court for the State of Oregon for breach of contract and breach of
implied covenant of good faith and fair dealing, seeking damages in excess of $1.1 million. ABS
alleged that we improperly terminated their agreement to provide us with certain sales and
marketing services. On October 1, 2008, we filed a Notice of Removal from the State Court to the
United States District Court, District of Oregon. Our answer to the claims was filed on October 8,
2008; we alleged that we were entitled to terminate the agreement due to ABS’ material breach of
the agreement and that ABS had failed to mitigate its alleged damages. We entered into a
Settlement Agreement with ABS effective May 29, 2009, under which we will make payments to ABS
through July 1, 2010 totaling $225,000, plus pay a $0.05 per case royalty for cases in excess of
2.2 million in 2010 and 3.2 million in 2011. The Settlement Agreement did not constitute any
admission of liability but was a compromise of a disputed claim. All claims between the parties
have been released and a Stipulation of Dismissal was filed on June 9, 2009. As of September 30,
2009, the remaining accrued settlement balance was $125,000.
In addition to the matters above, we are or may be involved from time to time in various
claims and legal actions arising in the ordinary course of business, including proceedings
involving product liability claims and other employee claims, and tort and other general liability
claims, for which we carry insurance, as well as trademark, copyright, and related claims and legal
actions. In the opinion of our management, the ultimate disposition of these matters will not have
a material adverse effect on our consolidated financial position, results of operations or
liquidity.
13
8. Segment Information
We have one operating segment with operations primarily in the United States and Canada. Sales
are assigned to geographic locations based on the location of customers. Geographic information is
as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
5,533 |
|
|
$ |
6,746 |
|
|
$ |
17,325 |
|
|
$ |
24,655 |
|
Canada |
|
|
1,461 |
|
|
|
1,768 |
|
|
|
3,844 |
|
|
|
4,717 |
|
Other countries |
|
|
162 |
|
|
|
170 |
|
|
|
541 |
|
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
7,156 |
|
|
$ |
8,684 |
|
|
$ |
21,710 |
|
|
$ |
29,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2009 and 2008, three of our customers
represented approximately 30% and 28%, respectively of revenues, one of which represented
approximately 14% and 10%, respectively of revenues. During the nine month period ended September
30, 2009 and 2008, three of our customers represented approximately 28% and 38%, respectively of
revenues, one of which represented approximately 12% and 20%, respectively of revenues.
|
|
|
| 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 2008 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 16, 2009.
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain
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,” 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 a range of premium beverages. With the addition of
Jones GABA® in the first quarter of 2009, our premium beverages include the
following six brands:
| |
• |
|
Jones Pure Cane Soda™, a premium carbonated soft drink; |
| |
• |
|
Jones 24C™, an enhanced water beverage; |
| |
• |
|
Jones GABA®, a functional tea juice blend; |
| |
• |
|
Jones Organics™, a ready-to-drink organic tea; |
| |
• |
|
Jones Naturals®, a non-carbonated juice & tea; and |
| |
• |
|
WhoopAss Energy Drink® a citrus energy drink. |
We sell and distribute our products primarily throughout the United States (U.S.) and Canada
through our network of independent distributors, which we refer to as our direct store delivery
(DSD) channel, national retail accounts, which we refer to as our direct to retail (DTR) channel,
as well as through licensing arrangements. We do not directly manufacture our products but instead
outsource the manufacturing process to third party contract packers.
In September 2006, we entered into an exclusive manufacturing and distribution agreement with
National Beverage Corp. (National Beverage) to manufacture and distribute Jones Soda 12-ounce cans
to the more mainstream channels and in-store locations. This was an effort to expand our points of
availability within all stores including the shelves that are normally restricted to national
mainstream brands manufactured by companies such as The Coca-Cola Company and PepsiCo. Beginning in
January 2007, National Beverage started selling Jones Pure Cane Soda to retailers in the grocery
and mass merchant channels in the U.S. Through this arrangement, we identify and secure retailers
across the U.S. for Jones Soda 12-ounce cans, and we are solely responsible for all sales efforts,
marketing, advertising and promotion. Using concentrate supplied by Jones, National Beverage both
manufactures and sells the products on an exclusive basis directly to retailers. However, beginning
in 2009, we have changed our strategic direction, emphasizing
our higher-margin, core products, including our Jones Pure Cane Soda glass bottle business,
with less emphasis on our canned soda (or CSD) business, which is a lower margin business for us.
14
Our products are sold in 50 states in the U.S. and nine provinces in Canada, primarily in
convenience stores, delicatessens, sandwich shops and selected supermarkets, 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. We have focused our sales and marketing resources on the expansion and penetration of
our products through our independent distributor network and national retail accounts in our core
markets consisting of the Northwest, Southwest and Midwest U.S. and Canada, as well as targeted
expansion into our less penetrated markets consisting of the Northeast and Southeast U.S. In
addition, we are expanding our international business outside of North America and have entered the
markets of Ireland, the United Kingdom, Australia and the United Arab Emirates through independent
distributors.
Beginning in 2004, we launched our licensing business strategy as a method to extend our brand
into non-alternative beverage products and non-beverage products. We currently have licensing
arrangements with four companies. With these licensing agreements, we believe that we are able to
partner with companies that will manufacture Jones-related products and extend our Jones brand into
select products that we feel enhance our brand image. We do not expect this business to be a
material part of our operations in 2009.
Our business strategy is to increase sales by expanding distribution of our brands in new and
existing markets (primarily within North America), stimulating consumer awareness and trial of our
products, thus leading to increased relevance and purchase intent of our brands. Our business
strategy focuses on:
| |
• |
|
expanding points of distribution for our products; |
| |
• |
|
creating strong alignment with our key distributors; |
| |
• |
|
developing innovative beverage brands and products; |
| |
• |
|
stimulating strong consumer demand for our existing brands and products, with primary
emphasis in the U.S. and Canada; |
| |
• |
|
inviting consumers to participate in our brand through submission of photographs to be
placed on labels through our interactive application of myJones.com; |
| |
• |
|
licensing our brand equity for the creation of other beverage or non-beverage products;
and |
| |
• |
|
exploring opportunities to license our patented custom-label process to non-competitive
products. |
In order to compete effectively in the beverage industry, we believe that we must convince
independent distributors that Jones Pure Cane Soda is a leading brand in the premium soda segment
of the alternative or New Age beverage industry. Additionally, as a means of maintaining and
expanding our distribution network, we introduce new products and product extensions, and when
warranted, new brands. During the year we have launched two new product extensions and one new
brand.
