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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2011
 OR
 o
    
    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)
 
 Washington
    
    52-2336602(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 234 Ninth Avenue NorthSeattle, Washington
    
    98109(Address of principal executive offices)
    
    (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)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



JONES SODA CO.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
TABLE OF CONTENTS
 PageExplanatory Note
    
    
    3Cautionary Notice Regarding Forward Looking Statements
    
    
    3PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)a) Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
    
    
    5b) Condensed Consolidated Statements of Operations  three months ended March 31, 2011 and 2010
    
    
    6c) Condensed Consolidated Statements of Cash Flows  three months ended March 31, 2011 and 2010
    
    
    7d) Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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EXPLANATORY NOTE
 ®
 Jones Soda Jones Soda Co
 
 CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
    
    
    Our ability to successfully execute on our 2011 operating plan;
    
    Our ability to establish and maintain distribution arrangements with independent
distributors, retailers, brokers and national retail accounts, most of whom sell and
distribute competing products, and whom we rely upon to employ sufficient efforts in
managing and selling our products, including re-stocking the retail shelves with our
product, on which our business plan and future growth are dependent in part;
    
    Our ability to successfully launch new products or our failure to
achieve case sales goals with respect to existing products;
    
    Our ability to secure additional financing or to generate sufficient cash flow from
operations;
    
    Our ability to use the net proceeds from future financings to improve our financial
condition or market value;
    
    Dilutive and other adverse effects on our existing shareholders and our stock price
arising from future securities issuances;
    
    Our ability to manage our inventory levels and to predict the timing and amount of our
sales;
    
    Our ability to modify our key sponsorship arrangement in a timely manner to reduce our
obligations or make any other changes or to realize the benefits expected from this
sponsorship agreement, to which we have dedicated significant resources;
    
    Our reliance on third-party contract manufacturers of our products, which could make
management of our marketing and distribution efforts inefficient or unprofitable;
    
    Our ability to secure a continuous supply and availability of raw materials, as well
as other factors affecting our supply chain;
 3




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
    
    Rising raw material, fuel and freight costs as well as freight capacity issues may
have an adverse impact on our results of operations;
    
    Our ability to source our flavors on acceptable terms from our key flavor suppliers;
    
    Our ability to maintain brand image and product quality and the risk that we may
suffer other product issues such as product recalls;
    
    Our ability to attract and retain key personnel, which would directly affect our
efficiency and results of operations;
    
    Our inability to protect our trademarks and trade secrets, which may prevent us from
successfully marketing our products and competing effectively;
    
    Litigation or legal proceedings, which could expose us to significant liabilities and
damage our reputation;
    
    Our ability to maintain effective disclosure controls and procedures and internal
control over financial reporting;
    
    Our ability to build and sustain proper information technology infrastructure;
    
    Our inability to maintain compliance with the continued listing requirements of The
Nasdaq Capital Market which may
adversely affect our market price and liquidity;
    
    Our ability to create and maintain brand name recognition and acceptance of our
products, which are critical to our success in our competitive, brand-conscious industry;
    
    Our ability to compete successfully against much larger, well-funded, established
companies currently operating in the beverage industry;
    
    Our ability to continue developing new products to satisfy our consumers changing
preferences;
    
    Global economic conditions that may adversely impact our business and results of
operations;
    
    Our ability to comply with the many regulations to which our business is subject.
  4




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 JONES SODA CO.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands, except share data)
 March 31, 2011
    
    
    December 31, 2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,584
    
    
    $
    5,448Accounts receivable, net of allowance of $238 and $166
    
    
    2,425
    
    
    
    2,220Taxes receivable
    
    
    5
    
    
    
    480Inventory
    
    
    2,538
    
    
    
    2,279Prepaid expenses and other current assets
    
    
    483
    
    
    
    305Total current assets
    
    
    11,035
    
    
    
    10,732Fixed assets, net of accumulated depreciation of $3,020 and $2,973
    
    
    411
    
    
    
    296Other assets
    
    
    423
    
    
    
    435Total assets
    
    $
    11,869
    
    
    $
    11,463LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    757
    
    
    $
    853Accrued expenses
    
    
    1,386
    
    
    
    1,592Taxes payable
    
    
    18
    
    
    
    146Capital lease obligations, current portion
    
    
    21
    
    
    
    Total current liabilities
    
    
    2,182
    
    
    
    2,591Capital lease obligations
    
    
    100
    
    
    
    Long-term liabilities  other
    
    
    2
    
    
    
    2Commitments and contingencies (Note 6)Shareholders equity:Common stock, no par value:Authorized  100,000,000; issued and outstanding shares 
31,990,297 and 30,418,301 at March 31, 2011 and December 31,
2010, respectively
    
    
    50,088
    
    
    
    47,917Additional paid-in capital
    
    
    6,745
    
    
    
