UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
AMENDMENT NO. 1
ON
FORM 10-KSB/A
x
o
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2001
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission File Number 005-58549
___________
Jones Soda Co.
(Exact name of small business issuer as specified in its charter)
___________
Washington
(State or other jurisdiction of
incorporation or organization)
234 Ninth Avenue North
Seattle, WA 98109
(Address of principal
executive offices)
91-1696175
(I.R.S. Employer Identification No.)
(206) 624-3357
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
(none)
___________
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value per share
___________
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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. [X] Yes [ ] No
Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $23,615,911
As of March 12, 2002, there were 19,800,596 shares of the Company's common stock issued and outstanding, and the aggregate
market value of such common stock held by non-affiliates was approximately $8,611,002, based on the average of the bid ($0.01) and
asked ($1.01) prices of such stock on that date of $0.51.
Documents Incorporated By Reference: None.
Transitional Small Business Disclosure Format (Check one): Yes ; No X
EXPLANATORY NOTE: This Amendment No. 1 is being filed solely for the purpose of filing the information required by
Part III of Form 10-KSB within 120 days of the fiscal year end, pursuant to General Instruction E.3.
JONES SODA CO.
Form 10-KSB Annual Report
Table of Contents
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 8.
Description of Business...............................................................................................................................................
Description of Property ...............................................................................................................................................
Legal Proceedings .......................................................................................................................................................
Submission of Matters to a Vote of Security Holders ................................................................................................
Market for Common Equity and Related Stockholder Matters ..................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations .....................................
Consolidated Financial Statements .............................................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................................
PART II
Item 9.
PART III
Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act ...............................................................................................................................................................................
Executive Compensation.............................................................................................................................................
Item 10.
Security Ownership of Certain Beneficial Owners and Management ........................................................................
Item 11.
Certain Relationships and Related Transactions.........................................................................................................
Item 12.
Item 13.
Exhibits and Reports on Form 8-K .............................................................................................................................
SIGNATURE .....................................................................................................................................................................................
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**
Incorporated by reference from the Company's definitive proxy statement for its 2002 annual meeting of shareholders, to be filed
with the Securities and Exchange Commission within 120 days after the close of the fiscal year 2001.
EXPLANATORY NOTE
Unless otherwise indicated or the context otherwise requires, all references in this Annual Report on Form 10-KSB to "we," "us,"
and the "Company" are to Jones Soda Co., a Washington corporation, and its wholly owed subsidiaries WAZU Products Ltd., Jones Soda
Co. (USA) Inc., myjones.com Inc. and Whoopass USA Inc.
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.
This Annual Report on Form 10-KSB contains a number of forward-looking statements that reflect the Company's current views with
respect to its business, strategies, products, future results and events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties including those discussed below that could cause actual results to differ materially from historical
results or those anticipated. When used in this Report, the words "anticipate," "believe," "estimate," "intend," "may," "will," "expect" and
similar expressions as they relate to the Company are intended to identify such forward-looking statements, but are not the exclusive means
of identifying such statements. The Company's actual results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. The Company does not undertake any obligation to revise these
forward-looking statements to reflect any future events or circumstances.
For a discussion of some of the factors that may affect the Company's business, results and prospects, see "ITEM 1.—
DESCRIPTION OF BUSINESS—Risk Factors Affecting the Business of the Company." Readers are urged to carefully review and
consider the various disclosures made by the Company in this Report and in the Company's other reports previously filed with the
Securities and Exchange Commission, including the Company's periodic reports on Forms 10-KSB and 10-QSB and its registration
statement on Form S-4, and those described from time to time in the Company's press releases and other communications, which attempt to
advise interested parties of the risks and factors that may affect the Company's business.
Unless otherwise stated, dollar figures stated in this Annual Report are in United States dollars. The Company's financial
statements are reported in United States dollars.
CURRENCY TRANSLATION
ITEM 1. DESCRIPTION OF BUSINESS.
The Company
PART I
We develop, produce, market and distribute "alternative" or "New Age" beverages. We currently produce, market and distribute
four unique beverage brands,
•
•
•
•
Jones Soda Co.®, a "premium" soda,
Jones Naturals, a non-carbonated juice & tea,
Jones Energy, an energy drink and
WhoopAss™, an energy drink.
Our business strategy is to increase sales by expanding distribution of our internally developed brands in new and existing
markets, stimulating consumer trial of our products and increasing consumer awareness of, and brand loyalty to, our unique brands and
products. Key elements of our business strategy include:
•
•
creating strong distributor relationships;
stimulating strong consumer demand for our existing brands and products with primary emphasis in the United States
and Canada; and
•
developing unique alternative beverage brands and products.
The premise underlying our business strategy is that the commercial success of any alternative or New Age beverage brand will,
in large part, be determined by its brand image. Moreover, due to the limited life cycle of beverages in the alternative or New Age category
of the beverage industry, we believe that the ongoing process of creating new brands, products and product extensions will be an important
factor in our long-term success. Beginning in March 1995, we shifted our business from being solely a regional distributor of licensed and
unlicensed brands and products to being exclusively a developer, producer, marketer and distributor of our internally developed brands and
products. One of the main reasons for our change in strategic direction from distributing other brands to producing and marketing our own
brands was the potential to increase sales beyond one specific territory and to earn higher gross margins from the sale of our own unique
beverage brands. During this period we also reorganized and added to our senior management team.
We use contract packers to prepare, bottle and package our internally developed products, continually reviewing our contract
packing needs in light of regulatory compliance and logistical requirements. Currently, our primary contract packers are located in
Burnaby, British Columbia, Woodbridge, Ontario, Forest Grove, Oregon, Cold Springs, Minnesota and Modesto, California. Substantially
all of the raw materials used in the preparation, bottling and packaging of our products are purchased by us or by our contract packers in
accordance with our specifications.
We arrange with independent trucking companies to have product shipped from our contract packers to independent warehouses.
From such independent warehouses, we deliver our products through independent trucking companies to our distributors. Distributors sell
and deliver our products either to sub-distributors or directly to retail outlets, and such distributors or sub-distributors stock the retailers'
shelves with our products.
Historical Development
Jones Soda Co. is a Washington corporation and has its principal place of business at 234 Ninth Avenue North, Seattle,
Washington 98109 and its telephone number is (206) 624-3357.
Originally, the Company was incorporated on December 23, 1986 as a British Columbia corporation under the name "2072
Investment Ltd." After several name changes, we became "Urban Juice & Soda Company Ltd." on May 26, 1993. Effective December 31,
1999, we relocated out of British Columbia and continued into the State of Wyoming, as a result of which, we ceased to be a British
Columbia corporation and became a Wyoming corporation. Subsequently, on August 1, 2000, Urban Juice & Soda Company Ltd. merged
into and became Jones Soda Co., a Washington corporation.
We began as a marketer and distributor of juices, sodas and other New Age and alternative beverages. By the end of 1994, we
had established our business as a full-line beverage distribution company focusing on the distribution of alternative beverage products in
Western Canada. During 1994, we simultaneously completed the creation of two internally developed products and began work on the
creation of a third internally developed product. In March 1995, coinciding with the accelerating demand for bottled water, we launched
our first unique brand, WAZU®, a natural spring water. In November 1995, we launched our second trademarked brand, Jones Soda Co.®.
We continued to distribute other brands, but stopped doing so by the end of 1996, in order to increase our business focus on our own
brands.
Since 1997, we have operated exclusively as a beverage manufacturer and marketer of its own brands. In August 1999, we
created a separate brand, Jones Whoopass, an energy drink and subsequently re-named Whoopass. In April 2001, we introduced Jones
Juice, a product extension of Jones Soda Co., which we subsequently renamed in early 2002 as Jones Naturals. In November 2001, we
created Jones Energy, an energy drink, as a third product extension of Jones Soda Co. Our primary brand, Jones Soda Co. and its product
extensions, comprise the majority of our sales, with Jones Naturals comprising 16.0% of total sales and Whoopass comprising 13.7% of
total sales. Recently, in February 2002, we reorganized our branded groups into two categories, Jones and Whoopass, with all operations
associated with the Whoopass brand to be conducted through our wholly owned subsidiary, Whoopass USA Inc.
Subsidiaries
Jones Soda Co. is a holding company and carries on no operating business except through its direct wholly owned subsidiaries, as
follows:
•
•
•
•
Jones Soda Co. (USA) Inc.—A wholly owned subsidiary incorporated in the State of Washington on August 3, 1995,
which focuses on our operations in the United States;
WAZU Products Ltd.—A wholly owned subsidiary incorporated in British Columbia on March 6, 1987 (originally
under the name Urban Hand Ltd.), which focuses on our operations in Canada;
WhoopAss USA Inc.—A wholly-owned subsidiary incorporated in the State of Washington on November 20, 2001,
which focuses on our Whoopass brand operations; and
Myjones.com Inc—A wholly owned subsidiary incorporated in the State of Washington on February 14, 2000, which
operates our www.myjones.com website.
