Quarterly Report (10-q)

Date : 05/13/2019 @ 8:42PM
Source : Edgar (US Regulatory)
Stock : Jones Soda Co. (QB) (JSDA)
Quote : 0.67  0.08 (13.56%) @ 8:58PM

Quarterly Report (10-q)

  





UNITED STATES SECURITIES AND EXCHANGE COMMISSION



Washington, D.C. 20549

_____________________________________________

Form 10-Q



June

30, 2014

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the Quarterly Period Ended   March 31 , 201 9

OR

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. Employer

incorporation or organization)

 

Identification No.)



 

 

66 South Hanford Street, Suite 150

 

 

Seattle, Washington

 

98134

(Address of principal executive offices)

 

(Zip Code)

_____________________________________________

(206) 624-3357

(Registrant’s telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:

None

 Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value



Indicate by checkmark 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 such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes       No 



Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes        No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company. or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):





 

 

Large accelerated filer

 

Accelerated filer 

Non-accelerated filer

 

Smaller reporting company

Emerging growth company  

 

 

If an emerging growth company , indicate by check mar k if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes       No 

As of May 1, 2019 , there were 4 2,210,985   shares of the registrant's common stock issued and outstanding.







 

 

 


 

JONES SODA CO.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31 ,   201 9

TABLE OF CONTENTS







 

 

Page

 Explanatory Note

3

 Cautionary Notice Regarding Forward Looking Statements

3

 PART I. FINANCIAL INFORMATION

 

 Item 1. Financial Statements (Unaudited)

 

    a) Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

5

    b) Condensed Consolidated Statements of Operations – three months ended March 31, 2019 and 2018

6

    c) Condensed Consolidated Statements of Comprehensive Income (Loss) – three months ended March 31, 2019 and 2018

7

    d) Condensed Consolidated Statements of Shareholders Equity (Deficit) for the three months ended March 31, 2019 and the year    ended December 31, 2018

8

    e) Condensed Consolidated Statements of Cash Flows – three months ended March 31, 2019 and 2018

9

    f ) Notes to Condensed Consolidated Financial Statements

10

 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 Item 3. Quantitative and Qualitative Disclosures about Market Risk

20

 Item 4. Controls and Procedures

20

 PART II. OTHER INFORMATION

 

 Item 1. Legal Proceedings

21

 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

21

 Item 5. Other Information

21

 Item 6. Exhibits

22



 



 



 



 

 

 


 

EXPLANATORY NOTE

Unless otherwise indicated or the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this “Report”) 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. and Jones Soda (Canada) Inc.

In addition, unless otherwise indicated or the context otherwise requires, all references in this Annual Report to “Jones Soda” refer to our premium beverages , including Jones ® Soda   and Lemoncocco ® sold under the trademarked brand name “Jones Soda Co. ®

C AUTIONARY 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 Report contains 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 case sales, revenues, profitability, distributor channels, new products, adequacy of funds from operations, cash flows and financing, our ability to continue as a going concern, potential strategic transactions, statements regarding 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,” "continue," 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 from the results expressed in, anticipated or implied by these forward-looking statements. 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.

In particular, our business, including our financial condition and results of operations and our ability to continue as a going concern may be impacted by a number of factors, including, but not limited to, the following:

·

Our ability to successfully execute on our growth strategy and operating plans;

·

Our ability to manage our operating expenses and generate cash flow from operations, along with our ability to secure additional financing if our sales goals take longer to achieve than anticipated;

·

Our ability to create and maintain brand name recognition and acceptance of our products, which is critical to our success in our competitive, brand-conscious industry;

·

Our ability to maintain brand image and product quality and avoid risks from other product issues such as product recalls;

·

Our ability to compete successfully against much larger, well-funded, established companies currently operating in the beverage industry generally, including in the fountain business, particularly from other major beverage companies;

·

Entrance into and increased focus on the craft beverage segment by other major beverage companies;

·

Our ability to respond to changes in the consumer beverage marketplace, including potential reduced consumer demand due to health concerns (including obesity) and legislative initiatives against sweetened beverages;

·

Our ability to successfully develop and launch new products that match consumer beverage trends, and to manage consumer response to such new products and new initiatives;

·

Our ability to establish, maintain and expand distribution arrangements with independent distributors, retailers, brokers and national retail accounts, most of whom sell and distribute competing products, and upon whom we rely to employ sufficient efforts in managing and selling our products, including re-stocking the retail shelves with our products;

·

Our ability to respond to any changes in, and to maintain, our private label relationship with 7-Eleven;

·

The timing and amount of reorders for 7-Select ® , including the impact on our inventory, revenue and cash flow;

·

Our ability to manage our inventory levels and to predict the timing and amount of our sales;

·

Our reliance on third-party contract manufacturers of our products and the geographic locations of their facilities, which could make management of our 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, including increases in raw material costs and shortages of glass in the supply chain;

3

 


 

·

Our ability to source our flavors on acceptable terms from our key flavor suppliers;

·

Our ability to attract and retain key personnel, including retaining the services of our CEO, the loss of whom would directly affect our efficiency and operations and could materially impair our ability to execute our growth strategy;

·

Our ability to protect our trademarks and trade secrets, the failure of 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 comply with the many regulations to which our business is subject;

·

Our ability to maintain an effective information technology infrastructure;

·

Fluctuations in fuel and freight costs;

·

Fluctuations in currency exchange rates, particularly between the United States and Canadian dollars;

·

Regional, national or global economic conditions that may adversely impact our business and results of operations;

·

Our ability to maintain effective disclosure controls and procedures and internal control over financial reporting;

·

Dilutive and other adverse effects on our existing shareholders and our stock price arising from future securities issuances ; and

·

Our ability to access the capital markets for any future equity financing, and any actual or perceived limitations to our common stock by being traded on the OTCQB marketplace, including the level of trading activity, volatility or market liquidity.  

For a 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, 201 8   filed with the Securities and Exchange Commission on March   2 2 ,   201 9 . 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 Forms 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.