During the second quarter of 2009, we launched two extensions of our Jones Pure Cane Soda
including Jones Refresco De Caña Pura, launched in our west coast markets, and Jones Jumble, our
summer seasonal soda launched in targeted markets. Both of these product extensions added
incremental Jones Soda glass bottle business for our DSD channel.
In February 2009, we launched a new brand, Jones GABA, our first line of beverage products
containing Pharma GABA, offered in a 12-ounce can and part of a new emerging category of functional
beverages. We are marketing this tea and juice blended beverage by focusing on the benefits of
enhanced focus and clarity that studies have shown GABA provides. Our results with respect to
Jones GABA depend in part on our ability to market the product’s benefits. We believe our launch has
been hampered by the continued economic slowdown, and as such, we are continuing to
explore the best channels and price points in which to sell Jones GABA as well as assessing other
potential opportunities for GABA. Jones GABA is our first entry into beverage products containing
GABA and much of our success will depend on our ability to gain new points of distribution through
our DSD channel. We must also be successful in developing DTR distribution for Jones GABA through
existing DTR customers and obtain new listings with customers that currently do not have points of
distribution.
The beverage industry, and particularly those companies selling premium beverages like us, can
be affected by macroeconomic factors including changes in national, regional, and local economic
conditions, unemployment levels and consumer spending patterns, which together may impact the
willingness of consumers to purchase our products as they adjust their discretionary spending. The
recent disruptions in the overall economy and financial markets as a result of the global economic
downturn have adversely impacted our two primary markets: the U.S. and Canada. This has reduced
consumer confidence in the economy and we believe has negatively affected consumers’ willingness to purchase our products as they reduce their discretionary
spending. Moreover, current economic
15
conditions may adversely affect the ability of our
distributors to obtain the credit necessary to fund their working capital needs, which could
negatively impact their ability or desire to continue to purchase products from us in the same
frequencies and volumes as they have done in the past. There can be no assurances that the
financial markets will stabilize or recover in the months ahead, that consumer confidence will be
restored, or that access to the credit markets will become available. If the current economic
conditions persist or deteriorate, sales of our products could be adversely affected,
collectability of accounts receivable may be compromised and we may face obsolescence issues with
our inventory, any of which could have a material adverse impact on our operating results and
financial condition.
As we have moved through the historically seasonally-stronger shipping months of April to
September, we have gained insight into developing economic conditions and the severity of the
impact of those conditions on our business. As a result, as of the date of our quarterly report
for the first quarter of 2009, we had refined our operating plan to contemplate lower case sales
through the remainder of 2009 than we had anticipated at the beginning of the year. However, case
sales in the second quarter of 2009, and again in the third quarter of 2009, have been even lower
than our revised expectations. Therefore, as of the date of this report, we have further refined
our operating plan from last quarter to contemplate slightly lower case sales through the remainder
of 2009. With these further adjustments, and the additional cost containment measures including an
additional reduction in workforce implemented during the third quarter, we believe that our revised
12-month operating plan, with its foundation built upon the broader macroeconomic factors, allows
us to meet our anticipated cash needs for the next 12 months and beyond. However, we believe our
revised operating plan already includes the majority of attainable cost cutting measures, which
places greater emphasis on the need to meet our case sales projections in order to effectively
operate our business. The economic conditions so far in 2009 have made forecasting demand for our
products much more difficult, so there is significant uncertainty regarding our ability to meet our
revised case sales projections. This uncertainty, together with our inability to implement further
meaningful cost containment measures beyond those we undertook in the third quarter, and the
extremely difficult environment in which to obtain additional equity or debt financing, raise
substantial doubt about our ability to continue as a going concern. Refer to “Liquidity and
Capital Resources” included below in this report.
Results of Operations
The following selected unaudited 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 September 30, |
|
|
Nine Months Ended September 30, |
|
| |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
| |
|
2009 |
|
|
Revenue |
|
|
2008 |
|
|
Revenue |
|
|
2009 |
|
|
Revenue |
|
|
2008 |
|
|
Revenue |
|
| |
|
(Dollars in thousands, except per share data) |
|
Consolidated statements of operation data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
7,156 |
|
|
|
100.0 |
|
|
$ |
8,684 |
|
|
|
100.0 |
|
|
$ |
21,710 |
|
|
|
100.0 |
|
|
$ |
29,787 |
|
|
|
100.0 |
|
Cost of goods sold |
|
|
(5,643 |
) |
|
|
(78.9 |
) |
|
|
(7,718 |
) |
|
|
(88.9 |
) |
|
|
(16,696 |
) |
|
|
(76.9 |
) |
|
|
(23,918 |
) |
|
|
(80.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,513 |
|
|
|
21.1 |
|
|
|
966 |
|
|
|
11.1 |
|
|
|
5,014 |
|
|
|
23.1 |
|
|
|
5,869 |
|
|
|
19.7 |
|
Licensing revenue |
|
|
19 |
|
|
|
0.3 |
|
|
|
43 |
|
|
|
0.5 |
|
|
|
70 |
|
|
|
0.3 |
|
|
|
152 |
|
|
|
0.5 |
|
Promotion and selling expenses |
|
|
(1,590 |
) |
|
|
(22.2 |
) |
|
|
(3,481 |
) |
|
|