    6,570Accumulated other comprehensive income
    
    
    489
    
    
    
    450Accumulated deficit
    
    
    (47,737
    )
    
    
    (46,067
    )Total shareholders equity
    
    
    9,585
    
    
    
    8,870Total liabilities and shareholders equity
    
    $
    11,869
    
    
    $
    11,463
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JONES SODA CO.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In thousands, except share data)
 Three Months Ended March 31,2011
    
    
    2010Revenue
    
    $
    4,087
    
    
    $
    3,893Cost of goods sold
    
    
    3,087
    
    
    
    3,085Gross profit
    
    
    1,000
    
    
    
    808Licensing revenue
    
    
    5
    
    
    
    10Operating expenses:Promotion and selling
    
    
    1,280
    
    
    
    1,224General and administrative
    
    
    1,480
    
    
    
    1,6842,760
    
    
    
    2,908Loss from operations
    
    
    (1,755
    )
    
    
    (2,090
    )Other income (expense), net
    
    
    72
    
    
    
    (4
    )Loss before income taxes
    
    
    (1,683
    )
    
    
    (2,094
    )Income tax benefit (expense), net
    
    
    13
    
    
    
    (38
    )Net loss
    
    $
    (1,670
    )
    
    $
    (2,132
    )Net loss per shareBasic and diluted
    
    $
    (0.05
    )
    
    $
    (0.08
    )Weighted average basic and diluted common shares outstanding
    
    
    31,453,016
    
    
    
    26,427,972
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JONES SODA CO.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In thousands)
 Three months Ended March 31,2011
    
    
    2010OPERATING ACTIVITIES:Net loss
    
    $
    (1,670
    )
    
    $
    (2,132
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    46
    
    
    
    119Stock-based compensation
    
    
    175
    
    
    
    167Deferred income taxes
    
    
    
    
    
    
    2Change in allowance for doubtful accounts
    
    
    72
    
    
    
    (3
    )Other non-cash charges and credits
    
    
    
    
    
    
    7Changes in operating assets and liabilities:Accounts receivable
    
    
    (260
    )
    
    
    (246
    )Taxes receivable
    
    
    479
    
    
    
    5Inventory
    
    
    (249
    )
    
    
    (91
    )Prepaid expenses and other current assets
    
    
    (206
    )
    
    
    34Other assets
    
    
    11
    
    
    
    11Accounts payable
    
    
    (110
    )
    
    
    (72
    )Accrued expenses
    
    
    (213
    )
    
    
    (356
    )Taxes payable
    
    
    (130
    )
    
    
    31Net cash used in operating activities
    
    
    (2,055
    )
    
    
    (2,524
    )INVESTING ACTIVITIES:Purchase of fixed assets
    
    
    (149
    )
    
    
    (10
    )Net cash
used in investing activities
    
    
    (149
    )
    
    
    (10
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock, net
    
    
    2,185
    
    
    
    Proceeds from capital lease obligation
    
    
    122
    
    
    
    Proceeds from exercise of stock options
    
    
    16
    
    
    
    1Payments on capital lease obligations
    
    
    (1
    )
    
    
    Repayment of note payable
    
    
    
    
    
    
    (32
    )Net cash provided by (used in) financing activities
    
    
    2,322
    
    
    
    (31
    )Net increase (decrease) in cash and cash equivalents
    
    
    118
    
    
    
    (2,565
    )Effect of exchange rate changes on cash
    
    
    18
    
    
    
    21Cash and cash equivalents, beginning of period
    
    
    5,448
    
    
    
    4,975Cash and cash equivalents, end of period
    
    $
    5,584
    
    
    $
    2,431Supplemental disclosure:Cash (received) paid during period for:Interest
    
    $
    (52
    )
    
    $
    3Income taxes
    
    
    (372
    )
    
    
    13
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JONES SODA CO.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Nature of Operations and Summary of Significant Accounting Policies
  
    
    Jones Soda®, a premium carbonated soft drink:
 
    
    Jones Zilch,with zero calories (and an extension of the Jones Soda®
product line);
 
    
    WhoopAss Energy Drink®, an energy supplement drink; and
 
    
    WhoopAss Zero Energy Drink®, with zero sugar (and an extension of the
WhoopAss Energy Drink® product line).
  Basis of presentation and consolidation
   Use of estimates
  Seasonality
  8




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Liquidity
  Jones Soda WhoopAss Energy Drink
    9




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##### Table of Contents



2. Equity Financing
  3. Inventory
  March 31, 2011
    
    
    December 31, 2010Finished goods
    
    $
    1,810
    
    
    $
    1,695Raw materials
    
    
    728
    
    
    
    584$
    2,538
    
    
    $
    2,279
  4. Capital Lease
  5. Stock-Based Compensation
  10




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(a) Stock options:




Outstanding OptionsWeighted AverageNumber of
    
    
    ExerciseShares
    
    
    PriceBalance at January 1, 2011
    
    
    1,789,784
    
    
    $
    1.96Options granted
    
    
    290,000
    
    
    
    1.42Options exercised
    
    
    (22,431
    )
    
    
    0.66Options cancelled/expired
    
    
    (104,425
    )
    
    
    1.16Balance at March 31, 2011
    
    
    1,952,928
    
    
    $
    1.71Exercisable, March 31, 2011
    
    
    938,162
    
    
    $
    2.39Vested and expected to vest
    
    
    1,821,963
    
    
    $
    1.75


(b) Restricted stock awards:




Weighted AverageNumber of
    
    
    Grant DateShares
    
    

Fair
ValueNon-vested restricted stock at January 1, 2011
    
    
    158,581
    
    
    $
    1.52Granted
    
    
    
    
    
    
    Vested
    
    
    (106,692
    )
    
    
    1.51Cancelled/expired
    
    
    (47,781
    )
    
    
    1.44Non-vested restricted stock at March 31, 2011
    
    
    4,108
    
    
    $
    2.87
  (c) Stock-based compensation expense:
    Three months ended March 31,2011
    
    
    2010Type of awards:Stock options
    
    $
    85
    
    
    $
    135Restricted stock
    
    
    90
    
    
    
    32$
    175
    
    
    $
    167
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Three months ended March 31,2011
    
    
    2010Income statement account:Promotion and selling
    
    $
    58
    
    
    $
    33General and administrative
    
    
    117
    
    
    
    134$
    175
    
    
    $
    167
  Three months endedMarch 31, 2011Expected dividend yield
    
    
    Expected stock price volatility
    
    
    98.7
    %Risk-free interest rate
    
    
    2.6
    %Expected term (in years)
    
    
    6.0 yearsWeighted-average grant date fair-value
    
    $
    1.12
  6. Commitments and contingencies
 Legal proceedings
 Saltzman v. Jones Soda Company, et al. In re Jones
Soda Company Securities Litigation
  12




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Cramer v. van Stolk, et al.
     7. Comprehensive Loss
   Three months ended March 31,2011
    
    
    2010Net loss
    
    $
    (1,670
    )
    
    $
    (2,132
    )Currency translations
    
    
    39
    
    
    
    33Comprehensive loss
    
    $
    (1,631
    )
    
    $
    (2,099
    )
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##### Table of Contents



8. Segment Information
  Three months ended March 31,2011
    
    
    2010United States
    
    $
    3,164
    
    
    $
    2,700Canada
    
    
    879
    
    
    
    1,013Other countries
    
    
    44
    
    
    
    180Total revenue
    
    $
    4,087
    
    
    $
    3,893
  
 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 2010 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 21, 2011.
 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
  
    
    Jones Soda®, a premium carbonated soft drink;
 
    
    Jones Zilch,with zero calories (and an extension of the Jones
Soda® product line);
 
    
    WhoopAss Energy Drink®,an energy supplement drink; and
 
    
    WhoopAss Zero Energy Drink®, with zero sugar (and an extension of
the WhoopAss Energy Drink® product line).
  14




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Jones
Soda
  Jones Soda
  
    
    expanding points of distribution of Jones Sodathroughout the entire U.S. in the grocery,
mass and club channels;
    
    growing our convenience and gas (C&G) distribution behind WhoopAss Energy Drink;
    
    expanding our stock-keeping unit (SKU) offerings and space in the grocery stores where we
are already present;
    
    developing innovative beverage brands that will allow us to capture share in the growing
natural carbonated drink segment; and
    
    initiating relationships in additional international regions that index high on
carbonated soft drink consumption.
 Jones Soda WhoopAss Energy Drink
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Results of Operations
  Three Months Ended March 31,2011
    
    
    % of Revenue
    
    
    2010
    
    
    % of Revenue(Dollars in thousands, except share data)Consolidated statements of operation data:Revenue
    
    $
    4,087
    
    
    
    100.0
    
    
    $
    3,893
    
    
    
    100.0Cost of goods sold
    
    
    (3,087
    )
    
    
    (75.5
    )
    
    
    (3,085
    )
    
    
    (79.2
    )Gross profit
    
    
    1,000
    
    
    
    24.5
    
    
    
    808
    
    
    
    20.8Licensing revenue
    
    
    5
    
    
    
    0.1
    
    
    
    10
    
    
    
    0.3Promotion and selling expenses
    
    
    (1,280
    )
    
    
    (31.3
    )
    
    
    (1,224
    )
    
    
    (31.4
    )General and administrative expenses
    
    
    (1,480
    )
    
    
    (36.2
    )
    
    
    (1,684
    )
    