The New Age or Alternative Beverage Industry
Jones Soda Co. and WhoopAss, which are classified as New Age or alternative beverages, as well as other unique brands and
products that we may develop in the future, compete with beverage products of all types, including soft drinks, beer, fruit juices and drinks,
bottled water, wine and spirits.
In its annual beverage market survey for calendar year 2000, Beverage World magazine (www.beverageworld.com) estimated
that the New Age or alternative beverage markets grew 11.2% over 1999, to approximately $9.7 billion in total sales.
New Age or alternative beverages are distinguishable from mainstream carbonated soft drinks in that they tend to contain less
sugar, less carbonation, and natural ingredients. As a general rule, three criteria have been established for such a classification:
(1) relatively new introduction to the market- place; (2) a perception by consumers that consumption is healthful compared to mainstream
carbonated soft drinks; and (3) the products use natural ingredients and flavors. According to Beverage Marketing Corporation
(www.beverageworld.com), for 2000, the New Age or alternative beverage category consists of the following segments:
•
•
•
•
Energy drinks
Fresh packaged fruit beverages
Premium soda
Retail PET (polyethylene terephthalate) bottled water
•
•
•
•
•
•
•
•
•
•
•
•
Ready-to-drink (RTD) coffee
RTD tea (regular/diet)
RTD (nutrient-enhanced)
Shelf-stable dairy (regular/diet)
Shelf-stable dairy (nutrient-enhanced)
Single-serve-fruit beverages (regular/diet)
Single-serve-fruit beverages (nutrient enhanced)
Smoothies
Sparkling water
Sports drinks
Vegetable/fruit juice blends
Other New Age beverages
Business Strategy
In late 1995, we launched our premium soda product under our trademarked brand, Jones Soda Co. We made this decision after
witnessing the proliferation of new ready-to-drink tea brands during the first half of the 1990s, anticipating what we believed to be a peak
in the product life cycle for that segment of the New Age beverage category. By launching Jones Soda Co., we believed we were creating a
new category in the New Age beverage market and that we were offering distributors something new to sell. In its January 1998 issue,
Beverage Aisle magazine changed the name of the "all-natural soda" segment to the "premium soda" segment and cited Jones Soda Co. as
an example of a beverage in this category. Thus, we believe that the Jones Soda Co. brand and product line have helped to create a new
segment in the New Age or alternative beverage industry.
Utilizing creative but relatively low cost marketing and brand promotion techniques, we are currently focused on building a
strong distributor network for our lead brand, Jones Soda Co. We believe that our experience as a distributor of licensed and non-licensed
New Age beverage brands has given, and will continue to give, our company credibility in connection with its efforts to build a quality
network of independent distributors. Moreover, we believe that our first hand experience watching other companies' fortunes rise and fall
with a single New Age beverage brand has been incorporated into our business strategy. Five New Age beverage brands, including
Sundance, New York Seltzer, Koala Springs, Clearly Canadian and Snapple, have each achieved a minimum of $100,000,000 in revenues.
Each of these brands was the first brand in a new segment of the New Age beverage category and each brand had a certain fashion or trend
component. For instance, Koala Springs increased sales at a time when Australia was popular as a travel destination. In developing the
Jones Soda Co. brand, we believe we have created a leading brand in the premium soda segment of the New Age beverage category and
have marketed the product with a distinct fashion component. The fashion component includes black and white labels, which is
representative of current overall fashion trends. See "Products —Jones Soda Co." We believe we will be ready to launch new unique
brands, products and/or product extensions through our then-existing distributor network if and when the consumer demand for Jones Soda
Co. brand or products begins to decline.
Our business strategy is to attempt to increase sales by expanding product distribution in new and existing markets (primarily
within North America), stimulating consumer trial of our products and creating and increasing consumer awareness of and brand loyalty to
our unique brands and products. We believe that products in the New Age beverage category, much like certain fashion trends, tend to
have a limited life cycle of approximately five to nine years. As part of our business strategy, we intend to launch new brands, products
and/or product extensions at approximately 18 to 30 month intervals. See "Brand and Product Development," below.
Key elements of our business strategy include the following:
Brand Franchise
We believe that the market for alternative beverages is dependent to a large extent on image more than taste, and that this market
is driven by trendy, young consumers between the ages of 12 and 34. Accordingly, our strategy is to develop unique brand names, slogans
and trade dress. In addition to unique labeling on our products, we provide each of our distributors with point-of-sale promotional materials
and branded apparel items. We promote interaction with our customers through the use of these point-of-sale items, such as posters,
stickers, table cards, shelf danglers, post cards, hats, pins, T-shirts, and our proprietary lighted display box. In addition, through the labels
on our bottles, we invite consumers to access our website and to send in photographs to be featured on the Jones Soda Co. labels. We
believe that our labeling, marketing and promotional materials are important elements to creating and increasing distributor, retailer and
consumer awareness of our brands and products.
Distributor Network and Key Accounts
We distribute our products through a network of independent distributors. We have also obtained listings for our Jones Soda Co.
Whoopass, and Jones Naturals brands with certain key retail accounts, including QFC, Meijer, Ralph's, Kroger and Safeway. We have
pursued this strategy both in an effort to increase sales and to encourage distributors to distribute our brands and products to our key
accounts and other accounts of our distributors.
We usually grant independent distributors the right to distribute finished cases of one or more of our brands in a particular region,
province, state or local territory, subject to our overall management directives. We select distributors who we believe will have the ability
to get our unique brands and products on the "street level" retail shelves in convenience stores, delicatessens, sandwich shops and selected
supermarkets. Ultimately, we have chosen, and will continue to choose, our distributors based upon their perceived ability to build our
brand franchise. We currently maintain a network of approximately 140 distributors in 41 states in the U.S. and eight provinces in Canada.
We have additionally pursued distribution to "alternative" or "non-traditional" beverage retailers. We have entered into exclusive
distribution agreements with approximately 250 independent non-traditional beverage retailers, including music stores, skateboard shops,
comic book stores and clothing stores primarily in San Diego, Seattle and Vancouver, B.C. We intend to selectively pursue distribution to
these national and independent non-traditional beverage accounts as part of our distribution and marketing strategy.
Brand and Product Development
We have developed and intend to continue to develop our brands and products in-house. We used a similar process initially to
create the WAZU and Jones Soda Co. brands, and intend to continue utilizing this process in connection with the creation of our future
brands. This process primarily consists of the following steps:
Market Evaluation. First we perform a complete review of the beverage industry in general, including a review of existing beverage
categories and segments, and the product life cycle stages of such categories and segments. In addition, we review the fashion industry and
the consumer products industry to determine the general trends in such industries. Based on these findings, we also review and attempt to
determine the direction of future fashion and consumer product trends. Finally, we evaluate the strengths and weaknesses of certain
categories and segments of the beverage industry with a view to pinpointing potential opportunities.
Distributor Evaluation. We then prepare a thorough analysis of existing and potential distribution channels. This analysis addresses,
among other things, which companies will distribute particular beverage brands and products, where such companies may distribute such
brands and products, and what will motivate these distributors to distribute such brands and products.
Production Evaluation. Next, we review all aspects of production in the beverage industry, including current contract packing capacity,
strategic production locations, and quality control, and prepare a cost analysis of the various considerations that will be critical to
producing our unique brands and products.
Image And Design. In light of our market, distributor and production evaluations, we then create and develop the concept for a beverage
brand or product extension. Although we control all aspects of the creation of each brand or product extension, we contract with outside
creative artists to help design our brands. We have used, and intend to continue to use, a different artist, or group of artists, whose portfolio
of work best suits us with respect to the creation of a particular new brand or product extension. These artists work closely with us to
finalize the creation of a new brand image and design. Our technical services department then works with various flavor concentrate houses
to test, choose and develop product flavors for the brand.
Due to the limited life cycle of beverages in the New Age or alternative category, we believe that the ongoing process of creating
new brands, products and product extensions will be an important factor in our long-term success.
Products
Jones Soda Co.
We believe that our trademarked Jones Soda Co. brand and product line is a leader in the Premium Soda segment of the New Age
beverage category. We originally launched Jones Soda Co. in November 1995, and the Jones Soda Co. product line currently consists of
the following eighteen flavors:
• Orange & Cream Soda
• Peachy Keen Soda
• Cherry Soda
• Lemon Lime Soda
• Crushed Melon
• Fun Soda
• Strawberry Lime Soda
• Vanilla Cola
• Root Beer
• Cream Soda
• Strawberry & Cream Soda
• Happy Soda
• Fufu Berry Soda
• Blue Bubblegum Soda
• Green Apple Soda
• Berry Lemonade Soda
• Slim Cream Soda
• Slim Black Cherry
Each of the current Jones Soda Co. products is made from natural and artificial flavors. Some flavors distributed in the U.S.
market may contain caffeine (whereas in Canada only Vanilla Cola and Root Beer contain caffeine). Each flavor has a different color
profile that we believe is readily distinguishable on a retail shelf. All Jones Soda Co. beverage products come in 12 ounce (355 ml) clear
long-neck bottles with primarily black and white labels displaying a variety of contemporary urban American images. We also encourage
consumers of Jones Soda Co., through the labels on our bottles, to send in photographs that may potentially be used on one of the Jones
Soda Co. labels.
