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, 2017, which has been derived from our audited consolidated financial statements, and unaudited interim condensed consolidated financial statements as of March 31, 2018, 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 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, 2017
.
Liquidity
As of
March 31, 2018
, we had cash and cash-equivalents of approximately $3.0 million and working capital of approximately
$3.2
million. Cash used in operations during the three months ended March 31, 2018 totaled $71,000 compared to $371,000 provided by operations for the same period a year ago. The increase in cash used in operations compared to the same period a year ago is primarily due to timing of the collection of receivables. We reported a net loss of $469
,000
for the three months ended
March 31, 2018
.
We have experienced recurring losses from operations and negative cash flows from operating activities. This situation created uncertainties about the our ability to execute our business plan, finance operations, and initially indicated substantial doubt about the Company’s ability to continue as a going concern. On March 23, 2018, we received proceeds of $2,800,000 and on April 18, 2018
, we
received $120,000 in connection with the note purchase agreement described in Note 4 and Note 7. We believe that the recent financing alleviates the conditions which initially indicated substantial doubt about our ability to continue as a going concern. However, we have experienced and continue to experience negative cash flows from operations, as well as an ongoing requirement for additional capital to support working capital needs. The amount of additional capital that we may require, the timing of capital needs and the availability of financing to fund those needs will depend on a number of factors, including strategic initiatives and operating plans, the performance of our business and the market conditions for debt or equity financing.
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 the our anticipated funding requirements for one year after these consolidated financial statements are issued. Additionally, our Loan Facility (described below), is available for our working capital needs.
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, 2018, our accounts receivable and inventory eligible borrowing base was approximately $1.6 million, of which we had drawn down approximately $759,000.
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 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 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 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 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.
Revenue Recognition
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the new 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 6, Segment information, for information on revenue disaggregated by geographic area.
Because the Company’s agreements have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) 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, included in
r
evenue, and total $39,000 and $44,000 for the three months ended March 31, 2018 and 2017, respectively. Sales tax and other similar taxes are excluded from revenue.
Revenue is recorded net of provisions for discounts, slotting fees 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, 2018 and 2017, our revenue was reduced by $259,000 and $309,000 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 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 is considered remote. Allowances for doubtful accounts of $10 and $7 as of March 31, 2018 and December 31, 2017, respectively, are netted against accounts receivable. No impairment losses were recognized as of March 31, 2018 and December 31, 2017, 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.
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 July 2017, the FASB issued ASU 2017-11, which allows companies to exclude a down round feature when determining whether a financial instrument is considered indexed to the entity’s own stock. As a result, financial instruments with down round features are no longer classified as liabilities and embedded conversion options with down round features are no longer bifurcated. For equity-classified freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the down round, when triggered, as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion options that have down round features, an entity will recognize the intrinsic value of the feature only when the feature becomes beneficial. The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We early adopted ASU 2017-11 effective January 1, 2018 without a material impact on our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”) and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification on a number of specific issues as well as requiring additional disclosures. The core principle of ASC 606 requires that an entity 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. We adopted ASC 606 effective January 1, 2018 using the full retrospective approach. The adoption of ASU 2014-09 did not have a
material impact on our consolidated financial position, results of operations, equity or cash flows and there were no other significant changes impacting the timing or measurement of the Company’s Revenue or business processes and controls.
In February 2016, the 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. ASU 2016-2 is effective for us beginning January 1, 2019. Early adoption is permitted. While we expect adoption to lead to an increase in the assets and liabilities recorded on our balance sheets, we are still evaluating the overall impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments: Credit Losses
, 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. The Company is currently evaluating the potential impact the adoption of ASU 2016-13 will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for us in the first quarter of 2018 with early adoption permitted and must be applied retrospectively to all periods presented. We adopted ASU 2016-15 during 2018 without a material impact on our consolidated financial statements.
2.
Inventory
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Finished goods
|
|
$
|
1,100
|
|
$
|
1,106
|
Raw materials
|
|
|
367
|
|
|
451
|
|
|
$
|
1,467
|
|
$
|
1,557
|
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.
The current term of the
Loan Facility
expires
on December 27, 201
8
,
unless
renewed
.
Under this
Loan Facility, as amended in January and December 2016, 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
.
As of
March 31, 2018
, our accounts receivable and inventory eligible borrowing base was approximately
$1.6
million, of which we had drawn down
approximately $
759
,000
.
As amended by the December 2016 renewal, advances under the Loan Facility bear interest at the prime rate plus 0.75%, where prime may not be less than 0%, and a loan fee of 0.10% on the daily loan balance
and
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, 2018
, 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.
Convertible Subordinated Notes Payable
On March 23, 2018, we issued and sold an aggregate principal amount of
$2,800,000
of convertible subordinated promissory notes (the “Convertible Notes”) to institutional investors, our management team, and other individual accredited investors.