(40.0 |
) |
|
|
(6,151 |
) |
|
|
(28.3 |
) |
|
|
(9,967 |
) |
|
|
(33.5 |
) |
General and administrative expenses |
|
|
(1,446 |
) |
|
|
(20.2 |
) |
|
|
(2,724 |
) |
|
|
(31.4 |
) |
|
|
(5,006 |
) |
|
|
(23.1 |
) |
|
|
(7,809 |
) |
|
|
(26.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(1,504 |
) |
|
|
(21.0 |
) |
|
|
(5,196 |
) |
|
|
(59.8 |
) |
|
|
(6,073 |
) |
|
|
(28.0 |
) |
|
|
(11,755 |
) |
|
|
(39.5 |
) |
Other (expense) income, net |
|
|
(65 |
) |
|
|
(0.9 |
) |
|
|
66 |
|
|
|
0.7 |
|
|
|
(65 |
) |
|
|
(0.3 |
) |
|
|
301 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(1,569 |
) |
|
|
(21.9 |
) |
|
|
(5,130 |
) |
|
|
(59.1 |
) |
|
|
(6,138 |
) |
|
|
(28.3 |
) |
|
|
(11,454 |
) |
|
|
(38.5 |
) |
Income tax benefit (expense) |
|
|
87 |
|
|
|
1.2 |
|
|
|
(130 |
) |
|
|
(1.5 |
) |
|
|
88 |
|
|
|
0.4 |
|
|
|
(392 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,482 |
) |
|
|
(20.7 |
) |
|
$ |
(5,260 |
) |
|
|
(60.6 |
) |
|
$ |
(6,050 |
) |
|
|
(27.9 |
) |
|
$ |
(11,846 |
) |
|
|
(39.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.06 |
) |
|
|
|
|
|
$ |
(0.20 |
) |
|
|
|
|
|
$ |
(0.23 |
) |
|
|
|
|
|
$ |
(0.45 |
) |
|
|
|
|
16
| |
|
|
|
|
|
|
|
|
| |
|
As of |
| |
|
September 30, 2009 |
|
December 31, 2008 |
| |
|
(Dollars in thousands) |
Balance sheet data: |
|
|
|
|
|
|
|
|
Cash and cash equivalents, short term investments and accounts receivable |
|
$ |
9,703 |
|
|
$ |
15,054 |
|
Fixed assets, net |
|
|
1,443 |
|
|
|
2,099 |
|
Total assets |
|
|
18,170 |
|
|
|
24,315 |
|
Long-term liabilities |
|
|
294 |
|
|
|
396 |
|
Working capital |
|
|
11,329 |
|
|
|
17,674 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
288-ounce equivalent case sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished products case sales |
|
|
538,500 |
|
|
|
712,300 |
|
|
|
1,691,800 |
|
|
|
2,416,200 |
|
Concentrate case sales |
|
|
317,600 |
|
|
|
314,700 |
|
|
|
685,800 |
|
|
|
1,365,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total case sales |
|
|
856,100 |
|
|
|
1,027,000 |
|
|
|
2,377,600 |
|
|
|
3,782,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2009 Compared to Quarter Ended September 30, 2008
Revenue
For the quarter ended September 30, 2009, revenue was approximately $7.2 million, a decrease
of $1.5 million, or 17.6% from $8.7 million in revenue for the three months ended September 30,
2008. The decrease in revenue was primarily attributable to a decrease in total case sales of 16.6%
to 856,100 cases. Case sales through our DTR and DSD channels decreased 24.4% to 538,500 cases. A
decline in case sales of our core product, Jones Soda glass bottles, of approximately 64,000 cases
contributed to the reduced case sales, and we believe was caused primarily by reduced demand
resulting from the impact of the economic downturn on consumer spending levels. We expect economic
conditions to continue to have a negative impact on our business for at least the remainder of
2009. In addition, the discontinuance of Jones Soda glass bottles at some of our major retailers
in our DTR channel, which occurred in 2008 as part of our realigned channel focus, contributed to a
lesser extent to the decline in case sales. Also contributing to the decline was a reduction in
24C shipments of 83,000 cases; 24C had stronger pull-through a year ago subsequent to its launch in
2007. These declines were partially offset by an increase in case sales of concentrate to National
Beverage to 317,600 cases, or 0.9%, compared to the same period of 2008. As part of management’s
strategic refocus, we will continue to emphasize our higher-margin core products, including our
Jones Pure Cane Soda glass bottle business, with less emphasis on our CSD business, which is a
lower margin business for us, and we expect this strategy will have a negative impact on case sales
of concentrate compared to prior periods.
For the quarter ended September 30, 2009, promotion allowances and slotting fees, which are a
reduction to revenue, totaled $486,000, a decrease of $559,000, or 53.5%, from $1.0 million a year
ago. The promotion allowances and slotting fees for the third quarter of 2009 were primarily
attributable to promoting some new distribution points in our DSD business. The promotion
allowances and slotting fees a year ago related primarily to price promotion programs implemented
in the quarter for our DTR and CSD business and for the continued introduction of 24C across North
America. We believe using promotional allowances as a way to promote our core products, while
judiciously using slotting fees to gain access on new products, is a more balanced strategy in this
economy. As a result, we anticipate for the remainder of 2009 an overall reduction in our
promotional allowance and slotting fee costs with an emphasis on our higher margin business,
including our core glass bottle business, and only modest slotting fees for the product rollout of
Jones GABA in comparison to previous product launches.
Gross Profit
For the quarter ended September 30, 2009, gross profit increased by approximately $547,000, or
56.6%, to $1.5 million as compared to $966,000 in gross profit for the quarter ended September 30,
2008. This was primarily a result of a reduction in promotion allowances and slotting fees due to
cost containment measures and a significant reduction in freight and storage costs per case due to
reduced fuel surcharges and inventory management. For the quarter ended September 30, 2009, gross
profit as a percentage of revenue increased to 21.1% from 11.1% compared to the third quarter of
2008.
17
Licensing Revenue
Licensing revenue decreased 55.3%, or $24,000, to $19,000 for the quarter ended September 30,
2009 from $43,000 for the quarter ended September 30, 2008, and consisted primarily of our
exclusive licensing arrangements with Big Sky Brands for Jones Soda Flavor Booster Hard Candy. We
believe licensing revenue was down due to the negative impact on sales resulting from the economic
downturn. We do not expect licensing revenue to represent a material portion of our overall
revenues in 2009.