 

4

 


 

PART 1 – FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



JONES SODA CO.

CONDENSED CONSOLIDATED BALANCE SHEETS







 

 

 

 

 

 



 

March 31, 2019

 

December 31, 2018



 

(Unaudited)

 

 

 

ASSETS

 

 

(In thousands, except share data)

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

459 

 

$

991 

Accounts receivable, net of allowance of $69 and $40

 

 

1,849 

 

 

1,362 

Inventory

 

 

1,851 

 

 

1,349 

Prepaid expenses and other current assets

 

 

159 

 

 

245 

Total current assets

 

 

4,318 

 

 

3,947 

Fixed assets, net of accumulated depreciation of $497 and $489

 

 

85 

 

 

88 

Other assets

 

 

33 

 

 

33 

Right of use lease asset

 

 

91 

 

 

 -

Total assets

 

$

4,527 

 

$

4,068 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,457 

 

$

1,058 

Line of credit

 

 

952 

 

 

428 

Accrued expenses

 

 

697 

 

 

614 

Lease liability

 

 

96 

 

 

 -

Taxes payable

 

 

 

 

 -

Total current liabilities

 

 

3,204 

 

 

2,100 

Convertible subordinated notes payable, net

 

 

2,436 

 

 

2,528 

Deferred rent 

 

 

 -

 

 

Accrued interest expense

 

 

163 

 

 

135 

Shareholders’ equity (deficit):

 

 

 

 

 

 

Common stock, no par value:

 

 

 

 

 

 

Authorized — 100,000,000 ;   issued and outstanding shares — 42,013,874 shares and 41,464,373 shares, respectively

 

 

53,963 

 

 

53,822 

Additional paid-in capital

 

 

9,452 

 

 

9,389 

Accumulated other comprehensive income

 

 

315 

 

 

296 

Accumulated deficit

 

 

(65,006)

 

 

(64,210)

Total shareholders’ equity (deficit)

 

 

(1,276)

 

 

(703)

Total liabilities and shareholders’ equity (deficit)

 

$

4,527 

 

$

4,068 



See accompanying notes to condensed consolidated financial statements.

5

 


 



JONES SODA CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Una udited)





 

 

 

 

 



Three months ended March 31,



2019

 

2018



(In thousands, except share data)

Revenue

$

2,824 

 

$

2,837 

Cost of goods sold

 

2,257 

 

 

2,221 

Gross profit

 

567 

 

 

616 

Operating expenses:

 

 

 

 

 

Selling and marketing

 

615 

 

 

554 

General and administrative

 

658 

 

 

539 



 

1,273 

 

 

1,093 

Loss from operations

 

(706)

 

 

(477)

Interest expense

 

(89)

 

 

(21)

Other income (expense), net

 

 

 

34 

Loss before income taxes

 

(793)

 

 

(464)

Income tax expense, net

 

(3)

 

 

(5)

Net loss

$

(796)

 

$

(469)



 

 

 

 

 

Net loss per share - basic and diluted

$

(0.02)

 

$

(0.01)

Weighted average basic and diluted common shares outstanding

 

41,592,851 

 

 

41,464,373 



See accompanying notes to   condensed consolidated financial statements.

6

 


 



JONES SODA CO.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)







 

 

 

 

 

 



 

 



 

Three months ended March 31,



 

2019

 

2018



 

(In thousands)

Net loss

 

$

(796)

 

$

(469)

Other comprehensive income (loss):

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

19 

 

 

(17)

Total comprehensive loss

 

$

(777)

 

$

(486)



See accompanying notes to condensed consolidated financial statements.



7

 


 



JONES SODA CO.

COND ENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Common Stock

 

 

 

 

 

 

 

 



 

Number

 

Amount

 

Additional Paid-in Capital

 

Accumulated Other Comprehensive Income (Loss)

 

Accumulated Deficit

 

Total Shareholders’ Equity (Deficit)



 

(In thousands, except share amounts)

Balance, December 31, 2017

 

41,464,373 

 

$

53,822 

 

$

8,861 

 

$

391 

 

$

(62,131)

 

$

943 

Stock-based compensation

 

 

 

 

 

49 

 

 

 

 

 

 

49 

Beneficial conversion feature on convertible debt

 

 

 

 

 

350 

 

 

 

 

 

 

350 

Net loss

 

 

 

 

 

 

 

 

 

(469)

 

 

(469)

Other comprehensive loss

 

 

 

 

 

 

 

(17)

 

 

 

 

(17)

Balance March 31, 2018

 

41,464,373 

 

 

53,822 

 

 

9,260 

 

 

374 

 

 

(62,600)

 

 

856 

Stock-based compensation

 

 

 

 

 

34 

 

 

 

 

 

 

34 

Net loss

 

 

 

 

 

 

 

 

 

(363)

 

 

(363)

Other comprehensive loss

 

 

 

 

 

 

 

(27)

 

 

 

 

(27)

Balance June 30, 2018

 

41,464,373 

 

 

53,822 

 

 

9,294 

 

 

347 

 

 

(62,963)

 

 

500 

Stock-based compensation

 

 

 

 

 

45 

 

 

 

 

 

 

45 

Net loss

 

 

 

 

 

 

 

 

 

(425)

 

 

(425)

Other comprehensive income

 

 

 

 

 

 

 

24 

 

 

 

 

24 

Balance September 30, 2018

 

41,464,373 

 

 

53,822 

 

 

9,339 

 

 

371 

 

 

(63,388)

 

 

144 

Stock-based compensation

 

 

 

 

 

50 

 

 

 

 

 

 

50 

Net loss

 

 

 

 

 

 

 

 

 

(822)

 

 

(822)

Other comprehensive loss

 

 

 

 

 

 

 

(75)

 

 

 

 

(75)

Balance, December 31, 2018

 

41,464,373 

 

 

53,822 

 

 

9,389 

 

 

296 

 

 

(64,210)

 

 

(703)

Stock-based compensation

 

111,488 

 

 

 

 

63 

 

 

 

 

 

 

63 

Common stock issuance on conversion of notes payable

 

438,013 

 

 

141 

 

 

 

 

 

 

 

 

141 

Net loss  

 

 

 

 

 

 

 

 

 

(796)

 

 

(796)

Other comprehensive income

 

 

 

 

 

 

 

19 

 

 

 

 

19 

Balance, March 31, 2019

 

42,013,874 

 

$

53,963 

 

$

9,452 

 

$

315 

 

$

(65,006)

 

$

(1,276)







See accompanying notes to condensed consolidated financial statements.



