NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Operations and Summary of Significant Accounting Policies
Jones Soda Co. develops, produces, markets and distributes premium beverages which
it
sell
s
and distribute
s
primarily in
United States and Canada
through
its
network of independent distributors and directly to
its
national and regional retail accounts.
We are a Washington corporation and have
two
operating subsidiaries, Jones Soda Co. (USA) Inc. and Jones Soda (Canada) Inc. (“Subsidiaries”).
Basis of presentation and consolidation
The accompanying condensed consolidated balance sheet as of December 31, 2015, which has been derived from our audited consolidated financial statements, and unaudited interim condensed consolidated financial statements as of
June 30, 2016
, has 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 our accounts and accounts of our wholly owned subsidiaries. All intercompany transactions between us and our subsidiaries have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments, consisting only of those of a normal recurring nature, considered necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
.
Liquidity
As of
June 30, 2016
, we had cash and cash-equivalents of approximately $
584
,000 and working capital of
$
1.9
million. Cash used in operations during the
six months ended
June 30, 2016
totaled $
462
,000 compared to
$984,000
for the same period a year ago. The decrease in cash used in operations compared to the same period a year ago is primarily due to an increase in sales volume. We reported
a
net
loss
of $
65
,000
for
the three months ended
June 30, 2016
.
As of the date of this Report, we believe that our current cash and cash equivalents, combined with our Loan Facility and anticipated cash from operations, will be sufficient to meet our anticipated cash needs through
June 30, 2017
.
We have a revolving secured credit facility (the “Loan Facility”) with
CapitalSource
Business Finance
Group
. The Loan Facility allows us to borrow a maximum aggregate amount of up to
$
3.
2
million based on eligible accounts receivable and inventory
. As
of June 30, 2016, our accounts receivable and inventory eligible borrowing base was approximately $
1.9
million, of which we had drawn
down $
1.2 million
.
See
Note 3
for further information.
We may require additional financing to support our working capital needs in the future. The amount of additional capital we may require, the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including our strategic initiatives and operating plans, the performance of our business and the market conditions for debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our case sales goals and otherwise successfully execute our operating plan. We believe it is imperative to meet these sales objectives in order to lessen our reliance on external financing in the future. We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. Although we believe various debt and equity financing alternatives will be available to us to support our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. Additionally, these alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic transactions that we consider to be in the best interest of the Company and our shareholders, which may include, without limitation, public or private offerings of debt or equity securities, a rights offering, and other strategic alternatives; however, these options may not ultimately be available or feasible.
The uncertainties relating to our ability to successfully execute on our business plan and finance our operations continue to raise substantial doubt about our ability to continue as a going concern. Our financial statements for the periods presented were prepared assuming we would continue as a going concern, which contemplates that we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that could result should we be unable to continue as a going concern.
Seasonality and other fluctuations
Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. We historically have generated a greater percentage of our revenues during the warm weather months of April through September.
Sales may
fluctuate
materially on a quarter to quarter basis or an annual basis when
we launch a new product or fill
the “pipeline” of a new distribution partner or a large retail partner such as 7-Eleven. Sales results may also fluctuate based on the number of SKUs selected or removed by
our
distributors and retail partners through the normal course of serving consumers in the dynamic, trend-oriented beverage industry.
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.
Use of estimates
The preparation of the condensed consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include, but are not limited to, inventory valuation, depreciable lives and valuation of capital assets, valuation allowances for receivables, trade promotion liabilities, stock-based compensation expense, valuation allowance for deferred income tax assets, contingencies, and forecasts supporting the going concern assumption and related disclosures. Actual results could differ from those estimates.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standard Update (‘‘ASU’’) 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU is effective for public entities for annual periods beginning after December 15, 2017. In June 2015, the FASB deferred for one year the effective date of the new revenue standard, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the original effective date is not permitted. We are evaluating the impact this standard may have on our revenue recognition, but do not expect that the adoption will have a material impact on our consolidated financial statements.
I
n July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
(Topic 330)
,
to amend Topic 330, Inventory. Topic 330 currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015-11 requires that inventory measured using either the first-in, first-out (FIFO) or average cost method be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Adoption of ASU 2015-11 is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years. We do not expect adoption of ASU 2015-11 to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
The ASU is intended to provide more transparent and economically neutral information about the assets and liabilities that arise from leases than previous guidance. The ASU is effective for public entities for annual periods beginning on or after December 15, 2018. Early adoption is permitted, and adoption must be applied on a modified retrospective basis. We are evaluating the impact of this standard but do not expect that the adoption will have a material impact on our consolidated financial statements.