Promotion and Selling Expenses
Promotion and selling expenses for the quarter ended September 30, 2009 were approximately
$1.6 million, a decrease of $1.9 million, or 54.3%, from $3.5 million for the quarter ended
September 30, 2008. Promotion and selling expenses as a percentage of revenue decreased to 22.2%
for the quarter ended September 30, 2009, from 40.1% in the same period in 2008. The decrease in
promotion and selling expenses was primarily due to a decrease in selling expenses year over year
of $1.2 million, to $832,000, or 11.6% of revenue. This decrease resulted primarily from decreases
in sales personnel in conjunction with the strategic refocus in the fourth quarter of 2008 and
continued cost containment efforts during 2009, which included reductions in workforce and our
realigned channel focus which contributed to a decrease in promotional expenses. The effects of the
workforce reductions including the most recent reduction in the third quarter of 2009 are expected
to reduce ongoing promotion and selling expenses for the remainder of 2009 compared to prior year
periods. Also contributing to the decrease in promotion and selling expenses was a decrease in
marketing expenses of $651,000, to $759,000, or 10.6% of revenue for the quarter ended September
30, 2009, from $1.4 million in the same period in 2008 due in part to our cost containment efforts.
General and Administrative Expenses
General and administrative expenses for the quarter ended September 30, 2009 were $1.4
million, a decrease of $1.3 million, or 46.9%, compared to $2.7 million for the quarter ended
September 30, 2008. General and administrative expenses as a percentage of revenue decreased to
20.2% for the three months ended September 30, 2009 from 31.4% in the same period of 2008. The
decrease in general and administrative expenses was primarily due to a decrease of salaries and
benefits including stock-based compensation, resulting from a decrease in headcount primarily as a
result of the strategic refocus in the fourth quarter of 2008 and continued cost containment
efforts during 2009, which also included reductions in workforce. Also contributing to the
decrease was a reduction in professional fees including consulting and legal expenses as well as a
reduction in bad debt expense. The effects of the workforce reductions including the most recent
reduction in the third quarter of 2009 are expected to reduce ongoing general and administrative
expenses for the remainder of 2009 compared to prior year periods.
Other (Expense) Income, Net
Other (expense) income, net decreased to an expense of $65,000 for the quarter ended September
30, 2009, from other income, net of $66,000 in the same period a year ago, primarily due to a
decrease in interest income due to lower levels of cash and short-term investments.
Income Tax Benefit (Expense)
Provision for income taxes for the quarter ended September 30, 2009 and 2008 was a benefit of
$87,000 and an expense of $130,000, respectively. The tax provision relates primarily to the tax
provision on income from our Canadian operations and reflects a credit for the quarter ended
September 30, 2009 due to a tax refund received resulting from our Canadian operations. No tax
benefit is recorded 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, 2009 decreased to $1.5 million from a net loss of
$5.3 million for the quarter ended September 30, 2008. This was due to improvements to our gross
profit of $547,000 through reductions in promotion allowances and slotting fees due to cost
containment measures and a significant reduction in freight and storage costs per case due to
reduced fuel surcharges and inventory management. Additionally the reduction in net loss was
attributable to decreases in promotion and selling expense of $1.9 million and general and
administrative expenses of $1.3 million as a result of our cost containment efforts.
18
Nine Month Period Ended September 30, 2009 and 2008
Revenue
For the nine months ended September 30, 2009, revenue was approximately $21.7 million, a
decrease of $8.1 million, or 27.1%, from $29.8 million in revenue for the nine months ended
September 30, 2008. The decrease in revenue was primarily attributable to a 30.0% decrease in case
sales through our DTR and DSD channels to 1,691,800 cases. A decline in case sales of our core
product, Jones Soda glass bottles, of approximately 421,500 cases contributed to the reduced case
sales, and we believe was caused primarily by the discontinuance of Jones Soda glass bottles at
some of our major retailers in our DTR and DSD channels which occurred in 2008 as part of our
realigned channel focus. In addition, we believe reduced demand resulting from the impact of the
economic downturn on consumer spending levels negatively affected our case sales, and we expect
economic conditions to continue to have a negative impact on our business for at least the
remainder of 2009. Also contributing to the decline was a reduction in 24C shipments of 238,900
cases; 24C had stronger pull-through a year ago subsequent to its launch in 2007. Additionally,
case sales of concentrate to National Beverage decreased to 685,800 cases, or 49.8%, compared to
the same period of 2008. As part of management’s strategic refocus, we will continue to emphasize
our higher-margin core products, including our Jones Pure Cane Soda glass bottle business, with
less emphasis on our CSD business, which is a lower margin business for us, and we expect this
strategy will continue to have a negative impact on case sales of concentrate compared to prior
periods.
For the nine months ended September 30, 2009, promotion allowances and slotting fees, which
are a reduction to revenue, totaled $2.4 million, a decrease of $1.9 million or 43.7% from $4.3
million a year ago. The promotion allowances and slotting fees for the nine months ended September
30, 2009 were primarily attributable to promoting some new distribution points in our DSD business.
The promotion allowances and slotting fees a year ago related primarily to price promotion programs
implemented for our DTR and CSD business and for the continued introduction of 24C across North
America. We believe using promotional allowances as a way to promote our core products, while
judiciously using slotting fees to gain access on new products, is a more balanced strategy in this
economy. As a result, we anticipate for the remainder of 2009 an overall reduction in our
promotional allowance and slotting fee costs with an emphasis on our higher margin business,
including our core glass bottle business, and only modest slotting fees for the product rollout of
Jones GABA in comparison to previous product launches.
Gross Profit
For
the nine months ended September 30, 2009, gross profit decreased
by approximately $855,000, or 14.6% to $5.0 million as compared to $5.9 million in gross profit for the nine months
ended September 30, 2008. This was primarily a result of lower sales volumes in our DTR channel due
to the discontinuance of the Jones Soda glass bottles at some of our major retailers and lower DSD
volumes in the majority of U.S. regions due, we believe, to softer consumer demand as a result of
the economic downturn. These decreases to gross profit were offset by a reduction in promotion
allowances and slotting fees and by a significant reduction in freight and storage costs per case
due to reduced fuel surcharges and inventory management. For the nine months ended September 30,
2009, gross profit as a percentage of revenue increased to 23.1% from 19.7% compared to the same
period in 2008.