Whoopass
We originally launched Jones WhoopAss in October 1999, and subsequently re-named it Whoopass. WhoopAss is a citrus drink in
an 8.4 ounce (250 ml) slim can containing riboflavin, niacin, vitamin B6 and thiamin. WhoopAss competes in the Energy Drink category of
the New Age beverage industry.
Jones Naturals
In April 2001, the Company launched a non-carbonated beverage, Jones Juice. The Jones Juice products have 100% natural
flavors and contain ingredients such as ginseng, royal jelly, kava kava, valerian root, lemongrass, zinc, taurine, creatine and various
vitamins. Jones Juice comes in 20 ounce (591 ml) clear bottles with color photograph labels. Consumers are similarly encouraged to send
in photographs that potentially may be used on one of the Jones Juice labels. In order to promote a clearer and more integrated brand
image, in March 2002 we re-labeled Jones Juice to resemble the black and white photo labels of Jones Soda Co., and we renamed the
product Jones Naturals. The Jones Naturals line currently consists of:
• Berry White
• Betty
• D'Peach Mode
Jones Energy
• Limes with Orange
• Fu Cran Fu
• Black
• Purple Carrot
• Bada Bing!
• Dave
In November 2001, we launched, Jones Energy, another energy drink. Jones Energy is a citrus energy drink in an 8.4 ounce (250
ml) slim can containing vitamin B6, riboflavin, niacin, thiamin and coQ-10. Jones Energy competes in the Energy Drink category of the
New Age beverage industry.
In March 2002, we announced the re-organization of our products under two separate brands, Jones and Whoopass. The Jones
brand, which includes Jones Soda Co., Jones Naturals and Jones Energy, will be operated within the Jones Soda Co. operating structure.
Whoopass, and all Whoopass product extensions will be operated through our subsidiary company, Whoopass USA Inc. In March 2002,
we also announced the launch of a Whoopass product extension, Whoopass Energy Shots, which are concentrated energy supplements in a
1 ounce container.
For the year ended December 31, 2001, revenue from the sale of the Jones brands, Jones Soda Co., Jones Naturals and Jones
Energy, constituted 86.1% of our total revenue. Revenue from the sale of WhoopAss constituted 13.9% of our total revenue.
Marketing, Sales And Distribution
Marketing
Our pricing policies for the Jones and Whoopass brands take into consideration competitors' prices and our perception of what a
consumer is willing to pay for the particular brand and product. The goal is to competitively price our unique products with the other New
Age beverages. Since we can control our production costs, we work back through the distribution chain so that our suggested retail prices
are proportional with respect to the anticipated profit margins of each chain in the distribution process. The following table shows the
suggested retail prices for our products in the United States and in Canada:
Jones Soda Co....................................................................................................................
Jones Naturals....................................................................................................................
Whoopass...........................................................................................................................
Jones Energy......................................................................................................................
$0.79—$1.09
$1.49
$1.99
$1.99
Cdn.$0.99—Cdn.$1.29
Cdn.$1.89
Cdn.$1.99
N/A
United States
Canada
We primarily use point-of-sale materials such as posters, stickers, table cards, shelf danglers, post cards, hats, pins, T-shirts and
jackets to create and increase consumer awareness of our proprietary products and brands. In response to consumer demand, we also sell
Jones and Whoopass products and our wearables on our web site (http://www.jonessodastore.com). Through cooperative advertising,
several of our independent distributors fund a portion of our marketing budget, based upon case sales. In selected cities, we participate on a
"grass roots" level at certain events in an attempt to create and increase brand awareness and loyalty. We also have a program of
sponsoring alternative sport athletes to promote Jones and Whoopass, and we have signed up several athletes in the skateboard, snowboard
and mountain bike arenas. We also use three leased recreational vehicles painted with the Jones colors and logos to create consumer
awareness and enthusiasm to assist distributors as they open new retail accounts and markets. In addition to these marketing techniques, we
also pursue cross-promotional campaigns with other companies.
During 2001 we maintained our unique website, www.myjones.com, which allows our Jones Soda Co. consumers to create their
own personalized 12 pack of Jones Soda Co. with their unique photo in the labels. The strategy of www.myjones.com is to provide a
unique product offering to our consumers as well as provide a unique marketing opportunity for our Jones Soda Co. brand. Consumers can
scan their unique photo through the web and crop and create their own "myjones" labels. The unique labels are downloaded at our office in
Seattle and we send out 12 packs of the personalized soda to the consumer. We believe this strategy has increased awareness for the Jones
Soda Co. brand as well as provided for increased consumer interactivity with the Jones Soda Co. brand, and we anticipate that it will
continue to do so.
Sales
Our products are sold in 41 states in the U.S. and eight provinces in Canada, as well as in the U.K., primarily in convenience
stores, delicatessens, sandwich shops and selected supermarkets. During the year ended December 31, 2001, sales in the U.S. represented
84.1% of total sales, while sales in Canada represented 15.4% and sales in the U.K. represented 0.5% of total sales, respectively.
During 2001, our sales force was organized into six regional groups, consisting of the U.S. Pacific Northwest, the U.S. Southwest,
the U.S. Midwest, the U.S. East Coast, Canada and International. Regional Managers are ultimately responsible for the separate regions.
Senior sales personnel are responsible for large retail accounts located in their regions, the management of existing independent distributor
relations and the selection of new independent distributors as may be required. Junior sales personnel work closely with our independent
distributors and their sales representatives to help them open street level retail accounts and train them in our sales and marketing
techniques. All of our sales personnel have had prior industry experience.
Distribution
We primarily sell our products through our distribution network, and we currently have relationships with approximately 140
independent distributors throughout North America. Our policy is to grant our distributors rights to sell particular brands within a defined
territory. The majority of our distributors carry other beverage products. Agreements with our distributors vary, but most are oral and
terminable by either party at will, as we believe is common in the beverage industry.
During the year ended December 31, 2001, the three primary distributors of our products purchased approximately 10.6%, 8.2%
and 2.7%, respectively, of the total number of cases sold. We anticipate that, as consumer awareness of our brands develops and increases,
we will continue to upgrade and expand our distributor network, which may result in a decreased dependence on any one or more of our
independent distributors. In addition, during 2001, our top distributor and two of our other top five distributors either filed for bankruptcy
or went out of business, and in late 2001 and early 2002 we subsequently entered into agreements or letters of intent with new distribution
partners for these three markets. For two of these markets, our new distribution partners agreed to pay us for the rights to distribute our
brands.
We generally require our independent distributors to place their purchase orders for our products at least 10 days in advance of
shipping. To the extent we have additional product available in inventory, we will fulfill other purchase orders when and as received. We
contract with outside trucking companies to deliver our products from our independent warehouses to our independent distributors. After
an independent distributor receives delivery of our products it will most often, in turn, resell and deliver those products directly to a retail
outlet and stock the retailer's shelves with our products.
Production
Contract Packing Arrangements
We currently use five main independent contract packers known as "co-packers" to prepare and bottle our products. As is
customary in the contract packing industry, we are expected to arrange for our contract packing needs sufficiently in advance of anticipated
requirements. Accordingly, it is our business practice to require our independent distributors to place their purchase orders for our products
at least 10 days in advance of shipping. Other than minimum case volume requirements per production run, we do not have any minimum
production requirements, except as detailed below.
Raw Materials
The raw materials used in the preparation and packaging of our products (consisting primarily of concentrate, glass, labels, caps
and packaging) are purchased from suppliers selected either directly by our contract packers or by us, who, in turn, supply those raw
materials to our contract packers.
We believe that we have adequate sources of raw materials, which are available from multiple suppliers. Currently, we purchase
our flavor concentrate from two flavor concentrate companies, Pro-Liquitech International and Wild Flavors, Inc. We anticipate that we
will purchase flavor concentrate from other flavor houses for future Jones and Whoopass flavors and/or additional products, with the
intention of developing secondary sources of flavor concentrate for each of our products. The water used to produce Jones and Whoopass
is filtered and is also treated to reduce alkalinity.
Quality Control
Our products are made from high quality ingredients and natural and artificial flavors. We seek to ensure that all of our products
satisfy our quality standards. Contract packers are selected and monitored by our own quality control representatives in an effort to assure
adherence to our production procedures and quality standards. We analyze samples of our products from each production run undertaken
by each of our contract packers.
For every run of product, our contract packer undertakes extensive on-line testing of product quality and packaging. This includes
testing levels of sweetness, carbonation, taste, product integrity, packaging and various regulatory cross checks. For each product, the
contract packer must transmit all quality control test results to us on a daily basis. These test results are reviewed by our internal technical
staff for compliance with our standards. In addition, samples from every production run are forwarded to our quality control department.