I
n March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
which amends ASC 718
, Compensation — Stock Compensation
. The ASU includes provisions intended to simplify various provisions related to how share-based payments are accounted for and presented in the financial statements. The ASU is effective for public entities for annual periods beginning on or after December 15, 2016 and interim periods within that reporting period. Early adoption is permitted in any interim or annual period. We are evaluating the impact of this standard but do not expect that the adoption will have a material impact on our financial statements.
2.
Inventory
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Finished goods
|
|
$
|
1,519
|
|
$
|
1,842
|
Raw materials
|
|
|
995
|
|
|
727
|
|
|
$
|
2,514
|
|
$
|
2,569
|
Finished goods primarily include product ready for shipment, as well as promotional merchandise held for sale. Raw materials primarily include ingredients, concentrate and packaging.
3.
Line of Credit
We have
a revolving secured Loan Facility with
CapitalSource Business Finance Group (“CapitalSource”)
, pursuant to which we, through our Subsidiaries, may borrow a maximum aggregate amount of up to
$3.2
million, subject to satisfaction of certain conditions.
We originally entered into this Loan Facility on December 27, 2013, and amended and renewed it for an additional year as of December
18
, 201
5 and January 7, 2016
.
Under this
Loan Facility, we may periodically request advances equal to the lesser of: (a) $3.2 million, or (b) the Borrowing Base which is, in the following priority, the sum of: (i) 85% of eligible U.S. accounts receivable, plus (ii) 35% of finished goods inventory not to exceed $475,000, plus (iii) 50% of eligible Canadian accounts receivable not to exceed $300,000, subject to any reserve amount established by CapitalSource
. As of
June 30, 2016
, our
accounts receivable and inventory
eligible borrowing base was approximately
$1.9
million, of which we had drawn down $
1
.2 million
. Advances under the Loan Facility
as amended in January 2016,
bear interes
t at the prime rate plus
1%
,
and a loan fee of
0.15%
on the daily loan balance is payable to CapitalSource on a monthly basis
with a minimum annual interest requirement of
$30,000
.
The Loan Facility has a term of one year which automatically extends for successive one year terms unless either party gives at least 30 days' prior written notice of its intent to terminate the Loan Facility at the end of the then current term. The Company pays an annual fee of 0.75% of the total commitment.
CapitalSource has the right to terminate the Loan Facility at any time upon 120 days’ prior written notice.
All present and future obligations of the Subsidiaries arising under the Loan Facility are guaranteed by us and are secured by a first priority security interest in all of our assets. The Loan Facility contains customary representations and warranties as well as affirmative and negative covenants. As of
June 30, 2016
,
we were in compliance with all covenants under the Loan Facility
.
The draws on the Loan Facility were used to fulfill working capital needs. We will continue to utilize the Loan Facility, as needed, for working capital needs in the future.
4.
Warrants
I
n February 2012
as part of our registered offering,
we sold
and issued
w
arrants
for the
purchase
of
up to
3,207,500
shares of common stock.
Each
w
arrant has an exercise price of
$
0.70
per share, for total potential proceeds to us of up to
$
2,245,250
if all of the
w
arrants are exercised in full for cash. The
w
arrants are exercisable for cash or, solely in the absence of an effective registration statement, by cashless exercise. The exercise price of the
w
arrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions, and also upon any distributions to Company shareholders, business combinations, sale of substantially all assets and other fundamental transactions. The exercise of the
w
arrants is subject to certain beneficial ownership
limitations
and other
restrictions
set forth in the
w
arrant
document
s. The term of the
w
arrants expire
s
on
August
6, 2017
.
Any remaining
w
arrants that are outstanding on
August 6, 2017
, the expiration date, will automatically be exercised at that time by cashless exercise
(to the extent that the volume weighted average trading price of our common stock as of such date exceeds the warrant exercise price).
As of
June 30, 2016
,
3,057,500
of the
w
arrants remain outstanding
.
No
w
arrants were exercised during the
six months ended
June 30, 2016
.
5.