Licensing Revenue
Licensing revenue decreased 53.7%, or $82,000, to $70,000 for the nine months ended September
30, 2009 from $152,000 for the nine months ended September 30, 2008, and consisted primarily of our
exclusive licensing arrangements with Big Sky Brands for Jones Soda Flavor Booster Hard Candy. We
believe licensing revenue was down due to the negative impact on sales resulting from the economic
downturn. We do not expect licensing revenue to represent a material portion of our overall
revenues in 2009.
Promotion and Selling Expenses
Promotion and selling expenses for the nine months ended September 30, 2009 were approximately
$6.2 million, a decrease of $3.8 million, or 38.3%, from $10.0 million for the nine months ended
September 30, 2008. Promotion and selling expenses as a percentage of revenue decreased to 28.3%
for the quarter ended September 30, 2009, from 33.5% in the same period in 2008. The decrease in
promotion and selling expenses was primarily due to a decrease in selling expenses year over year
of $2.9 million, to $3.2 million, or 14.7% of revenue. This decrease resulted primarily from
decreases in sales personnel in conjunction with the strategic refocus in the fourth quarter of
2008 and continued cost containment efforts during 2009, which
included reductions in workforce and our realigned channel focus which contributed to a
decrease in promotional expense, broker and invasion fees. The effects of the workforce reductions,
including the most recent reduction in the third quarter of 2009, are expected to reduce ongoing
promotion and selling expenses in 2009 compared to prior year periods. Also contributing to the
decrease in promotion and selling expenses was a $930,000 decrease in trade promotion and marketing
expenses from $3.9 million to $3.0 million, or 13.6% of revenue, due in part to our cost
containment efforts.
19
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2009 were $5.0
million, a decrease of $2.8 million, or 35.9%, compared to $7.8 million for the nine months ended
September 30, 2008. General and administrative expenses as a percentage of revenue decreased to
23.1% for the nine months ended September 30, 2009 from 26.2% in 2008. The decrease in general and
administrative expenses was primarily due to (1) a decrease of salaries and benefits as a result of
a reduction in headcount, and (2) a decrease in professional fees, including accounting fees. The
effects of the workforce reductions including the most recent reduction in the third quarter of
2009 are expected to reduce ongoing general and administrative expenses for the remainder of 2009
compared to prior year periods.
Other (Expense) Income, Net
Other expense, net decreased to an expense of $65,000 for the nine months ended September 30, 2009, from
other income, net of $301,000 in the same period a year ago, primarily due to a decrease in interest
income due to lower levels of cash and short-term investments.
Income tax Benefit (Expense)
Provision for income taxes for the nine months ended September 30, 2009 and 2008 was a benefit
of $89,000 and an expense of $392,000, respectively. The tax provision relates primarily to the tax
provision on income from our Canadian operations and reflects a credit for the nine months ended
September 30, 2009 due to a tax refund received resulting from our Canadian operations. No tax
benefit is recorded 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 nine months ended September 30, 2009 decreased to $6.1 million from a net
loss of $11.8 million for the nine months ended September 30, 2008. This was primarily due to a decrease in
promotion and selling expense of $3.8 million and general and administrative expense of $2.8
million as a result of decreases in salaries and benefits primarily due to headcount reductions and
cost containment efforts. Offsetting these decreases was a reduction in gross profit of $855,000
as a result of lower sales in our DTR channel driven by the decline in sales of Jones Soda
glass bottles, as well as lower DSD volumes in the majority of U.S. regions we believe as a result
of reduced overall demand resulting from the economic downturn.
Liquidity and Capital Resources
As of September 30, 2009, we had cash and cash-equivalents of approximately $6.1 million and
working capital of $11.3 million. Cash used in operations during the nine months ended September
30, 2009 totaled $6.2 million, of which approximately $823,000 was used during the quarter ended
September 30, 2009. 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. In addition, the cash used in the first half of
2009 included approximately $1.6 million to purchase raw materials under the terms of our amended
Pharma GABA supply agreement, and no GABA purchase requirements remain as of September 30, 2009.
Additionally, for the nine months ended September 30, 2009, net cash provided by investing
activities totaled approximately $438,000 due primarily to the sales of short-term investments
offset by the purchase of certificates of deposit which is for the required restricted reserve account to secure our promissory note. Net cash used by financing activities for the nine months ended September 30, 2009 totaled approximately $113,000 due to the repayment of
capital lease obligations offset by the proceeds from the note
payable resulting from the consolidation of our capital leases into
one promissory note for a lower interest rate. We have incurred a net loss of $6.1 million year to date and our
accumulated deficit increased to $35.5 million as of September 30, 2009.
Our ability to execute on our operating plan and to manage our costs in light of developing
economic conditions and the performance of our business continues to be critical to the success of
our Company. We took into account several factors in developing our operating plan for the next
twelve months and beyond (which we refer to in this section as our operating plan or our plan). We
gave careful consideration to the macroeconomic factors stemming from the global economic downturn
understanding that the current economic conditions are likely to persist as the year progresses.
The beverage industry, and particularly those companies selling premium beverages like us, can be
affected by macroeconomic factors, including changes in national, regional, and local economic
conditions, unemployment levels and consumer spending patterns, which together may impact the
willingness of consumers to purchase our products as they adjust their discretionary spending.
Although we believe we had made conservative assumptions regarding our case sales volumes in our
original operating plan, we have had to further refine our estimated case sales as discussed below.
20
In
addition, our plan factored in a modest launch of our new product, Jones GABA, both in terms
of expected case sales and costs relating to promotion allowances and slotting fees and other
promotional expenses. A portion of our cash used in operating activities during the year was the
result of our launch of Jones GABA in February 2009. These costs, contemplated in our operating
plan, of approximately $1.6 million were used to purchase raw materials under the terms of our
amended Pharma GABA supply agreement, with the final payment made in July 2009 of $149,000. We
believe we purchased sufficient GABA raw materials to supply our needs for the foreseeable future.