These samples are then re-tested by us to double-check the production facilities' quality control. Based on our experience, we believe this
cross check on product meets or exceeds standard procedures established in the industry.
Testing at both our facility and the contract production facilities includes microbiological checks and other tests to ensure the
production facilities meet the standards and specifications of our quality assurance program. This information is then logged into a
database for rapid statistical analysis and followed up with each contract packer. We believe our production facilities inspection program
meets or exceeds industry standards. Water quality is monitored during production and at scheduled testing times to ensure compliance
with applicable government regulatory requirements. Flavors are pre-tested before shipment to contract packers from the flavor
manufacturer. We are committed to an on-going program of product improvement with a view toward ensuring the high quality of our
product.
We believe we source and select only those suppliers that use only quality components. We also inspect packaging suppliers'
production facilities and monitor their product quality.
Regulation
The production and marketing of our licensed and proprietary beverages are subject to the rules and regulations of various
federal, provincial, state and local health agencies, including in particular Health Canada, Agriculture and Agri-Food Canada and the U.S.
Food and Drug Administration. The FDA and Agriculture and Agri-Food Canada also regulate labeling of our products. From time to time,
we may receive notifications of various technical labeling and/or ingredient infractions with respect to our licensed products. We believe
that we have a compliance program in place to ensure compliance with production, marketing and labeling regulations on a going-forward
basis. There are no notifications or actions currently outstanding. See "Risk Factors Affecting the Business of the Company," below.
Trademarks, Flavor Concentrate Trade Secrets and Patent Pending
We own a number of trademarks, including the following in the United States and Canada: "Jones Soda Co.®," "Jones
Naturals™" "WhoopAss™" and "Slim Jones®." In the United States the trademarks expire 10 years from the registration date and in
Canada 15 years from the registration date, although in both Canada and the United States, they may be renewed for a nominal fee. In
addition, we have trademark protection in the United States and Canada for a number of other trademarks for slogans and product designs,
including "Wet Yourself™," "I've Got A Jones For A Jones®," "Jones Soda Co. and Design™," "Whoopass and Design®" and "My
Jones". In addition, we have applied for trademark protection for several marks, including "Jones Soda Co." and "Whoopass" in the United
Kingdom, Germany, Japan, and other foreign jurisdictions.
We also have the exclusive rights to twenty-seven flavor concentrates developed with our flavor concentrate companies, which
we protect as trade secrets. We will continue to take appropriate measures, such as entering into confidentiality agreements with our
contract packers and exclusivity agreements with our flavor houses, to maintain the secrecy and proprietary nature of our flavor
concentrates.
We also have applied for patent protection in the U.S. and in Canada for our "myjones.com" project.
We consider our trademarks and trade secrets to be of considerable value and importance to our business. No successful
challenges to our registered trademarks have arisen and we have no reason to believe that any such challenges will arise in the future. See
"Risk Factors Affecting The Business of The Company," below.
Competition
The beverage industry is highly competitive. The principal methods of competition in the beverage industry include the following:
•
•
•
•
•
•
•
brand name;
brand image;
price;
labeling and packaging;
product quality and taste;
trade and consumer promotions; and
the development of new brands, products and product extensions.
We compete with other beverage companies not only for consumer acceptance but also for shelf space in retail outlets and for
marketing focus by our distributors, all of whom also distribute other beverage brands. Our products compete with all non-alcoholic
beverages, most of which are marketed by companies with substantially greater financial resources than Jones Soda Co. We also compete
with regional beverage producers and "private label" soft drink suppliers.
In order to compete effectively in the beverage industry, we believe that we must first convince independent distributors that
Jones Soda Co. is a leading brand in the premium soda segment of the alternative or New Age beverage industry. In connection with or as
a follow-up to the establishment of an independent distributor relationship for the Jones Soda Co. brand, we sell Jones Naturals, Jones
Energy and WhoopAss as complementary products that may replace other non-carbonated single-serve fruit beverages or ready-to-drink
(RTD) teas or energy drinks. As a means of maintaining and expanding our distribution network, we intend to introduce new products and
product extensions, and when warranted, new brands. Although we believe that we will be able to continue to create unique, exciting and
fashionable brands, there can be no assurance that we will be able to do so or that other companies will not be more successful in this
regard over the long term. See "Risk Factors Affecting The Business of The Company," below.
Pricing of the products is also important. The Jones and Whoopass brands are priced in the same price range as competitive New
Age beverage brands and products.
Employees
As of December 31, 2001, we had 36 full-time employees, 23 of whom were employed in sales and marketing capacities, eight
were employed in administrative capacities, and five were employed in manufacturing and quality control capacities. None of our
employees is represented by labor unions. We believe that our relationships with our employees are good.
Risk Factors Affecting the Business of the Company
The following discussion in this Annual Report on Form 10-KSB contains forward-looking statements regarding the Company,
its business, prospects and results of operations that involve risks and uncertainties. The Company's actual results could differ materially
from the results that may be anticipated by such forward-looking statements and discussed elsewhere in this Report. Factors that could
cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed under the captions
"business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed
elsewhere in this Report. In evaluating the Company's business, prospects and results of operations, readers should carefully consider the
following factors in addition to other information presented in this Report and in the Company's other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business, prospects
and results of operations.
We rely heavily on our independent distributors, and this could affect our ability to efficiently and profitably distribute and
market our product.
Our marketing and sales strategy presently, and in the future, will rely on the availability and performance of our independent
distributors. We currently do not have, nor do we anticipate in the future that we will be able to establish, long-term contractual
commitments from many of our distributors. Accordingly, there is no assurance that we will be able to maintain our current distribution
relationships or establish and maintain successful relationships with distributors in new geographic distribution areas. Moreover, there is
the additional possibility that we may have to incur additional expenditures to attract and/or maintain key distributors in one or more of our
geographic distribution areas in order to profitably exploit our geographic markets.
As we believe is customary in the beverage industry, generally we do not have written contractual commitments with our
independent distributors, rather our agreements are typically oral and terminable at will. Our independent distributors are not required to
place minimum monthly or annual orders for our products. In order to reduce inventory costs, independent distributors endeavor to order
products from us on a "just in time" basis in quantities, and at such times, based on the demand for the products in a particular distribution
area. Accordingly, there is no assurance as to the timing or quantity of purchases by any of our independent distributors or that any of our
distributors will continue to purchase products from us in the same frequencies and/or volumes as they may have done in the past.
Our ability to establish a market for our unique brands and products in new geographic distribution areas, as well as maintain and
expand our existing markets, is dependent on our ability to establish and maintain successful relationships with reliable independent
distributors strategically positioned to serve those areas. Many of our larger distributors sell and distribute competing products, including
non-alcoholic and alcoholic beverages, and our products may represent a small portion of their business. To the extent that our distributors
are distracted from selling our products or do not employ sufficient efforts in managing and selling our products, our sales and profitability
will be adversely affected. In addition, our ability to maintain our distribution network and to attract additional distributors in new areas
will depend on a number of factors, many of which are outside our control. Some of these factors include,
•
•
•
the level of demand for our brands and products in a particular distribution area,
our ability to price our products at levels competitive with those offered by competing products, and
our ability to deliver products in the quantity and at the time ordered by distributors.
We cannot ensure that we will be able to meet all or any of these factors in any of our current or prospective geographic areas of
distribution. Our inability to achieve any of these factors in a geographic distribution area will have a material adverse effect on our
relationships with our distributors in that particular geographic area, thus limiting our ability to expand our market, which will likely
adversely effect our revenues and financial results.
For the year ended December 31, 2001, three distributors (out of our network of approximately 140 distributors) accounted for
approximately 21.4% of the total number of cases of our beverage products sold. If any one of these primary distributors were to stop
selling our products or decrease the number of cases purchased, this would have an adverse impact on our revenues and financial results. In
fact, during 2001, our top distributor and two of our other top five distributors either filed for bankruptcy or went out of business. Although
subsequently in late 2001 and early 2002 we entered into agreements or letters of intent with new distribution partners for these three
markets, there can be no assurance that in the future we will be successful in finding new or replacement distributors. There can be no
assurance as to the number of cases sold by any of our distributors.
Opposition from traditional non-alcoholic beverage manufacturers may adversely affect our distribution relationships and
may hinder development of our existing markets, as well as prevent us from expanding our markets.
The alternative beverage industry is highly competitive. We compete with other beverage companies not only for consumer
acceptance but also for shelf space in retail outlets and for marketing focus by our distributors, all of whom also distribute other beverage
brands. Our products compete with all non-alcoholic beverages, most of which are marketed by companies with greater financial resources
than Jones Soda Co. and some of which are placing severe pressure on independent distributors not to carry competitive alternative or New
Age beverage brands such as Jones and Whoopass. We also compete with regional beverage producers and "private label" soft drink
suppliers. Increased competitor consolidations, market place competition, particularly among branded beverage products, and competitive
product and pricing pressures could impact our earnings, market share and volume growth. If, due to such pressure or other competitive
threats, we are unable to sufficiently maintain or develop our distribution channels, we may be unable to achieve our current revenue and
financial targets. As a means of maintaining and expanding our distribution network, we intend to introduce product extensions and
additional brands. There can be no assurance that we will be able to do so or that other companies will not be more successful in this regard
over the long term. Competition, particularly from companies with greater financial and marketing resources than Jones Soda Co., could
have a material adverse affect on our existing markets, as well as our ability to expand the market for our products.