8

 


 



JONES SODA CO.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)





 

 

 

 

 

 



 

Three months ended March 31,



 

2019

 

2018



 

(In thousands)

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(796)

 

$

(469)

Adjustments to reconcile net loss to net cash flows from

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Gain on insurance claim

 

 

 -

 

 

(36)

Depreciation and amortization

 

 

41 

 

 

Stock-based compensation

 

 

63 

 

 

49 

Change in allowance for doubtful accounts

 

 

29 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(515)

 

 

(291)

Inventory

 

 

(498)

 

 

84 

Prepaid expenses and other current assets

 

 

87 

 

 

Accounts payable

 

 

395 

 

 

616 

Accrued expenses

 

 

113 

 

 

(36)

Taxes payable

 

 

 

 

(2)

Other liabilities

 

 

 

 

(1)

Net cash flows   f rom operating activities

 

 

(1,070)

 

 

(71)

INVESTING ACTIVITIES:

 

 

 

 

 

 

Proceeds from insurance claim on property damage

 

 

 -

 

 

36 

Purchase of fixed assets

 

 

(4)

 

 

                    -

Net cash flows   from investing activities

 

 

(4)

 

 

36 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from issuance of convertible note, net

 

 

 -

 

 

2,756 

Proceeds from line of credit, net of repayments

 

 

524 

 

 

(99)

Net cash flows   from financing activities

 

 

524 

 

 

2,657 

Net change in cash and cash equivalents

 

 

(550)

 

 

2,622 

Effect of exchange rate changes on cash

 

 

18 

 

 

(4)

Cash and cash equivalents, beginning of period

 

 

991 

 

 

397 

Cash and cash equivalents, end of period

 

$

459 

 

$

3,015 

Supplemental disclosure:

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

Interest

 

$

12 

 

$

16 

Income taxes

 

 

 -

 

 

Supplemental disclosure of non-cash transactions:

 

 

 

 

 

 

Conversion of notes payable

 

$

141 

 

$

-

 

 

 

 

 

 

 



 

 

 

 

 

 



See accompanying notes to condensed consolidated financial statements.

9

 


 

JONES SODA CO.

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 the 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. (together, our “Subsidiaries”).



Basis of presentation and consolidation

The accompanying condensed consolidated balance sheet as of December 31, 2018 , which has been derived from our audited consolidated financial statements, and unaudited interim condensed consolidated financial statements as of March 31, 2019 , 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 our accounts and the accounts of our 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 and 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.  Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. 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. 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, 2018. 



Liquidity

As of March 31, 2019 , we had cash and cash-equivalents of $459,000 and working capital of approximately $ 1. 1 million. Net c ash used in operations during the three   months ended March 31 , 201 9 totaled approximately $1. 1   million compared to $ 71 ,000 used in   operations for the same period a year ago. The net increase in cash used in operations compared to the same period a year ago is primarily due to the timing of the collection of receivables , the build-up of inventory due to the timing of promotional programs , and the increase in net loss . We reported a net loss of $7 96 ,000 for the three   months ended March 31, 2019 , compared to a net loss of approximately $46 9 ,000 for the same period a year ago .

We have experienced recurring losses from operations and negative cash flows from operating activities.  This situation creates uncertainties about our ability to execute our business plan, finance operations, and indicate s substantial doubt about the Company’s ability to continue as a going concern.

We continue to experience negative cash flows from operations, as well as an ongoing requirement for additional capital to support working capital needs.  Therefore, currently, based upon our near term anticipated level of operations and expenditures, management believes that cash on hand, excluding cash available under our line of credit, is not sufficient to enable us to fund operations for twelve months from the date the financial statements included in this Report are issued.  Our line of credit is not included in this assessment due to the ability of the bank to terminate the line of credit upon 120 days’ notice as discussed in Note 4 below.  In view of these conditions, our ability to continue as a going concern is in substantial doubt and dependent upon achieving a profitable level of operations and on our ability to obtain necessary financing to fund ongoing operations.  The condensed consolidated financial statements included in this Report do not give effect to any adjustments which will be necessary should we be unable to continue as a going concern and therefore be required to realize our assets and discharge our liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.

We have a revolving secured credit facility with CapitalSource Business Finance Group (the “Loan Facility”). 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 March 31, 2019 , our accounts receivable and inventory eligible borrowing base was approximately $ 1 . 8 million before adjustments , of which we had drawn down $ 95 2 ,000. See Note 4 below for further information.

10

 


 

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 available debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our sales goals and otherwise successfully execute our operating plan. We believe it is imperative that we meet these sales objectives in order to lessen our reliance on external financing in the future. We intend to continually monitor and adjust our operating 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 when needed.



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. 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.



Revenue r ecognition

 

The Company recognizes revenue under Accounting Standards Update (“ASU”)  No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods and services transferred to the customer. The following five steps are applied to achieve that core principle:



Step 1: Identify the contract with the customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when the company satisfies a performance obligation



See Note 7 , Segment information, for information on revenue disaggregated by geographic area.



Because the Company’s agreements generally have an expected duration of one year or less, the Company has elected to not disclose information about its remaining performance obligations.