Moreover, under our plan, we do not believe we are dependent on sale of Jones GABA to
generate sufficient cash flow from operations.
Our operating plan also takes into account a change in our strategic direction with an
emphasis on our higher-margin core products, including our Jones Pure Cane Soda glass bottle
business, and less emphasis on our CSD business, which is a lower margin business for us. In the
prior year, we incurred significant promotional allowances and slotting fees in building our CSD
business, but our CSD business did not generate sales volumes commensurate with these costs. We
believe using promotional allowances as a way to promote our core products, while judiciously using
slotting fees to gain access on new products, is a more balanced strategy in this economy. As a
result, our plan provides for an overall reduction in our promotional allowances and slotting fees
and the re-allocation of a portion of our promotional allowance and slotting fee costs from our CSD
business to our core glass bottle business and the rollout of our new product, Jones GABA.
With respect to our operating expenses, our original operating plan also takes into account
the cost containment measures we implemented in the fourth quarter of 2008 and early 2009,
including reductions in workforce resulting in a combined 40% headcount reduction. Additionally,
our executive level positions were reduced as a result of the departure of our former Chief
Executive Officer, Stephen Jones, effective May 1, 2009, and our former Executive Vice President of
Sales, Thomas O’Neill, who resigned in April 2009. We believe these cost containment measures, our
decision to proceed with fewer executive level positions, and additional cost containment measures
including an additional reduction in workforce in the third quarter of 2009 resulting in an
additional 30% headcount reduction, further align our cost structure with our revised revenue
expectations. Our operating expenses year to date 2009 are 37% lower, a reduction of $6.6 million,
compared to the same period a year ago, and we expect to achieve similar results for the remainder
of this year in comparison to the prior year periods.
Finally, our operating plan factors in the use of our cash to meet our contractual obligations
for 2009 totaling approximately $8.8 million. A substantial portion of these contractual
obligations (approximately 82% of the total for 2009) consist of obligations to purchase raw
materials, including approximately $5 million in sugar under our supply agreements with our three
pure cane sugar suppliers and approximately $1.8 million in glass under our supply agreement with
our glass supplier. 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 in 2009 and
beyond. Our purchase obligations also included a commitment under our amended Pharma GABA supply
agreement to order approximately $1.8 million of Pharma GABA by December 31, 2008 and, on or before
January 31, 2009, to pay 50% of that amount, with the remaining portion to be paid in six equal
monthly installments commencing on February 24, 2009 and ending July 26, 2009. We have satisfied
this commitment.
Our current operating plan does not depend upon obtaining financing. However, if our sales
volumes further decline in a material way from our expectations, as a result of worsening economic
conditions or otherwise, and we are not able to further reduce our costs by a sufficient amount, we
may be unable to generate enough cash flow from operations to cover our working capital and capital
expenditure requirements. If that happens, we would need to seek to obtain funds through
additional financing or by securing a credit facility, which may not be available to us on
acceptable terms, if at all. In this regard, in November 2008, our $15 million line of credit was
terminated and is no longer available to us. We have explored different borrowing alternatives
with Key Bank, the lender under that facility, and other parties, but to date determined that the
terms of these alternatives were not acceptable. We continue to monitor whether credit facilities
may be available to us on acceptable terms. We may also pursue various other strategies to secure
any necessary additional financing, which may include, without limitation, public or private
offerings of debt or equity securities, joint ventures with one or more strategic partners and
other strategic alternatives, though there can be no assurance that our efforts in this regard will
result in any agreements or transactions.
As we have moved through the historically seasonally-stronger shipping months of April to
September, we have gained insight into developing economic conditions and the severity of the
impact of those conditions on our business. As a result, as of the date of our quarterly report
for the first quarter of 2009, we had refined our operating plan to contemplate lower case sales
through the remainder of 2009 than we had anticipated at the beginning of the year. However, case
sales in the second quarter of 2009, and again in the third quarter of 2009, have been even lower
than our revised expectations. Therefore, as of the date of this report, we have further refined
our operating plan from last quarter to contemplate slightly lower case sales through the remainder
of 2009. With these further adjustments, and the additional cost containment measures including an
additional reduction in workforce implemented during the third quarter, we believe that our revised
12-month operating plan, with its foundation built upon the broader macroeconomic factors, allows
us to meet our anticipated cash needs for the next 12 months and beyond.
21
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. However, despite the further
refinements we have made to our operating plan and the additional cost containment measures we
implemented in the third quarter, we may no longer have sufficient margin in our plan to absorb
further material declines against our expectations with regard to the economy or our business. We
believe our revised operating plan already includes the majority of attainable cost cutting
measures, which places greater emphasis on the need to meet our case sales projections in order to
effectively operate our business. The economic conditions so far in 2009 have made forecasting
demand for our products much more difficult, so there is uncertainty regarding our ability to meet
our revised case sales projections. This uncertainty, together with our inability to implement
further meaningful cost containment measures beyond those we undertook in the third quarter and the
extremely difficult environment in which to obtain additional equity or debt financing, raise
substantial doubt about our ability to continue as a going concern. Our financial statements for
the quarter ended September 30, 2009 were prepared assuming we would continue as a going concern,
which contemplates the realization of assets and the settlement of liabilities and commitments in
the normal course of business. The accompanying consolidated 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 significant 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, 2008
as filed with the Securities and Exchange Commission on March 16, 2009. There have been no
material changes in our critical accounting policies during the nine months ended September 30,
2009.
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| ITEM 4. |
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CONTROLS AND PROCEDURES |
Procedures
(a) Evaluation of disclosure controls and procedures
Management, under the supervision and with the participation of our Chief Executive Officer
and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act))
as of September 30, 2009, the end of the period covered by this report. Based upon that evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of September 30, 2009.