We have limited working capital and may need to raise additional capital in the future.
At December 31, 2001, our cash and cash equivalents was nil, although we had $2,319,000 in accounts receivable and
$2,150,000 in inventory. Our working capital at December 31, 2001 was approximately $2,646,000. Although we believe that net cash
provided by operations and amounts available under our bank line of credit will be sufficient to meet anticipated cash needs for working
capital and capital expenditures through fiscal 2002, a revenue shortfall could deplete our limited financial resources and require us to
reduce costs and/or operations substantially or to raise additional funds through equity or debt financings.
Our capital needs in the future will depend upon factors such as market acceptance of our products and any other new products
we launch, the success of our independent distributors and our production, marketing and sales costs. None of these factors can be
predicted with certainty.
We may need substantial additional debt or equity financing in the future for which we currently have no commitments or
arrangement. We cannot assure you that any additional financing, if required, will be available or, even if it is available that it will be on
terms acceptable to us. If we raise additional funds by selling stock, the percentage ownership of our then current shareholders will be
reduced. Any inability to obtain required financing could have a material adverse effect on our business, results of operations and financial
condition.
We have not earned an operating profit in any year.
For the 2001 fiscal year, we had loss from operations of approximately $(1,787,000), and historically have not generated profit
from operations. In addition, through December 31, 2001, we had an accumulated deficit of $8,769,545, most of which had resulted from
our operations during the period in which we transformed from being a regional distributor of licensed and unlicensed beverage brands and
products to being a unique brand holder producing, developing and marketing our own products. We believe that to operate at a profit we
must:
•
•
•
increase the sales volume for our unique brands and products;
achieve and maintain efficiencies in operations;
maintain fixed costs at or near current levels; and
•
avoid significant increases in variable costs relating to production, marketing and distribution.
We cannot assure you that we will meet these objectives or achieve profitability or even if we do achieve profitability, that we will
be able to sustain profitability. We have incurred significant operating expenses in the past and expect to do so again in the future and, as a
result, will need to significantly increase revenues in order to achieve profitability. Our ability to increase sales from current sales levels
will depend primarily on success in expanding our current markets and introducing our current brands and products, and possibly new
unique brands, products or product extensions, into new geographic distribution areas, particularly in the United States. Our ability to
successfully enter new distribution areas will, in turn, depend on various factors, many of which are beyond our control including, but not
limited to, the continued demand for our brands and products in target markets, the ability to price our products at levels competitive with
competing products, the ability to establish and maintain relationships with distributors in each geographic area of distribution and the
ability in the future to create, develop and successfully introduce one or more new brands, products, and product extensions.
We rely on third-party packers of our products, and this dependence could make management of our marketing and
distribution efforts inefficient or unprofitable.
Even though we control and manage the entire manufacturing process of our products, we do not own the plant and equipment
required to manufacture and package our beverage products and do not anticipate having such capabilities in the future. As a consequence,
we depend on third-party or contract packers to produce our beverage products and to deliver them to distributors. Our ability to attract and
maintain effective relationships with contract packers for the production and delivery of our beverage products in a particular geographic
distribution area is important to the achievement of successful operations within each distribution area. Currently, the competition among
contract packers for business allows us to have the choice of two or more acceptable contract packers in each of our geographic
distribution areas. Under these circumstances, we are currently able to establish and maintain competitive arrangements with contract
packers. However, there is no assurance that these conditions will continue to exist in either our current geographic distribution areas or in
new areas we may enter. Accordingly, there is no assurance that we will be able to maintain our economic relationships with current
contract packers or establish satisfactory relationships with contract packers in new geographic distribution areas we may enter. The failure
to establish and maintain effective relationships with contract packers for a distribution area could increase our manufacturing costs and
thereby materially reduce profits realized from the sale of our products in that area. In addition, poor relations with our contract packers
could adversely affect the amount and timing of product delivered to our distributors for resale, which would in turn adversely affect our
revenues and financial condition.
As is customary in the contract packing industry for comparably sized companies, we are expected to arrange for our contract
packing needs sufficiently in advance of anticipated requirements. To the extent demand for our products exceeds available inventory and
the capacities produced by contract packing arrangements, or orders are not submitted on a timely basis, we will be unable to fulfill
distributor orders on demand. Conversely, we may produce more products than warranted by the actual demand for it, resulting in higher
storage costs, the potential unavailability of adequate storage facilities to meet inventory levels, and the potential risk of inventory spoilage.
Our failure to accurately predict and manage our contract packaging requirements may impair relationships with our independent
distributors and key accounts, which, in turn, would likely have a material adverse affect on our ability to maintain profitable relationships
with those distributors and key accounts.
The loss of key personnel would directly affect our efficiency and profitability.
We are dependent upon the creative skills and leadership of our founder, Peter M. van Stolk, who serves as President and Chief
Executive Officer, as well as the management and operational skills of other members of our senior management team. We currently have
in place with Mr. van Stolk a month-to-month employment agreement while we are negotiating a longer-term employment agreement. We
have key person life insurance in the amount of $1 million (Cdn.) on Mr. van Stolk. The loss of Mr. van Stolk's services could have a
material adverse affect on our business and results of operations, including our ability to develop a long-term, profitable business plan.
Our management team consists of several key production, distribution, sales and financial personnel who have been recruited
within the past several years. In order to manage and operate the Company successfully in the future, it may be necessary to further
strengthen our management team.
We could be exposed to product liability claims for personal injury or possibly death.
Although we have product liability insurance in the aggregate amount of $5 million, with an each occurrence limit of $5 million,
we cannot assure that the coverage will be sufficient to cover any or all product liability claims. To the extent our product liability coverage
is insufficient, a product liability claim would likely have a material adverse affect upon our financial condition. In addition, any product
liability claim successfully brought against us may materially damage the reputation of our products, thus adversely affecting our ability to
continue to market and sell that or other products.
Our inability to protect our trademarks and trade secrets may prevent us from successfully marketing our products
We consider our trademarks and trade secrets to be of considerable value and importance to our business. We rely on a
combination of trademark and trade secrecy laws, confidentiality procedures and contractual provisions to protect our intellectual property
rights. We are pursuing the registration of our trademarks in the United States, Canada and internationally. There can be no assurance that
the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate our
trademarks, trade secrets (including our flavor concentrate trade secrets) and/or similar proprietary rights. In addition, there can be no
assurance that other parties will not assert infringement claims against us, we may have to pursue litigation against other parties to assert
our rights. Any such claim or litigation could be costly. In addition, any event that would jeopardize our proprietary rights or any claims of
infringement by third parties could have a material adverse affect on our ability to market or sell our brands, profitably exploit our unique
products or recoup our associated research and development costs.
Our business is subject to many regulations and noncompliance is costly.
The production, marketing and sale of our unique beverages, including contents, labels, caps and containers, are subject to the
rules and regulations of various federal, provincial, state and local health agencies. If a regulatory authority finds that a current or future
product or production run is not in compliance with any of these regulations, we may be fined, or production may be stopped, thus
adversely affecting our financial conditions and operations. Similarly, any adverse publicity associated with any noncompliance may
damage our reputation and our ability to successfully market our products. Furthermore, the rules and regulations are subject to change
from time to time and while we closely monitor developments in this area, we have no way of anticipating whether changes in these rules
and regulations will impact our business adversely. Additional or revised regulatory requirements, whether labeling, environmental, tax or
otherwise, could have a material adverse effect on our financial condition and results of operations.
We compete in an industry that is brand-conscious, so brand name recognition and acceptance of our products are critical to
our success.
Our business is substantially dependent upon awareness and market acceptance of our products and brands by our targeted
consumers, between the ages of 12 and 34. In addition, our business depends on acceptance by our independent distributors of the Jones
and Whoopass brands as beverage brands that have the potential to provide incremental sales growth rather than reduce distributors'
existing beverage sales. Although we believe that we have been relatively successful towards establishing the Jones and Whoopass brands
as recognizable brands in the New Age beverage industry, it may be too early in the product life cycle of the Jones and Whoopass brands
to determine whether our products and brands will achieve and maintain satisfactory levels of acceptance by independent distributors and
retail consumers. We believe that the success of the Jones Energy, Jones Naturals, and WhoopAss brands will also be substantially
dependent upon acceptance of the Jones Soda Co. brand. Accordingly, any failure by the Jones Soda Co. brand to achieve or maintain
acceptance or market penetration would likely have a material adverse affect on our revenues and financial results.