    
    (43.3
    )Loss from operations
    
    
    (1,755
    )
    
    
    (42.9
    )
    
    
    (2,090
    )
    
    
    (53.6
    )Other income (expense), net
    
    
    72
    
    
    
    1.7
    
    
    
    (4
    )
    
    
    (0.1
    )Loss before income taxes
    
    
    (1,683
    )
    
    
    (41.2
    )
    
    
    (2,094
    )
    
    
    (53.7
    )Income tax benefit (expense), net
    
    
    13
    
    
    
    0.3
    
    
    
    (38
    )
    
    
    (1.0
    )Net loss
    
    $
    (1,670
    )
    
    
    (40.9
    )
    
    $
    (2,132
    )
    
    
    (54.7
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    
    
    
    
    $
    (0.08
    )
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##### Table of Contents



As ofMarch 31, 2011
    
    
    December 31, 2010(Dollars in thousands)Balance sheet data:Cash and cash equivalents and accounts receivable, net
    
    $
    8,009
    
    
    $
    7,668Fixed assets, net
    
    
    411
    
    
    
    296Total assets
    
    
    11,869
    
    
    
    11,463Long-term liabilities
    
    
    102
    
    
    
    2Working capital
    
    
    8,853
    
    
    
    8,141Three Months Ended March 31,2011
    
    
    2010Case sale data (288-ounce equivalent):Finished products cases
    
    
    302,000
    
    
    
    310,700Concentrate cases
    
    
    
    
    
    
    26,800Total cases
    
    
    302,000
    
    
    
    337,500
 Quarter Ended March 31, 2011 Compared to Quarter Ended March 31, 2010
 Revenue
 Jones Soda WhoopAss
Energy Drink, Jones Soda WhoopAss Energy Drink Jones 24C ® Jones
Naturals ® Jones Organics tm Jones Soda WhoopAss Energy Drink
  Gross Profit
  17




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##### Table of Contents



Promotion and Selling Expenses
 Jones Soda WhoopAss Energy
Drink
 General and Administrative Expenses
  Income Tax Benefit (Expense), Net
  Net Loss
  Liquidity and Capital Resources
 Liquidity
  18




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Jones Soda WhoopAss Energy Drink
    Contractual Obligations
  19




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Off-Balance Sheet Arrangements
  Seasonality
  Critical Accounting Policies
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
 Procedures
 (a) Evaluation of disclosure controls and procedures
  (b) Changes in internal controls
  
 PART II OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  20




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ITEM 1A.
    
    RISK FACTORS
  21




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ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number of
    
    
    Approximate DollarShares Purchased
    
    
    Value of Shares Thatas Part of Publicly
    
    
    May Yet Be PurchasedTotal Number of
    
    
    Average Price
    
    
    Announced Plans or
    
    
    Under the Plans orFiscal Period
    
    Shares Purchased(1)
    
    
    Paid per Share(1)
    
    
    Programs
    
    
    Programs (in $ 000)January 1 to January 31, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 1 to February 28, 2011
    
    
    46,779
    
    
    $
    1.32
    
    
    
    
    
    
    
    March 1 to March 31, 2011
    
    
    573
    
    
    $
    1.22
    
    
    
    
    
    
    
    Total
    
    
    47,352
    
    
    $
    1.32
    
    
    
    
    
    
    
    
 
 (1)
    
    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. 
 ITEM 5. OTHER INFORMATION
 Summary of 2011 Executive Bonus Plan
   Performance Measure
    
    Weighting
 for Meissner
    
    
    Weighting
 for OBrienCorporate Performance
Component:   Revenue
Growth
    
    
    25
    %
    
    
    12.5
    %   Gross Profit
Growth
    
    
    25
    %
    
    
    12.5
    %   Combined
Case Sales of New
Products
    
    
    25
    %
    
    
    12.5
    %Key Performance Criteria
    
    
    N/A
    
    
    
    37.5
    %Discretionary
    
    
    25
    %
    
    
    25
    %
      
 ITEM 6.
    
    EXHIBITS
 10.1*
    
    Jones Soda Co. 2011 Executive Bonus
Plan (Filed herewith.)31.1
    
    Section 302 Certification of CEO  William R. Meissner, Chief Executive Officer (Filed herewith.)31.2
    
    Section 302 Certification of CFO  Michael R. OBrien, Chief Financial Officer (Filed herewith.)32.1
    
    Section 906 Certification of CEO  William R. Meissner, 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.)32.2
    
    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.)
 
 *
    
    Management contract or compensatory plan or arrangement. 22




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SIGNATURES
   JONES SODA CO.By:
    /s/ WILLIAM R. MEISSNERWilliam R. MeissnerPresident and Chief Executive OfficerBy:
    /s/ MICHAEL R. OBRIENMichael R. OBrienChief Financial Officer 23