(b) Changes in internal controls
There were no changes in the Company’s internal control over financial reporting during the
three months ended September 30, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
22
PART II — OTHER INFORMATION
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| ITEM 1. |
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LEGAL PROCEEDINGS |
On September 4, 2007, a putative class action complaint was filed against us, our then serving
chief executive officer, and our then serving chief financial officer in the U.S. District Court
for the Western District of Washington, alleging claims under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The case was
entitled Saltzman v. Jones Soda Company, et al., Case No. 07-cv-1366-RSL, and purported to be
brought on behalf of a class of purchasers of our common stock during the period March 9, 2007 to
August 2, 2007. Six substantially similar complaints subsequently were filed in the same court,
some of which alleged claims on behalf of a class of purchasers of our common stock during the
period November 1, 2006 to August 2, 2007. Some of the subsequently filed complaints added as
defendants certain current and former directors and another former officer of the Company. The
complaints generally alleged violations of federal securities laws based on, among other things,
false and misleading statements and omissions about our financial results and business prospects.
The complaints sought unspecified damages, interest, attorneys’ fees, costs, and expenses. On
October 26, 2007, these seven lawsuits were consolidated as a single action entitled In re Jones
Soda Company Securities Litigation, Case No. 07-cv-1366-RSL. On March 5, 2008, the Court appointed
Robert Burrell lead plaintiff in the consolidated securities case. On May 5, 2008, the lead
plaintiff filed a First Amended Consolidated Complaint, which purports to allege claims on behalf
of a class of purchasers of our common stock during the period of January 10, 2007, to May 1, 2008,
against the Company and Peter van Stolk, our former Chief Executive Officer, former Chairman of the
Board, and former director. The First Amended Consolidated Complaint generally alleges violations
of federal securities laws based on, among other things, false and misleading statements and
omissions about our agreements with retailers, allocation of resources, and business prospects.
Defendants filed a motion to dismiss the amended complaint on July 7, 2008. After hearing oral
argument on February 3, 2009, the Court granted the motion to dismiss in its entirety on February
9, 2009. Plaintiffs filed their motion for leave to amend their complaint on March 25, 2009. On
June 22, 2009, the Court issued an order denying plaintiffs’ motion for leave to amend and
dismissed the case with prejudice. On July 7, 2009, the Court entered judgment in favor of the
Company and Mr. van Stolk. On August 5, 2009, plaintiffs filed a notice of appeal of the Court’s
orders dismissing the complaint and denying plaintiffs’ motion for leave to amend, and the
resulting July 7, 2009 judgment. Briefing for the appeal is currently scheduled to be completed in
early 2010.
In addition, on September 5, 2007, a shareholder derivative action was filed in the Superior
Court for King County, Washington, allegedly on behalf of and for the benefit of the Company,
against certain of our former officers and current and former directors. The case is entitled
Cramer v. van Stolk, et al., Case No. 07-2-29187-3 SEA (Cramer Action). The Company also was named
as a nominal defendant. Four other shareholders filed substantially similar derivative cases. Two
of these actions were filed in Superior Court for King County, Washington. One of these two
Superior Court actions has been voluntarily dismissed and the other has been consolidated with the
Cramer Action under the caption In re Jones Soda Co. Derivative Litigation, Lead Case No.
07-2-31254-4 SEA. On April 28, 2008, plaintiffs in the consolidated action filed an amended
complaint based on the same basic allegations of fact as in the federal securities class actions
and alleging, among other things, that certain of our current and former officers and directors
breached their fiduciary duties to the Company and were unjustly enriched in connection with the
public disclosures that are the subject of the federal securities class actions. On May 2, 2008,
the Court signed a stipulation and order staying the proceedings in the consolidated Cramer Action
until all motions to dismiss in the consolidated federal securities class action have been
adjudicated.
The two remaining shareholder derivative actions were filed in the U.S. District Court for the
Western District of Washington. On April 10, 2008, the Court presiding over the federal derivative
cases consolidated them under the caption Sexton v. van Stolk, et al., Case No. 07-1782RSL (Sexton
Action), and appointed Bryan P. Sexton lead plaintiff. The Court also established a case schedule,
which, among other things, set the close of fact discovery as January 4, 2009, and set a trial date
of May 4, 2009. The actions comprising the consolidated Sexton Action are based on the same basic
allegations of fact as in the securities class actions filed in the U.S. District Court for the
Western District of Washington and the Cramer Action, filed in the Superior Court for King County.
The actions comprising the Sexton Action allege, among other things, that certain of our current
and former directors and officers breached their fiduciary duties to the Company and were unjustly
enriched in connection with the public disclosures that are the subject of the federal securities
class actions. The complaints seek unspecified damages, restitution, disgorgement of profits,
equitable and injunctive relief, attorneys’ fees, costs, and expenses. On June 3, 2008, the parties
filed a joint motion to stay the Sexton Action until all motions to dismiss in the federal
securities class action have been adjudicated. On June 5, 2008, the Court granted the motion and
stayed the Sexton action.
The Cramer Action and Sexton Action are derivative in nature and do not seek monetary damages
from the Company. However, the Company may be required, throughout the pendency of the action, to
advance payment of legal fees and costs incurred by the defendants and the litigation may result in
significant obligations for payment of defense costs and indemnification.
We are unable to predict the outcome of the actions described above.
In addition to the matters above, we are or may be involved from time to time in various
claims and legal actions arising in the ordinary course of business, including proceedings
involving product liability claims and other employee claims, and tort and other
23
general liability claims, for which we carry insurance, as well as trademark, copyright, and
related claims and legal actions. In the opinion of our management, the ultimate disposition of
these matters will not have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
In addition to the information set forth in this report, you should carefully consider the
factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year
ended December 31, 2008 as filed with the Securities and Exchange Commission on March 16, 2009 (the
“2008 10-K”), which could materially affect our business, financial condition or future results.
The risks described in our 2008 10-K are not the only risks facing our Company. Additional risks
and uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating results. Except for
the risk factor set forth below, which updates the first risk factor in Part I, Item IA of our 2008
10-K, there have been no material changes that we are aware of from the risk factors set forth in
our 2008 10-K.
If we are not able to successfully execute on our revised operating plan, and without the
ability to further implement meaningful cost containment measures beyond those we undertook in the
third quarter of 2009, our financial condition and results of operation could be materially
adversely affected, and we may not be able to continue as a going concern.