We compete in an industry characterized by rapid changes in consumer preferences, so our ability to continue developing new
products to satisfy our consumers' changing preferences will determine our long-term success.
The current Jones Soda Co. market distribution and penetration may be limited with respect to the population as a whole to
determine whether the brand has achieved initial consumer acceptance, and there can be no assurance that this acceptance will ultimately
be achieved. Based on industry information and our own experience, we believe that alternative or New Age beverage brands and products
may be successfully marketed for five to nine years after the product is introduced in a geographic distribution area before consumers' taste
preferences change. In light of the limited life for alternative or New Age beverage brands and products, a failure to introduce new brands,
products or product extensions into the marketplace as current ones mature would likely prevent us from achieving long-term profitability.
Our business and financial results depend on maintaining a consistent and cost-effective supply of raw materials.
Raw materials for our products include concentrate, glass, labels, caps and packaging materials. Currently, we purchase our flavor
concentrate from two flavor concentrate companies, and we anticipate that we will purchase flavor concentrate from other flavor houses for
future Jones and Whoopass flavors and/or additional products, with the intention of developing secondary sources of flavor concentrate for
each of our products. We believe that we have adequate sources of raw materials, which are available from multiple suppliers, and that we
maintain good supplier relationships. The price of our concentrates is determined by our flavor houses and may be subject to change.
Prices for the remaining raw materials are generally determined by the market, and may change at any time. Increases in prices for any of
these raw materials could have a material adverse impact on our profitability and financial position. If we are unable to continue to find
adequate suppliers for our raw materials on economic terms acceptable to us, this will adversely affect our results of operations.
We face currency risks associated with fluctuating foreign currency valuations.
Approximately 15.4% of our sales are denominated in foreign currencies, primarily the Canadian dollar. A decrease in the value
of a relevant foreign currency in relation to the U.S. dollar after establishing prices and before our receipt of payment and conversion of
such payment to U.S. dollars would have an adverse effect on our operating results. The majority of our products are produced and bottled
in Canada. Accordingly, an increase in the value of the Canadian dollar in relation to the U.S. dollar could have an adverse effect on our
production costs. Furthermore, the financial statements for our Canadian subsidiary are denominated in Canadian dollars; accordingly, on a
consolidated financial statement reporting basis these numbers need to be converted into U.S. dollars and are affected by currency
conversion rates. To December 31, 2001, we have not entered into foreign currency contracts or other derivatives to mitigate the potential
impact of foreign currency fluctuations.
Our sales are affected by seasonality.
As is typical in the beverage industry, our sales are seasonal. In a typical year, approximately 61% of our sales by volume occur
from April to September and approximately 39% occur from October to March. As a result, our working capital requirements and cash
flow vary substantially throughout the year. Consumer demand for our products is also affected by weather conditions. Cool, wet spring or
summer weather could result in decreased sales of our beverages and could have an adverse effect on our position.
The market and liquidity for our shares is limited.
Our common stock is currently listed for trading on the OTC Bulletin Board and the Canadian Venture Exchange, and as a result,
an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, our securities than if the securities
were traded on the Nasdaq Stock Market or another national exchange. In addition, our common stock is subject to certain rules and
regulations relating to "penny stock" (generally defined as any equity security that is not quoted on the Nasdaq Stock Market and that has a
price less than $5.00 per share, subject to certain exemptions). Broker-dealers who sell penny stocks are subject to certain "sales practice
requirements" for sales in certain nonexempt transactions (i.e., sales to persons other than established customers and institutional
"accredited investors"), including requiring delivery of a risk disclosure document relating to the penny stock market and monthly
statements disclosing recent price information for the penny stock held in the account, and certain other restrictions. For as long as our
common stock is subject to the rules on penny stocks, the market liquidity for such securities could be significantly limited. This lack of
liquidity may also make it more difficult for us to raise capital in the future through sales of equity in the public or private markets. ITEM
2. DESCRIPTION OF PROPERTY. We own no real property.
Pursuant to a lease that expires on March 31, 2003, we lease approximately 7,989 square feet of office space in Seattle,
Washington for $10,985 per month, which is being used as our principal executive offices.
We also lease approximately 1,100 square feet of warehouse and office space in Richmond, British Columbia for Cdn.$1,000 per
month and on a month to month basis. We are also obligated under a lease for approximately 8,372 square feet of warehouse and office
space in Vancouver, British Columbia for Cdn.$4,090 per month, which we previously used as our principal executive offices before
relocating to the United States. The lease expires in January 2004. We are currently in dispute with the landlord and are in negotiations
with the landlord to terminate the lease early.
We believe the leased premises are suitable and adequate for their use. In the opinion of management, the leased premises are
adequately covered by insurance.
We do not have a policy pertaining to investments in real estate. Our current practice is to invest solely in short-term money
market securities. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any pending material legal proceedings. However,
from time to time, we may pursue (and have pursued in the past) litigation against third parties to enforce or protect our rights under our
trademarks, trade secrets and our intellectual property rights generally. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 2001.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PART II
Common Stock
Our common stock is currently quoted for trading on traded on the OTC Bulletin Board under the symbol "JSDA" and on the
Canadian Venture Exchange under the symbol "JSD". We have not made any application to list our common stock on any other exchange.
We initiated trading of our common stock on the OTC Bulletin Board on June 23, 2000. The following table shows the high and low bid
information as reported by the OTC Bulletin Board and the high and low closing sale prices as reported by the Canadian Venture
Exchange, for each quarter of fiscal 2001 and 2000. The quotations from the OTC Bulletin Board reflect inter-dealer prices without retail
mark-up, mark-down, or commissions and may not represent actual transactions.
OTC Bulletin Board
Low
High
Canadian Venture Exchange
High
Low
2001:
Fourth quarter ............................................................................................................. $0.81 $0.51 Cdn. $1.25
Third quarter ............................................................................................................... $0.86 $0.43 Cdn. $1.30
Second quarter ............................................................................................................ $0.73 $0.57 Cdn. $1.09
First quarter................................................................................................................. $0.72 $0.31 Cdn. $1.40
2000:
Fourth quarter ............................................................................................................. $0.77 $0.38 Cdn. $0.99
Third quarter ............................................................................................................... $0.81 $0.56 Cdn. $1.20
n/a Cdn. $1.30
Second quarter ............................................................................................................
n/a Cdn. $1.40
First quarter.................................................................................................................
n/a
n/a
Cdn. $0.80
Cdn. $0.65
Cdn. $0.86
Cdn. $0.90
Cdn. $0.55
Cdn. $0.90
Cdn. $0.88
Cdn. $0.90
As of March 12, 2002, there were 19,800,596 shares of common stock issued and outstanding, held by approximately 246 holders
of record.
Common Stock Purchase Warrants
Broker Warrants
In connection with our offerings of common stock in 1997, 1998 and 1999, we granted warrants to the brokers to purchase shares
of our common stock, with exercise prices ranging from $0.42 to $0.62 per share, expiring June 18, 2000 to May 4, 2001. Warrants for a
total of 98,810 shares were exercised in early 2001 (for proceeds of $58,640 to the Company), and all remaining brokers' warrants expired
by their terms on May 4, 2001.
Warrants
In March 2000, we granted warrants to our bank to purchase up to 25,000 shares of common stock in connection with the
provision of a $3 million line of credit. The warrants have an exercise price of $0.85 and expire on March 22, 2002. The warrants expired
by their terms on March 22, 2002 without being exercised.
In May 1999, we sold and issued 3,510,754 shares of common stock for net proceeds of $1,651,460, being net of $259,108 of
issuance costs. Attached to these shares were warrants to purchase 1,656,567 shares of common stock. The warrants had an exercise price
of $0.52 per share for the first year and $0.62 per share thereafter. Warrants for a total of 814,658 shares were exercised in early 2001 (for
proceeds of $486,336 to the Company), and all remaining warrants expired by their terms on May 4, 2001.
Dividends
We have never declared or paid any cash dividends with respect to our common stock. We anticipate that we will retain future
earnings for use in the operation and expansion of our business and do not anticipate paying cash dividends on the common stock in the
foreseeable future. Any future determination with regard to the payment of dividends will be at the discretion of the board of directors and
will be dependent upon our future earnings, financial condition, applicable dividend restrictions and capital requirements and other factors
deemed relevant by the board of directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Results of Operations for the Twelve months Ended December 31, 2001
Revenues
For the twelve months ended December 31, 2001, our total operating revenues were approximately $23,616,000, representing an
increase of $4,600,000 (or 24.2%) over the approximate $19,016,000 revenues for the 2000 fiscal year. The increase in revenues was
primarily attributable to the launch and sales of Jones Naturals, the Company's new non-carbonated juice & tea line launched in
April 2001, as well as an overall increase in sales of Jones Soda. Consolidated case sales for fiscal 2001 were 1,887,405, an increase of
22.2% over case sales of 1,544,908 in fiscal 2000. The increase in revenues is also reflective of an overall continued expansion and
development of our distribution network. This overall increase in revenues in 2001 was partially offset by decreased sales as a result of the
events of September 11 and a weakened U.S. economy, as well as the effects of having to find new distributors to replace three of our top
five distributors who either filed for bankruptcy or went out of business during 2001.