Shareholders’ Equity
Under the terms of our 2011 Incentive Plan (the “Plan”), the number of shares authorized under the Plan may be increased each January 1st by an amount equal to the least of (a)
1,300,000
shares, (b)
4.0
%
of our outstanding common stock as of the end of our immediately preceding fiscal year, and (c) a lesser amount determined by the Board of Directors (the “Board”), provided that the number of shares that may be granted pursuant to awards in a single year may not exceed
10
%
of our outstanding shares of common stock on a fully diluted basis as of the end of the immediately preceding fiscal year. Effective January 1,
2016
, the total number of shares of common stock authorized under the Plan
increased to
9
,
4
84,032
shares
.
Under the terms of the Plan, the Board may grant awards to employees, officers, directors, consultants, agents, advisors and independent contractors. Awards may consist of stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards or other stock or cash-based awards. Stock options are granted at the closing price of our stock on the date of grant, and generally have a
ten
-year
term and vest over a period of
48
months
with the first
25.0
%
cliff vesting
one
year
from the grant date and monthly thereafter. As of
June 30, 2016
, there were
3,723,538
shares of unissued common stock authorized and available for future awards under the Plan.
A summary of our stock option activity is as follows:
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
Balance at January 1, 2016
|
|
3,117,820
|
|
$
|
0.58
|
Options granted
|
|
540,000
|
|
|
0.50
|
Options exercised
|
|
(2,500)
|
|
|
0.34
|
Options cancelled/expired
|
|
(117,500)
|
|
|
0.36
|
Balance at June 30, 2016
|
|
3,537,820
|
|
$
|
0.54
|
Exercisable, June 30, 2016
|
|
2,371,883
|
|
$
|
0.58
|
Vested and expected to vest
|
|
3,196,282
|
|
$
|
0.55
|
(b)
Stock-based compensation expense:
Stock-based compensation expense is recognized using the straight-line attribution method over the employees’ requisite service period. We recognize compensation expense for only the portion of stock options or restricted stock expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to stock-based compensation expense may be required in future periods.
At
June 30, 2016
, we had unrecognized compensation expense related to stock options of
$
214,000
to be recognized over a weighted-average period of
2.8
years.
The following table summarizes the stock-based compensation expense attributable to stock options (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Income statement account:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
$
|
14
|
|
$
|
11
|
|
$
|
25
|
|
$
|
24
|
General and administrative
|
|
|
34
|
|
|
79
|
|
|
52
|
|
|
106
|
|
|
$
|
48
|
|
$
|
90
|
|
$
|
77
|
|
$
|
130
|
We employ the following key weighted-average assumptions in determining the fair value of stock options, using the Black-Scholes option pricing model and the simplified method to estimate the expected term of “plain vanilla” options:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
2016
|
|
2015
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected stock price volatility
|
|
|
87.2
|
%
|
|
|
88.3
|
%
|
Risk-free interest rate
|
|
|
1.7
|
%
|
|
|
1.6
|
%
|
Expected term (in years)
|
|
|
6.1
|
years
|
|
|
5.4
|
years
|
Weighted-average grant date fair-value
|
|
$
|
0.37
|
|
|
$
|
0.24
|
|
The aggregate intrinsic value of stock options outstanding at
June 30, 2016
and
2015
was
$
691,000
and
$
21,000
and for options exercisable was
$
458,000
and
$
16,000
, respectively.
The intrinsic value of outstanding and exercisable stock options is calculated as the quoted market price of the stock at the balance sheet date less the exercise price of the option.
There were
2,500
and
342,500
options exercised during the six months ended June 30, 2016 and 2015, respectively. The aggregate intrinsic value of the options exercised during the six months ended June 30, 2016 and 2015, was
$1,000
and
$2,000
respectively.
6.
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. Sales by geographic location are as follows (in thousands):
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,230
|
|
$
|
2,730
|
|
$
|
6,724
|
|
$
|
4,846
|
Canada
|
|
|
930
|
|
|
1,461
|
|
|
1,629
|
|
|
2,137
|
Other countries
|
|
|
144
|
|
|
71
|
|
|
225
|
|
|
172
|
Total revenue
|
|
$
|
4,304
|
|
$
|
4,262
|
|
$
|
8,578
|
|
$
|
7,155
|
During the three months ended
June 30, 2016
and
2015
,
f
ive
and
three
of our customers represented approximately
41
%
and
3
5
%
, respectively
, of revenue
.
During the six months ended
June 30, 2016
and
2015
,
four
and
three
of our customers represented approximately
47
%
and
35%
, respectively
, of revenue
.