We have incurred net losses of $6.1 million and $11.8 million for the nine months ended
September 30, 2009 and 2008, respectively, and have used a significant amount of our cash resources
during these periods to fund our net losses, working capital and capital expenditure requirements.
As of September 30, 2009, we had cash, cash-equivalents and short term investments of approximately
$6.1 million, compared to approximately $12.6 million as of December 31, 2008. Additionally, we had
accumulated deficits of $35.5 million and $29.4 million as of September 30, 2009 and December 31,
2008, respectively. Cash used in operations for the nine months ended September 30, 2009 and 2008
was $6.2 million and $11.5 million, respectively.
As we have moved through the historically seasonally-stronger shipping months of April to
September, we have gained insight into developing economic conditions and the severity of the
impact of those conditions on our business. As a result, as of the date of our quarterly report
for the first quarter of 2009, we had refined our operating plan to contemplate lower case sales
through the remainder of 2009 than we had anticipated at the beginning of the year. However, case
sales in the second quarter of 2009, and again in the third quarter of 2009, have been even lower
than our revised expectations. Therefore, as of the date of this report, we have further refined
our operating plan from last quarter to contemplate slightly lower planned case sales through the remainder
of 2009. With these further adjustments, and the additional cost containment measures implemented
in 2009 including an additional reduction in workforce during the third quarter, we believe that
our revised 12-month operating plan, with its foundation built upon the broader macroeconomic
factors, allows us to meet our anticipated cash needs for the next 12 months and beyond. However,
there can be no assurance that we will be able to successfully execute on our revised operating
plan or to respond to further developments in our business, our markets and the broader economy.
Additionally, despite the further refinements we have made to our operating plan and the additional
cost containment measures we implemented in the third quarter, we may no longer have sufficient
margin in our plan to absorb further material declines against our expectations with regard to the
economy or our business. We believe our revised operating plan already includes the majority of
attainable cost cutting measures, which places greater emphasis on the need to meet our case sales
projections in order to effectively operate our business. The economic conditions so far in 2009
have made forecasting demand for our products much more difficult, so there is uncertainty
regarding our ability to meet our revised case sales projections. This uncertainty, together with
our inability to implement further meaningful cost containment measures beyond those we undertook
in the third quarter and the extremely difficult environment in which to obtain additional equity
or debt financing, raise substantial doubt about our ability to continue as a going concern.
The valuation of our GABA raw materials inventory is dependent on our ability to increase
points of distribution for our existing Jones GABA product and our ability to successfully innovate
new GABA products and product extensions. If we are unable to successfully implement this
strategy, we may be required to adjust the value of our GABA raw materials inventory, which could
adversely affect our results of operations and financial condition.
We have allocated significant resources in our efforts to launch Jones GABA in 2009, our first
entry into beverage products containing GABA and part of a new emerging category of functional
beverage, including the purchase of sufficient inventory of the GABA raw material ingredient for
the foreseeable future. Under our Pharma GABA supply agreement, we were required to purchase a
significant quantity of the GABA ingredient. As of September 30, 2009, we had $1.9 million of
GABA raw materials, $1.6 million of which was recorded to other assets on our balance sheet and
represented the amount of inventory in excess of our forecasted inventory demands for the next 12
months. Our ability to use our GABA raw material inventory in line with our expectations will
depend on the success of the Jones GABA product and on our ability to develop and sell other
products that include the GABA ingredient. If we are unsuccessful in our efforts to promote Jones
GABA and innovate and distribute other products using our GABA inventory, we may not achieve the
sell-through of our GABA inventory that we anticipate or we may be forced to lower the price
24
points of our GABA products. In these cases, we may have to adjust the value of our GABA raw
materials inventory to reflect a decline in the lower of cost or market value of this inventory.
Any such adjustment could have a material adverse impact on our financial condition and on our
results of operations in the quarter and year in which the adjustment is recorded.
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| ITEM 2. |
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table contains information for shares repurchased during the third quarter of
2009.
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Total Number of |
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Approximate Dollar |
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Shares Purchased |
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Value of Shares That |
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as Part of Publicly |
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May Yet Be Purchased |
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Total Number of |
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Average Price |
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Announced Plans or |
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Under the Plans or |
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| Fiscal Period |
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Shares Purchased(1) |
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Paid per Share(1) |
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Programs |
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Programs (in $ ‘000) |
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July 1 to July 31, 2009 |
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— |
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— |
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— |
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— |
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August 1 to August 31, 2009 |
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1,459 |
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$ |
2.87 |
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— |
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— |
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September 1 to September 30, 2009 |
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1,218 |
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$ |
2.77 |
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— |
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— |
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Total |
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2,677 |
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$ |
2.82 |
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— |
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— |
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| (1) |
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The number of shares reported above as purchased are attributable to
shares withheld by the Company as payment for withholding taxes due in
connection with the vesting of restricted stock awards issued under
the Jones Soda Co. 2002 Stock Option and Restricted Stock Plan. The
average price paid per share reflects the average market value per
share of the shares withheld for tax purposes. |
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++10.1 |
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Seattle Seahawks Amended Sponsorship Agreement, dated July 15, 2009. (Filed
herewith.) |
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31.1 |
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Section 302 Certification of CEO — Jonathan J. Ricci, Chief Executive Officer (Filed herewith.) |
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31.2 |
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Section 302 Certification of CFO — Michael R. O’Brien, Chief Financial Officer (Filed herewith.) |
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32.1 |
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Section 906 Certification of CEO — Jonathan J. Ricci, Chief Executive Officer of Jones Soda
Co., pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Filed herewith.) |
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32.2 |
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Section 906 Certification of CFO — Michael R. O’Brien, Chief Financial Officer of Jones Soda
Co., pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Filed herewith.) |
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| ++ |
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Portions of the marked exhibit have been omitted and filed separately with the SEC pursuant to a request for
confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 9, 2009
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JONES SODA CO.
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By: |
/s/ JONATHAN J. RICCI
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Jonathan J. Ricci |
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President and Chief Executive Officer |
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By: |
/s/ MICHAEL R. O’BRIEN
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Michael R. O’Brien |
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Chief Financial Officer |
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26