Gross Profit
Gross profit was approximately $8,531,000 for the twelve months ended December 31, 2001, representing an increase of
$919,000 (or 12.1%) over the $7,612,000 gross profit for the twelve months ended December 31, 2000. Gross profit as a percentage of
revenues decreased to 36.1% for the twelve months ended December 31, 2001 from 40.0% for the twelve months ended December 31,
2000. The increase in gross profit was primarily attributable to increased volume of sales. The decrease in gross profit as a percentage of
revenue was primarily attributable to the launch and sales in 2001 of the Jones Naturals product line which has a lower gross profit per
case than Jones Soda and Whoopass, partially offset by certain costs saving in raw materials and packaging that we originally implemented
in 2000.
Total Operating Expenses
Total operating expenses were approximately $10,318,000 for the twelve months ended December 31, 2001, representing an
increase of $81,000 (or 0.8%) higher than total operating expenses of $10,237,000 for the twelve month period ended December 31, 2000.
Total operating expenses as a percentage of revenues decreased to 43.7% from 53.8% for the comparable periods. The decrease in total
operating expenses was primarily attributable to a decrease in promotion and selling expenses, partially offset by increases in general and
administration expenses and namely bad debt expense for the year, as described below.
Promotion and Selling Expenses
Promotion and selling expenses were approximately $6,666,000 for the twelve months ended December 31, 2001, representing a
decrease of $982,000 (or 12.8%) from expenses of $7,648,000 for the twelve months ended December 31, 2000. Promotion and selling
expenses as a percentage of revenues decreased to 28.2% for the twelve months ended December 31, 2001 from 40.2% for the twelve
months ended December 31, 2000. The decrease in promotion and selling expenses was attributable to lower per case spending on
distributor programs and a decrease in the number of event sponsorships, as well as a decrease in salaries and wages for the sales and
marketing team as a result of a reduction in the number of employees in that area.
General and Administrative Expenses
General and administrative expenses were approximately $3,653,000 for the twelve months ended December 31, 2001,
representing an increase of $1,064,000 (or 41.0%) compared to $2,589,000 for the twelve months ended December 31, 2000. General and
administrative expenses as a percentage of revenues increased to 15.5% for the twelve months ended December 31, 2001 from 13.6% for
the twelve months ended December 31, 2000. The increase in general and administrative expenses was primarily attributable to bad debt
expenses for the year of $703,000 (or 3.0% of sales) compared to 2000 bad debt expense of $96,000 (or 0.5% of sales). The increase in
bad debts arose as a large result of three of our top five distributors either filing for bankruptcy or going out of business in 2001.
Subsequently, in late 2001 and early 2002, we entered into agreements or letters of intent for new distribution relationships for each of
these three markets. In addition, general and administrative expenses increased due to stock-based compensation incurred in 2001 (see
Note 9 to audited consolidated financial statements) and as well expenses associated with our retention of a recruiting firm, hiring of a new
senior executive (COO), and increased salaries for some of our senior management team, as well as increased general legal expense. Also,
fiscal 2001 represented the first full twelve months of operations following the relocation of our corporate headquarter into the United
States and the increased expenses associated with being a U.S. company; whereas operating expenses for the first three months of fiscal
2000 (prior to the U.S. relocation) represent Canadian dollar operating expenses.
Other income (expense)
Other income was $85,000 for the twelve months ended December 31, 2001, representing primarily foreign exchange gain
partially offset by payment of interest expense. This compare to other income of $4,221,000 for the twelve months ended December 31,
2000, which consisted primarily of extraordinary income (offset with legal expenses) from settlement of litigation.
Net Loss
Net loss was $1,702,000 for fiscal 2001, compared to net income of $1,596,000 for fiscal 2000. The increase in the net loss from
2000 to 2001 reflects the significant one-time litigation settlement income of $4,092,000 in 2000, offset by an improvement in operating
losses for 2001 over 2000.
Liquidity and Capital Resources
Our operations historically have primarily been funded through the sale of common stock and warrants, and by bank lines of
credit and other external borrowings.
As of December 31, 2001, we had working capital of $2,646,000 compared to working capital of $3,378,000 as at December 31,
2000.
On March 17, 2000, we entered into a credit facility with Banc of America Commercial Finance Corporation, consisting of a
three-year revolving line of credit of up to $3 million. Wells Fargo Business Credit subsequently purchased the portfolio of loans from
Banc of America Commercial Finance. The amount available for borrowing from time to time under the revolving line of credit is
dependent upon the levels of certain eligible accounts receivable and inventory. This revolving line of credit is secured by all of the
Company's assets, including accounts receivable, inventory, trademarks and other intellectual property, and certain equipment. Borrowings
under the credit facility bear interest at a rate of prime plus 1.5% (6.25% as of December 31, 2001. The credit facility does not impose any
financial covenants. As of December 31, 2001, we had $657,678 outstanding under the line of credit, out of a total of $1,447,588 available
for borrowing based on eligible accounts receivable and inventory at that time.
Cash and cash equivalents decreased to nil as of December 31, 2001 from $3,035,000 at December 31, 2000. Net cash used in
operating activities was $2,704,000 for the twelve months ended December 31, 2001. Our investing activities used $188,000 for the twelve
months ended December 31, 2001 primarily for the purchase of computer and cooler equipment. Cash flow used by financing activities
was $143,000 for the twelve months ended December 31, 2001 and consisted primarily of payments on the line of credit partially offset by
proceeds from exercises of stock purchase warrants in May 2001.
We do not have any material commitments for capital expenditures.
Seasonality
We have experienced significant fluctuations in quarterly results that have been the result of many factors, including the
following:
•
•
•
•
the addition or deletion of certain licensed brands to our distribution portfolio;
the shift in our business focus from being solely a regional distributor of licensed and unlicensed brands and products to
being a developer, producer, marketer and distributor of our internally developed brands and products;
the seasonal demand for beverages; and
competition and general economic conditions.
Due to these and other factors, our results of operations have fluctuated from period to period. As a result, we believe that period-
to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as any indication of future
performance.
Like many other companies in the beverage industry, we generate a substantial percentage of our revenues during the warm
weather months of April through September. We believe that the demand for our products will continue to reflect such seasonal
consumption patterns. While we look to expand our distribution network and increase market penetration, however, such seasonality may
not be easily discernible from our results of operations. Due to all of the foregoing factors, our operating results in a particular quarter may
fail to meet market expectations.
Investor Relations
During the period ending December 31, 2001, we completed all investor relations activities in-house. We sent out copies of news
or press releases, our corporate brochure, and communicated to shareholders with a monthly newsletter and a quarterly investor conference
call. ITEM 7. FINANCIAL STATEMENTS. Financial Statements are listed in the Index to Financial Statements and filed and included
elsewhere herein as a part of this Annual Report on Form 10-KSB. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The directors and executive officers of Jones Soda Co. (the "Company") and their ages as of April 4, 2002, are as follows:
Name
Age Position
Peter M. van Stolk ........................................................................
Matthew Kellogg ..........................................................................
Jennifer L. Cue..............................................................................
Matt Hughes..................................................................................
Ron B. Anderson ..........................................................................
Michael M. Fleming .....................................................................
William Collin ..............................................................................
Peter Cooper .................................................................................
38 President, Chief Executive Officer and Director
36 Executive Chairman and Director
38 Chief Financial Officer, Secretary and Director
41 President of Whoopass USA Inc.
49 Director
53 Director
43 Director
50 Director and Chairman of the Board
Set forth below is biographical information for each of the Company's directors and executive officers.
Peter M. van Stolk is the founder of the Company, and has served as our President, Chief Executive Officer and a director since
May 1993. Mr. van Stolk began his career in the beverage industry in 1987 when he founded Urban Hand Ltd., a predecessor company to
Jones Soda Co. Mr. van Stolk is also a member of the Social Venture Network. He attended Grant McKewan College in Edmonton,
Alberta.
Matthew Kellogg has served as one of our directors since May 1999 and was appointed as Executive Chairman of the Company
in April 2002. Mr. Kellogg is also currently the Managing Member of Kingfisher Capital, LLC. From 1997 to 1999, Mr. Kellogg was the
Business Development Director for Playnetwork, Inc. From 1993 to 1996, Mr. Kellogg served as the Managing Member of MTC, LLC, a
restaurant management firm. Mr. Kellogg holds a Bachelor of Science degree from Skidmore College.