The Company’s performance obligations are satisfied at the point in time when products are received by the customer, which is when the customer has title and the significant risks and rewards of ownership. Therefore, the Company’s contracts have a single performance obligation (shipment of product). The Company primarily receives fixed consideration for sales of product. Shipping and handling amounts paid by customers are primarily for online orders, and are included in r evenue, and total ed   $ 32 ,000 and $ 39 ,000 for the three months ended March 31 , 201 9 and 201 8 , respectively. Sales tax and other similar taxes are excluded from revenue.



11

 


 

Revenue is recorded net of provisions for discounts, slotting fees payable by us to retailers to stock our products and promotion allowances, which are typically agreed to upfront with the customer and do not represent variable consideration. Discounts, slotting fees and promotional allowan ces vary the consideration the Company is entitled to in exchange for the sale of products to distributors. The Company estimates these discounts, slotting fees and promotional allowances in the same period that the revenue is recognized for products sales to customers. The amount of revenue recognized represents the amount that will not be subject to a significant future reversal of revenue. The liability for promotional allowances is included in accrued expenses on the consolidated balance sheets. Amounts paid for slotting fees are recorded as prepaid expenses on the consolidated balance sheets and amortized over the corresponding term. For the quarters ended  March 31 , 201 9  and 201 8 , our revenue was reduced by  $ 3 28 ,000 and  $ 259 ,000 respectively, for slotting fees and promotion allowances.  



All sales to distributors and customers are generally final. In limited instances the Company may accept returned product due to quality issues or distributor terminations and in such situations the Company would have variable consideration. To date, returns have not been material. The Company’s customers generally pay within 30 days from the receipt of a valid invoice. The Company offers prompt pay discounts of up to 2% to certain customers typically for payments made within 15 days. Prompt pay discounts are estimated in the period of sale based on experience with sales to eligible customers. Early pay discounts are recorded as a deduction to the accounts receivable balance presented on the consolidated balance sheets.



The accounts receivable balance primarily includes balances from trades sales to distributors and retail customers. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in existing accounts receivable. The Company determines the allowance for doubtful accounts based primarily on historical write-off experience. Account balances that are deemed u ncoll ectible are charged off against the allowance after all means of collection have been exhausted and the potential for recover y is considered remote. Allowances for doubtful accounts of $ 69   and $ 40   as of March 31 , 201 9 and December 31, 201 8 , respectively, were netted against accounts receivable. No impairment losses were recognized as of March 31 , 201 9 and December 31, 201 8 , respectively. Changes in accounts receivable are primarily due to the timing and magnitude of orders of products, the timing of when control of products is transferred to distributors and the timing of cash collections.  



Deferred financing costs



We defer costs related to the issuance of debt which are included on the accompanying balance sheets as a deduction from the debt liability. Deferred financing costs are amortized over the term of the related loan and are included as a component of interest expense on the accompanying consolidated statements of operations.



Operating leases



At lease commencement, the Company records a lease liability based on the present value of lease payments over the expected lease term.  The Company calculates the present value of lease payments using the discount rate implicit in the lease, unless that rate cannot be readily determined.  In that case, the Company uses its incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis an amount equal to the lease payments over the expected lease term.  The Company records a corresponding right-of-use lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor prior to the lease commencement date.



After lease commencement, the Company measures its leases as follows: (i) the lease liability based on the present value of the remaining lease payments using the discount rate determined at lease commencement; and (ii) the right-of use lease asset based on the remeasured lease liability, adjusted for any unamortized lease incentives received, any unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease agreement.  Any lease incentives received and any initial direct costs are amortized on a straight-line basis over the expected lease term.  Rent expense is recorded on a straight-line basis over the expected lease term.



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.



12

 


 

Recent accounting pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02 , Leases: Topic 842 (“ASU 2016-2”), which replaces existing lease guidance. ASU 2016-2 requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than twelve months to its balance sheets. ASU 2016-2 also expands the required quantitative and qualitative disclosures surrounding leases. Although ASU 2016-02 is required to be adopted at the earliest period presented using a modified retrospective approach, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which allows for an alternative transition method of adoption by recognizing a cumulative-effect adjustment, if any, to the opening balance of accumulated deficit in the period of adoption.

The Company adopted ASU 2016-02 and related ASUs, collectively ASC Topic 842, on January 1, 2019, utilizing the alternative transition method allowed for under ASU 2018-11. As a result, the Company recorded a lease liability and right-of-use asset of $124,000 and $116,000, respectively, on the condensed consolidated balance sheet as of January 1, 2019. The adoption of ASC Topic 842 did not have a material impact on either the condensed consolidated statement of operations or condensed consolidated statement of cash flows for the three months ended March 31, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Credit Losse s   (“ASU 2016-13”), which changes the impairment model for most financial instruments, including trade receivables from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU is effective for us in the first quarter of 2020 and must be adopted using a modified retrospective transition approach. We are currently evaluating the potential impact   that the adoption of ASU 2016-13 will have on our consolidated financial statements.

   

2.     Inventory

Inventory consisted of the following (in thousands):





 

 

 

 

 

 



 

March 31, 2019

 

December 31, 2018

Finished goods

 

$

1,242 

 

$

948 

Raw materials

 

 

609 

 

 

401 



 

$

1,851 

 

$

1,349 

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.     Operating l ease



We currently lease approximately 6,500 square feet of retail/office space in Seattle, Washington for our principal executive and administrative offices. The term of the lease is five years expiring February 2020 with an option to extend for additional one-year terms, indefinitely. In the normal course of business, it is expected that this lease will be renewed or replaced by leases on another property. The C ompany has not included these options to extend in its calculation of right-of-use assets or lease liabilities as it is not reasonably certain to exercise these options. The lease agreement does not contain any residual value guarantees, material restrictions or covenants.