The Convertible Notes have a
four
-year term from the date of issuance and bear interest at
6%
per annum until maturity. The holders can convert the Convertible Notes at any time to the number of shares of our common stock,
no
par value, 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 anti-dilution adjustment on a broad-based, weighted average basis if the Company issues 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 the indebtedness for borrowed money of the Company to banks, commercial finance lenders (CapitalSource), or other lending institutions regularly engaged in the business of lending money, with certain restrictions.
The fair value of our common stock on the closing date for the issuance of the convertible notes was
$0.36
per share, therefore, the Convertible Notes contained a beneficial conversion feature with an aggregate intrinsic value of
$350,000
. The resulting debt discount is presented as a direct deduction from the carrying value of the Convertible Notes and was recorded with an increase to additional paid-in capital. The discount along with the related closing costs amounting to
$43,996
will be amortized through interest expense over the term of the Convertible Notes. We intend to use the proceeds from the Convertible Notes to fund our Lemoncocco and Fountain initiatives and for working capital and general corporate purposes. The accrued interest and principal balance of notes payable from related parties amounted to
$100,000
at March 31, 2018.
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,
2018
, 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
25.0
%
of the shares subject to the option
vesting
one
year
from the grant date and
the remaining
75.0%
of the shares subject to the option
vesting in equal
monthly
increments
over the subsequent 36 months
. As of
March 31, 2018
, there were
4,310,900
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, 2018
|
|
4,016,653
|
|
$
|
0.54
|
Options granted
|
|
395,000
|
|
|
0.37
|
Options cancelled/expired
|
|
(46,250)
|
|
|
2.51
|
Balance at March 31, 2018
|
|
4,365,403
|
|
$
|
0.35
|
Exercisable, March 31, 2018
|
|
3,261,984
|
|
$
|
0.52
|
Vested and expected to vest
|
|
4,093,196
|
|
$
|
0.50
|
|
(b)
|
|
Restricted
s
tock
aw
ards:
|
Effective as of January 1, 2018, equity compensation for non-employee director service will be an annual restricted stock unit award with a value of
$15,000
based on the closing share price of the first business day in January.
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, 2018
|
|
-
|
$
|
-
|
|
|
Granted
|
|
202,705
|
|
0.37
|
|
|
Non-vested restricted stock at March 31, 2018
|
|
202,705
|
$
|
0.37
|
|
9.8
years
|
(
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. 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, 2018
, we had unrecognized compensation expense related to stock options
and non-vested restricted stock
of
$
2
76
,000
to be recognized over a weighted-average period of
2.
2
years.
The following table summarizes the stock-based compensation expense (in thousands):
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
Type of awards:
|
|
|
|
|
|
|
Stock options
|
|
$
|
31
|
|
$
|
42
|
Restricted stock
|
|
|
18
|
|
|
—
|
|
|
$
|
49
|
|
$
|
42
|
|
|
|
|
|
|
|
Income statement account:
|
|
|
|
|
|
|
Selling and marketing
|
|
$
|
15
|
|
$
|
16
|
General and administrative
|
|
|
34
|
|
|
26
|
|
|
$
|
49
|
|
$
|
42
|
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,
|
|
|
2018
|
|
2017
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected stock price volatility
|
|
|
67.0
|
%
|
|
|
74.0
|
%
|
Risk-free interest rate
|
|
|
2.6
|
%
|
|
|
2.0
|
%
|
Expected term (in years)
|
|
|
5.6
|
years
|
|
|
5.2
|
years
|
Weighted-average grant date fair-value
|
|
$
|
0.23
|
|
|
$
|
0.28
|
|
The aggregate intrinsic value of stock options outstanding at
March 31, 2018
and
2017
was
$
48
,000
and
$210,000
, respectively,
and for options exercisable was
$
46,000
and
$
188,000
, 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
0
and
38,646
options exercised
during the
three
months ended
March 31
,
2018 and
2017
, respectively
. The aggregate intrinsic value of the options exercised during the
three
months ended
March 31
,
2018 and
2017
was
$0
and
$
3
,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 March 31,
|
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
|
United States
|
|
$
|
2,237
|
|
$
|
2,705
|
Canada
|
|
|
583
|
|
|
681
|
Other countries
|
|
|
17
|
|
|
149
|
Total revenue
|
|
$
|
2,837
|
|
$
|
3,535
|
During the
three
months ended
March 31
,
2018
and
2017
,
two
and
t
hree
of our customers represented approximately
45
%
and
53
%,
of our revenue,
respectively
.
7.
Subsequent Events
On April 18, 2018,
we completed the second and final closing and
issued additional convertible subordinated promissory notes with an aggregate principal amount of
$120,000
.