Upon adoption, the Company elected the package of practical expedients permitted in ASC Topic 842. Accordingly, the Company accounted for its existing operating lease as an operating lease under the new guidance, without reassessing (a) whether the contract contains a lease under ASC Topic 842, (b) whether classification of the operating lease would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs before the transition adjustments would have met the definition of initial direct costs in ASC Topic 842 at lease commencement. As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019, a lease liability of $124,000 which represents the remaining lease payments and a right-of-use-asset of $116,000. The difference between the right-of-use asset and lease liability relates to the deferred rent liability of $8,000 that was included on the Company’s condensed consolidated balance sheets prior to adoption of ASC Topic 842. This amount was eliminated at the time of adoption and is included in the lease liability balance. The discount on the lease liability was not material and was not recognized.



As of March 31, 2019, we have $80,000 in lease payments remaining in 2019 and $16,000 lease payments remaining in 2020.



Operating lease cost for the three months ended March 31, 2019 was $25,000. Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2019 was $ 26,000.



13

 


 

The Company has elected the practical expedient for short-term leases. Operating lease cost for the Company’s short-term leases for the three months ended March 31, 2019, was immaterial.



4.    Line of Credit

We have an amended and restated revolving secured credit facility (the “Loan Facility”) with CapitalSource Business Finance Group (previously known as BFI Business Finance). The current term of the Loan Facility expires on December 27, 2019, unless renewed.



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) 50% of eligible Canadian accounts receivable not to exceed $300,000 (subject to any reserve amount established by CapitalSource), plus (iii) 35% of finished goods inventory not to exceed $475,000, or 50% of eligible accounts receivable collateral . The Loan Facility currently allows us to borrow a maximum aggregate amount of up to $3.2 million based on eligible accounts receivable and inventory.  As of March 31, 2019, our accounts receivable and inventory eligible borrowing base was approximately $1.8 million before adjustments, of which we had drawn down approximately $952,000.



Advances under the Loan Facility bear interest at the prime rate plus 0.75%, where prime may not be less than 0% (resulting in an interest rate of 6.25% as of March 31,2019), and a loan fee of 0.10% on the daily loan balance is payable monthly. The Loan Facility provides for a minimum cumulative amount of interest of $30,000 per year to be paid to CapitalSource, regardless of whether or not we draw on the Loan Facility.



CapitalSource has the right to terminate the Loan Facility at any time upon 120 days’ prior written notice. All present and future obligations of our Subsidiaries 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 March 31, 2019, we were in compliance with all covenants under the Loan Facility. During 2019, 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. 



5.     Convertible Subordinated Notes Payable



The Company issued certain convertible subordinated promissory notes with an aggregate principal amount of $2,920,000 at issuance (the “Convertible Notes”) during the first half of 2018 to certain institutional investors, our management team, and other individual accredited investors.

 

The Convertible Notes have a four-year term and bear interest at 6%.  The holders can convert the Convertible Notes at any time into the number of shares of our common stock equal to the quotient obtained by dividing (i) the amount of the unpaid principal and interest on such Convertible Note by (ii) $0.32 (the “Conversion Price”).  The Conversion Price is subject to a down round adjustment if we issue shares or equity-linked instruments at a conversion price below $0.32 per share.  No payments of principal or interest are due until the maturity.

 

The Convertible Notes are subordinated in right of payment to the prior payment in full of all of our Senior Indebtedness, which is defined as amounts due in connection with our indebtedness for borrowed money to banks, commercial finance lenders (including CapitalSource), or other lending institutions regularly engaged in the business of lending money, with certain restrictions.

 

During the period from January 1, 2019 through March 31, 2019, Convertible Notes in the aggregate principal amount of $125,000 and related accrued interest were converted into 438,013 shares of common stock in accordance with the original terms of the Convertible Notes.  As a result, the carrying amount of the converted principal amount of such Convertible Notes, along with the converted accrued interest, in an aggregate amount of $14 1 ,000, was credited to common stock and additional paid-in capital and unamortized discounts in an amount equal to $34,000 were recognized as interest expense for the first quarter.

 

The principal balance of Convertible Notes outstanding was equal to $2,795,000 and $2,920,000 at March 31, 2019 and December 31, 2018, respectively.  The balance of Convertible Notes is presented net of unamortized discounts in an amount equal to $ 359,000 and $392,000 at March 31, 2019 and December 31, 2018, respectively.  The principal balance of Convertible Notes payable to related parties was equal to $120,000 at both March 31, 2019 and December 31, 2018.



Subsequent to March 31, 2019, Convertible Notes in the aggregate princip al amount of $ 62 , 5 00 and related accrued interest were converted into 197, 111 shares of common stock in accordance with the original terms of the Convertible Note s .  

14

 


 



6.     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 lesser   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. As of March 31 ,   2019 , the total number of shares of common stock authorized under the Plan was   10,784,032 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 with an exercise price equal to 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 %   of the shares subject to the option vesting one year from the grant date and the remaining 75%   of the shares subject to the option vesting in equal monthly increments   over the subsequent 36 months . Restricted stock awards generally vest over one year. As of March 31, 2019 , there were 4,376,901 shares of unissued common stock authorized and available for future awards under the Plan.

(a)

Stock options:

A summary of our stock option activity is as follows:





 

 

 

 

 



 

Outstanding Options



 

Number of Shares

 

Weighted Average Exercise Price

Balance at January 1, 2019

 

3,825,083 

 

$

0.48 

Options granted

 

205,000 

 

 

0.28 

Options cancelled/expired

 

(139,899)

 

 

0.64 

Balance at March 31, 2019

 

3,890,184 

 

$

0.46 

Exercisable, March 31, 2019

 

3,161,973 

 

$

0.47 

Vested and expected to vest

 

3,703,458 

 

$

0.46 



(b)

Restricted s tock aw ards:

Effective as of January 1, 2018, equity compensation for non-employee director service is an annual restricted stock unit award that vests over one year, the number of shares underlying such award is determined by dividing  $15,000  by the closing share price on the date of grant (which shall be the first business day in January in each calendar year); when joining the Board each  non-employee director shall receive an initial restricted stock unit award that vests over one year, the number of shares underlying such award be determined by dividing $15,000 by the Company’s closing stock price on the date of grant (which shall be the first trading day following the date on which such director is appointed), prorated based on the date on which such director is appointed.



A summary of our restricted stock activity is as follows:





 

 

 

 

 

 



 

Restricted Shares

 

Weighted-Average Grant Date Fair Value

 

Weighted-Average Contractual Life

Non-vested restricted stock at January 1, 2019

 

253,363

$

0.31

 

9.4

Granted

 

358,560

 

0.25

 

Vested

 

(121,623)

 

0.37

 

Cancelled/expired

 

 

 

Non-vested restricted stock at March 31, 2019

 

490,300

$

0.26

 

9.7

We withheld a total of 10,135 shares as payment for withholding taxes due in connection with the vesting of restricted stock awards d u ring the three months ended March 31, 2019, and the average price paid per share of $0.25 reflects the average market value per share of the shares withheld for tax purposes.

( c ) 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.

15

 


 

Therefore, we apply estimated forfeiture rates that are derived from historical employee attrition . 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 March 31, 2019 , we had unrecognized compensation expense related to stock options and non-vested restricted stock of $ 212, 000 to be recognized over a weighted-average period of 2.1  y ears.

The following table summarizes the stock-based compensation expense (in thousands):





 

 

 

 

 

 



 

Three months ended March 31,



 

2019

 

2018

Type of awards:

 

 

 

 

 

 

Stock options

 

$

32 

 

$

31 

Restricted stock

 

 

31 

 

 

18 



 

$

63 

 

$

49 



 

 

 

 

 

 

Income statement account:

 

 

 

 

 

 

Selling and marketing

 

$

15 

 

$

15 

General and administrative

 

 

48 

 

 

34 



 

$

63 

 

$

49 



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:







 

 

 

 

 

 

 

 



 

Three months ended March 31,



 

2019

 

2018

Expected dividend yield

 

 

 

 

 

 

Expected stock price volatility

 

 

65.4 

%

 

 

67.0 

%

Risk-free interest rate

 

 

2.6 

%

 

 

2.6 

%

Expected term (in years)

 

 

6.0 

years

 

 

5.6 

years

Weighted-average grant date fair-value

 

$

0.17 

 

 

$

0.23 

 

The aggregate intrinsic value of stock options outstanding at March 31, 2019 and 2018 was approximately $ 1.2   m illion and $48,000 , respectively, and for options exercisable was $ 941,000 and $ 46,000 , 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   no  o ptions exercised during the three months ended March 31 , 201 9 and 201 8 , respectively .  



7.     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 March 31,



 

2019

 

2018

Revenue:

 

 

 

 

 

 

United States

 

$

2,234 

 

$

2,237 

Canada

 

 

565 

 

 

583 

Other countries

 

 

25 

 

 

17 

Total revenue

 

$

2,824 

 

$

2,837 



During each of the three months ended March 31 ,   201 9   and 201 8 ,   three and two of our customers represented an aggregate of approximately 36 %   and 45 %, of our revenue, respectively .  

16

 


 

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 201 8   audited consolidated financial   statements and notes thereto included in our Annual Report on Form 10-K, which   was filed with the SE C on March 2 2 ,   201 9 .

This Report contains forward-looking statements. These statements relate to   future events or our future financial performance. In some cases, you can   identify forward-looking statements by terminology such as “believe,” “expect,”   “intend,” “anticipate,” “estimate,” “may,” “will,” “can,” “plan,” “predict,”   “could,” “future,” “continue,” variations of such words, and similar expressions. These   statements are only predictions. Actual events or results may differ   materially. In evaluating these statements, you should specifically consider   various factors, including the risks outlined at the beginning of this R eport   under “Cautionary Notice Regarding Forward-Looking Statements” and in Item 1A   of our most recent Annual Report on Form 10-K filed with the SEC. These factors   may cause our actual results to differ materially from any forward-looking   statements. Except as required by law, we undertake no obligation to publicly   release any revisions to these forward-looking statements that may be made to   reflect events or circumstances after the date hereof or to reflect the   occurrence of unanticipated events.

Overview

We develop, produce, market and distribute premium beverages that we sell and distribute primarily in North America through our network of independent distributors and directly to our national and regional retail accounts. We also sell our products in select international markets. Our products are sold primarily in grocery stores, convenience and gas stores, on fountain in restaurants, “up and down the street” in independent accounts such as delicatessens, sandwich shops and burger restaurants, as well as through our national accounts with several large retailers. We refer to our network of independent distributors as our direct store delivery (DSD) channel, and we refer to our national and regional accounts who receive shipments directly from us as our direct to retail (DTR) channel. We do not directly manufacture our products, but instead outsource the manufacturing process to third-party contract manufacturers. We also sell various products online, including soda with customized labels, wearables, candy and other items, and we license our trademarks for use on products sold by other manufacturers.

Our Focus : Sales Growth

Our focus is sales growth through the execution of the following key initiatives:

·

Expand our fountain program in the United States and Canada;



·

Expand in existing and new Jones Soda sales channels; and



·

Increase distribution of Lemoncocco in the United States and Canada.



17

 


 

Results of Operations

The following selected financial and operating data are derived from our condensed consolidated financial statements and should be read in conjunction with our condensed consolidated financial statements.





 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31,



 

2019

 

% of Revenue

 

2018

 

% of Revenue

Consolidated statements of operations data:

 

(Dollars in thousands, except per share data)

Revenue

 

$

2,824 

 

100.0 

%

 

$

2,837 

 

100.0 

%

Cost of goods sold

 

 

(2,257)

 

(79.9)

%

 

 

(2,221)

 

(78.3)

%

Gross profit

 

 

567 

 

20.1 

%

 

 

616 

 

21.7 

%

Selling and marketing expenses

 

 

(615)

 

(21.8)

%

 

 

(554)

 

(19.5)

%

General and administrative expenses

 

 

(658)

 

(23.3)

%

 

 

(539)

 

(19.0)

%

Loss from operations

 

 

(706)

 

(25.0)

%

 

 

(477)

 

(16.8)

%

Interest expense

 

 

(89)

 

(3.2)

%

 

 

(21)

 

(0.7)

%

Other income (expense), net

 

 

 

0.1 

%

 

 

34 

 

1.2 

%

Loss before income taxes

 

 

(793)

 

(28.1)

%

 

 

(464)

 

(16.4)

%

Income tax expense, net

 

 

(3)

 

(0.1)

%

 

 

(5)

 

(0.2)

%

Net loss

 

$

(796)

 

(28.2)

%

 

$

(469)

 

(16.5)

%

Basic and diluted net loss per share

 

$

(0.02)

 

 

 

 

$

(0.01)

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

As of



 

March 31, 2019

 

December 31, 2018

Balance sheet data:

(Dollars in thousands)

Cash and cash equivalents and accounts receivable, net

 

$

2,308 

 

$

 

2,353 

Fixed assets, net

 

 

85 

 

 

 

88 

Total assets

 

 

4,527 

 

 

 

4,068 

Long-term liabilities

 

 

2,599 

 

 

 

2,671 

Working capital

 

 

1,114 

 

 

 

1,847 



Seasonality and Other F luctuations

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. 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.

Quarter Ended March 31, 2019 Compared to Quarter Ended March 31, 2018

Revenue

For the quarter ended March 31, 2019 ,   revenue was approximately $2.8 million, a   decrease of $ 13 ,000 , from approximately   $2.8 million in revenue for the quarter ended March 31, 2018 .     The relatively flat revenue continues to reflect a shift in our product sales mix , with an increase in our fountain revenues for the current quarter .

For the quarter ended March 31 , 201 9 , trade spend and promotion allowances, wh ich offset revenue, totaled $ 3 28 ,000 , a n   in crease of  $ 69 ,000, or   26 . 6 % , compared to $ 259 ,000 for the quarter ended March 31 ,   201 8 , due to the timing of incentive and retailer programs .  

18

 


 



Gross Profit

For the quarter ended March 31, 2019 , gross profit decrease d by $ 49 ,000 , or 8.0 % , to   $ 5 67 ,000   compared to   approximately $ 616 ,000   for the quarter ended March 31, 2018 due to an increase in strategic slotting fees and higher promotional activity related to new accounts, along with an increase in raw material costs associated with packaging .     For the quarter ended March 31, 2019 gross margin de creased to   20.1 % from 21.7% for the quarter ended March 31, 2018 .

Selling and Marketing Expenses

Selling and marketing expenses for the quarter ended March 31, 2019   were $ 615 ,000 ,   a n   increase of $ 61,000 , or 11.0% , from $ 554 ,000 for the quarter ended March 31, 2018 .   S elling and marketing expenses as a percentage of revenue increased to 21 . 8 %   for the quarter ended March 31, 2019 , from 19.5 % in 2018 as we invested in our sales team through staggered hiring throughout 2018 , which resulted in increased expenses for 2019 .   We will continue to balance selling and marketing expenses with our working capital resources as we invest   in and hire employees to further support   our sales efforts .   For   the three months ended   March  3 1 ,   201 9   and 201 8 , non-cash expenses   included in selling and marketing expense (stock compensation and depreciation) were $ 2 2 ,000 and $ 17 ,000 , respectively .  

General and Administrative Expenses

General and administrative expenses for the quarter ended March 31, 2019   were $ 616 ,000 , a n   increase of $ 77,000 , or 14.3% , compared to $ 539 ,000 for the quarter ended March 31, 2018 ,   primarily due to stock compensation costs , an increase in consulting expenses, and additional board compensation incurred during the quarter. General and administrative expenses   as a percentage of revenue increased to 2 1 . 8 % in March 31, 2019   from 19 .0% in 2018 . We will continue to carefully   manage   general and administrative expenses with our working capital resources.   For the three months end ed   March 31 ,   201 9   and 201 8 , non-cash expenses included in general and administrative expense (stock compensation and depreciation) were $ 4 9 ,000 and $ 3 6 ,000, respectively.  

In terest Expense

We had $ 8 9 ,000 of interest expense for the quarter ended March 31 , 201 9 , compared to $ 2 1 ,000 for the quarter ended March 31 , 201 8 , primarily related to the amortization of the discount associated with the beneficial conversion feature on the Convertible Notes, along with the amortization of associated closing costs and interest related to the Convertible N otes.   For the three months end ed   March 31 , 201 9 and 201 8 , c ash paid for interest was $ 12 ,000 and $ 16 ,000, respectively, and was primarily related to our line of credit.

Income Tax Expense

We had $ 3 ,000 and $5,000 of income tax expense fo r   the quarters ended March 31 , 201 9 ,   and   2018 ,   respect ively ,   primarily related to the tax provision on income from our Canadian operations. We have not recorded any tax benefit for the loss in our U.S. operations as we have recorded a full valuation allowance on our U.S. net deferred tax assets. We expect to continue to record a full valuation allowance on our U.S. net deferred tax assets until we sustain an appropriate level of taxable income through improved U.S. operations. Our effective tax rate is based on recurring factors, including the forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a full valuation allowance on our U.S. net deferred tax assets.

Net loss

Net loss   for the quarter ended March 31, 2019   was  $ 7 96 , 000 compared to net loss   of $ 469 ,000 for the quarter ended March 31, 2018 ,   primarily due to the timing of promotions,   and the staggered hiring of sales employees during 2018 ,   as well as non-cash costs incurred during the first quarter, including interest and the beneficial conversion feature debt discounts amortization associated with the Convertible Note s   i ssued during 2018. We also had an increase in consulting expenses and board compensation for the three months ended March 31, 2019 in comparison to March 31, 2018.



Liquidity and Capital Resources

As of March 31, 2019 , we had cash and cash-equivalents of $459,000 and working capital of approximately $ 1. 1 million. Net c ash used in operations during the three months ended March 31 , 201 9 totaled approximately $1. 1 million compared to $ 71 ,000 used in   operations for the same period a year ago. The net increase in cash used in operations compared to the same period a year ago is primarily due to the timing of the collection of receivables, the build-up of inventory due to the timing of promotional programs, and the increase in net loss. We reported a net loss of $7 96 ,000 for the three months ended March 31, 2019 , compared to a net loss of approximately $46 9 ,000 for the same period a year ago .

19

 


 

We have experienced recurring losses from operations and negative cash flows from operating activities.  This situation creates uncertainties about our ability to execute our business plan, finance operations, and indicates substantial doubt about   our ability to continue as a going concern.

We continue to experience negative cash flows from operations, as well as an ongoing requirement for additional capital to support working capital needs.  Therefore, currently, based upon our near term anticipated level of operations and expenditures, management believes that cash on hand, excluding cash available under our line of credit, is not sufficient to enable us to fund operations for twelve months from the date the financial statements included in this Report are issued.  Our line of credit is not included in this assessment due to the ability of the bank to terminate the line of credit upon 120 days’ notice.  In view of these conditions, our ability to continue as a going concern is in substantial doubt and dependent upon achieving a profitable level of operations and on our ability to obtain necessary financing to fund ongoing operations.  The consolidated financial statements included in this Report do not give effect to any adjustments which will be necessary should we be unable to continue as a going concern and therefore be required to realize our assets and discharge our liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.

We have an amended and restated 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 March 31, 2019, our eligible borrowing base was approximately $1.8 million before adjustments, of which we had drawn down $952,000.



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 available debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our sales goals and otherwise successfully execute our operating plan. We believe it is imperative that we meet these sales objectives in order to lessen our reliance on external financing in the future. We intend to continually monitor and adjust our operating 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 our c ompany 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 when needed.

Off-B alance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies



See the information concerning our critical accounting policies included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 201 8 , filed with the SEC on March 2 2 ,   201 9 . There have been no material changes in our critical accounting policies during the three   months ended March 31, 2019 .



IT EM 3 .   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Not Applicable.  



ITEM 4.   CONTROLS AND PROCEDURES.



Procedures



(a) Evaluation of disclosure controls and procedures

We maintain disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial

20

 


 

Officer (or Acting Principal Financial Officer, as the case may be), as appropriate, to allow timely decisions regarding required disclosure. Management, under the supervision and with the participation of our Chief Executive Officer and Acting Principal Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Acting Principal Financial Officer concluded that these disclosure controls and procedures were effective as March 31, 2019.



(b) Changes in internal controls

There were no changes in our internal controls over financial reporting during the three months ende d   March 31, 2019   that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



PART II – OTHER INFORMATION

IT EM 1. LEGAL PROCEEDINGS



        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 employee claims, contract disputes, product liability and other general liability claims, 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.



ITEM 1A RISK FACTORS

Not applicable.





ITEM 2. UNREG ISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



None.







ITEM 5. OTHER IN FORMATION



Effective as of May 9 , 2019 , our Board of Directors has authorized Jennifer L. Cue, our President and Chief Executive Officer, to also serve as our “Acting Principal Financial Officer” solely in connection with the review, execution and certification of our filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.

2019 Annual Meeting - Submission of Matters to a Vote of Shareholders

At our 2019 Annual Meeting of Shareholders held on May 9, 2019, the following matters were submitted to a vote of our shareholders:

The shareholders elected the following six directors, who received the number of votes set forth opposite their respective names:





 

 

 

 

 



               For

 

               Withheld

 

                        Broker Non-Votes



 

 

 

 

 

Jeffrey Anderson

7,774,124 

 

1,108,478 

 

29,093,503 

Christopher Beach

7,732,942 

 

1,149,660 

 

29,093,503 

Jennifer L. Cue

7,749,727 

 

1,132,875 

 

29,093,503 

Michael M. Fleming

7,015,081 

 

1,867,521 

 

29,093,503 

Raymond Silcock

7,017,619 

 

1,864,983 

 

29,093,503 

Vanessa Walker

7,735,218 

 

1,147,384 

 

29,093,503 











21

 


 

The shareholders ratified the appointment of Peterson Sullivan LLP as our independent registered public accounting firm for the fiscal year 2019 by a vote of 35,840,180 shares For, 2,054,195 shares Against, and 81,730 shares abstaining. There were no broker non-votes in connection with this matter.

  The shareholders approved a non-binding advisory resolution (commonly referred to as a “say-on-pay” resolution) on our executive compensation for fiscal year 2018 by a vote of 7,391,794 shares For ,   1,287,659 shares Against, and 203,149 shares abstaining. There were 29,093,503 broker non-votes in connection with this matter.

22

 


 





I TEM 6. EXHIBITS





 

 

3.1

 

Articles of Incorporation of Jones Soda Co. (Previously filed with, and incorporated herein by reference to, Exhibit 3.1 to our annual report on Form 10-KSB for the fiscal year ended December 31, 2000, filed on March 30, 2001; File No. 333-75913).

3.2

 

Amended and Restated Bylaws of Jones Soda Co. (Previously filed with, and incorporated herein by reference to, Exhibit 3.1 to our quarterly report on Form 10-Q, filed on November 8, 2013).

31.1

 

Certification by Jennifer L. Cue, Chief Executive Officer and Acting Principal Financial Officer, pursuant to Rule 13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

32.1

 

Certification by Jennifer L. Cue, Chief Executive Officer and Acting Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

101.INS**

 

XBRL Instance Document.

101.SCH**

 

XBRL Taxonomy Extension Schema Document.

101.CAL**

 

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**

 

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB**

 

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**

 

XBRL Taxonomy Extension Presentation Linkbase Document.





**   Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

23

 


 



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.

May 1 3 , 2019  





 

 



JONES SODA CO.



By: 

/s/  Jennifer Cue



 

Jennifer L. Cue



 

President, Chief Executive Officer and Acting Principal Financial Officer



 

 



 



 

 



 

 



 

 



24

 


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