Jennifer L. Cue has served as our Corporate Secretary since August 1997, Chief Financial Officer since February 1997, Vice
President, Corporate and Financial Development, between October 1995 and January 1997, and a director since March 1995. Prior to
October 1995, Ms. Cue served as Vice President Investment Research of D. Grant Macdonald Capital Corporation from February 1994,
and prior to that served as Vice President, Investments at Penfund Management in Toronto, Ontario from November 1990. From 1986 to
1988, Ms. Cue worked in Commercial Banking for Lloyds Bank Canada. Ms. Cue holds an MBA from McGill University in Montreal and
a Bachelor of Commerce from the University of British Columbia in Vancouver, British Columbia. Ms. Cue is also a Chartered Financial
Analyst.
Matthew Hughes served as Jones Soda's Chief Operating Officer from June 2001 to March 2002. In March 2002, Mr. Hughes
was appointed President of our subsidiary company, Whoopass USA Inc. Prior to June 2001, Mr. Hughes served as President and C.O.O.
of Full Service Beverage Company in Englewood, Colorado from April 1996 to May 2001. From 1993 to 1996, Mr. Hughes served as
Senior Vice President, Sales & Marketing at Cott Beverages.
Ron B. Anderson has served as one of our directors since July 1994. Mr. Anderson is currently President of North Point Capital
Corp., a private merchant banking company, and is the Senior Vice President, Corporate Development of ParkSide Developments L.P., a
private partnership involved in real estate development and an affiliate of North Point Capital. Mr. Anderson is a Certified General
Accountant and holds a B. Comm. from the University of British Columbia in Vancouver, B.C.
Michael M. Fleming has served as one of our directors since April 1997. Since February 2000, Mr. Fleming has been an attorney
with the law firm of Lane Powell Spears Lubersky LLP in Seattle, Washington, specializing in real estate, dispute resolution, securities and
environmental matters. From November 1992 to February 2000, Mr. Fleming was an attorney with the law firm of Ryan, Swanson &
Cleveland in Seattle, Washington. He is also the President and owner of Kidcentre, Inc., a company in the business of providing child care
services in Seattle, Washington. Since April 1985, he has also been the President and owner of Fleming Investment Co., an investment
company. Mr. Fleming holds a Bachelor of Arts degree from University of Washington and a law degree from the University of California,
Hastings College of the Law.
William Collin was appointed as one of our directors in August 2001. Mr. Collin is currently President of Summit Capital
Advisors, LLC, a financial advisory firm focused on the consumer products sector. From 1997 to 2000, Mr. Collin was a managing
director in the investment banking department with First Union Securities, Inc. ("First Union") and its predecessors where he held
corporate finance positions as head of the Consumer Products Group and co-head of origination in First Union's northern operations. From
1994 to 1997, Mr. Collin served as a director in the corporate finance department of Deutsche Morgan Grenfell ("DMG"). Prior to DMG,
he was a director of PNC Corporate Finance and spent nine years at Kidder, Peabody & Co. Incorporated where he was a member of the
corporate finance group. Mr. Collin received his M.B.A. from Harvard Business School and his Bachelor of Arts in Economics magna cum
laude, from Duke University.
Peter Cooper has served as one of our directors since May 1999 and has served as Chairman of the Board since October 1999.
Since 1992, Mr. Cooper has been the owner of P.C. Cooper & Co. Inc, a U.S. based investment company with interests in real estate and
private companies. Mr. Cooper is also a founding partner of Cooper & LeVasseur, a "special situation" investment partnership. From 1986
through 1994, Mr. Cooper served as Chief Executive of L.D. Nathan & Co., Ltd., a New Zealand based retail and consumer brand
company and, following the merger with Lion Breweries, as an Executive Director of Lion Nathan Limited. Mr. Cooper received an
Honors Degree in Law from Auckland University and was admitted as a Barrister and Solicitor in New Zealand in 1977.
Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1933, as amended, requires the Company's directors, executive officers and
persons who own more than 10% of the Company's Common Stock (collectively, "Reporting Persons") to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock of the Company. Reporting
Persons are also required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file.
Based solely on the Company's review of the copies of such reports received or written communications from certain Reporting
Persons, the Company believes that, except as set forth below, during the 2001 fiscal year, all Reporting Persons complied with all
Section 16(a) filing requirements. The following Reporting Persons had late filings for 2001: (i) Matt Kellogg filed a late Form 4 in
March 2002 to report both the prior grant of stock options in March 2001 and the prior exercise of warrants in May 2001; (ii) in
April 2002, William Collin filed late his Form 3 which was due in September 2001 for his appointment as a director of the Company, and
he also filed a late Form 4 to report the grant of stock options to him in October 2001; (iii) Michael Fleming filed a late Form 4 in
June 2001 to report the prior grant of stock options in March 2001; and (iv) Ron Anderson filed a late Form 4 in April 2001 to report the
prior grant of stock options in March 2001. ITEM 10. EXECUTIVE COMPENSATION
Chief Executive Officer Compensation
The following table shows for each of the three fiscal years ended December 31, 2001, 2000, and 1999, respectively, certain
compensation awarded or paid to, or earned by, the Company's Chief Executive Officer. Other than the Chief Executive Officer, no
executive officer earned more than $100,000 in salary and bonus for the 2001 fiscal year.
Summary Compensation Table
Name and Principal Position
Fiscal
Year
Salary($)
Bonus($)
Other Annual
Compensation($)
Annual Compensation
Long Term
Compensation
Securities Under
Options Granted(1)(#)
Peter van Stolk,
Chief Executive Officer
2001
2000
1999
$90,000
73,758
57,517
$70,000
Nil
Nil
$15,984
49,000(2)
Nil
60,000
20,000
165,000
___________
(1)
All referenced options granted are exercisable at prices equal to or higher than the fair market value of the Common Stock on the
respective dates of grant.
(2)
Represents a one-time payment made in 2000 to reimburse Mr. van Stolk for taxes incurred in connection with the sale of stock
options, which resulted in additional equity financing for the Company in 1997.
Stock Option Grants
The following table shows information regarding stock options granted to the Chief Executive Officer during the 2001 fiscal year:
Name
No. of Shares
Underlying
Options
Granted
Percentage of
Total Options
Granted to
Employees
Exercise
Price Per
Share
Expiration Date
Peter van Stolk..............................................................
60,000
24.3%
C$0.90(1)
May 28, 2006
___________
(1)
The options vest over a period of 18 months from the grant date. The exercise price for these options is in Canadian dollars.
Aggregated Option Exercises and Fiscal Year-End 2001 Option Values
The following table shows certain information regarding the value of unexercised options held at fiscal year end by the Chief
Executive Officer. The Chief Executive Officer did not exercise any stock options during the 2001 fiscal year.
Name
No. of Shares of Common Stock Underlying
Unexercised
Options at Fiscal Year-End
Exercisable
Unexercisable
Value of Unexercised
In-the-Money Options
at Fiscal Year-End
Exercisable
Unexercisable
Peter van Stolk................................................................
435,000
30,000
$35,050
$3,900
Compensation of Directors
In January 2001, the Board authorized the payment of directors' fees and stock options to outside directors. The directors' fees
consist of $500 for each meeting of the Board and $250 for each Board conference call or Board committee meeting. In addition, in 2001
the Company granted to each of the outside Board members stock options to purchase 20,000 shares. The exercise price of these options
was at the fair market value on the date of grant and the options vest over a period of 18 months from the date of grant, at the rate of 25%
on the date of grant and an additional 25% on each six month anniversary of the date of grant. In addition, directors are reimbursed for
their out of pocket expenses incurred in attending Board of Directors and committee meetings of the Board, and the Company maintains
liability insurance for its directors and officers.
Peter van Stolk Employment Agreement
In April 2002, Mr. van Stolk and the Company agreed to terminate Mr. van Stolk's previous employment arrangements and
entered into a new two-year employment agreement (the "Employment Agreement") beginning effective April 1, 2002 through March 31,
2004.
Pursuant to the Employment Agreement, Mr. van Stolk will serve as Chief Executive Officer of the Company and will receive an
annual salary of $100,000. Mr. van Stolk will also be eligible to receive (a) an annual performance bonus in an amount determined by the
Executive Chairman and (b) annual stock options equal to a minimum of four times the number of options granted to any one of the
Company's outside directors. Mr. van Stolk also receives under the Employment Agreement term life insurance in the amount of
$1.5 million payable to Mr. van Stolk's designated beneficiary. It is also contemplated under the Employment Agreement that for as long as
Mr. van Stolk remains employed pursuant to the Employment Agreement, the Company's Board of Directors will nominate Mr. van Stolk
for re-election to the Board.
In addition, provided that Mr. van Stolk is employed by the Company on December 31, 2003, he will be entitled to receive a
bonus in stock options to purchase up to 150,000 shares of Common Stock of the Company. These stock options will have an exercise
price equal to the average weighted trading price of the Company's Common Stock on the OTC Bulletin Board for the 10 trading days
following the date of the Employment Agreement. However, the Company will be obligated to grant the stock options only if the Company
has positive net income for fiscal 2003 as set forth in the Company's audited financial statements for the 2003 fiscal year.
Mr. van Stolk may at any time, upon 14 days' notice to the Company, elect to terminate his employment with the Company and be
entitled to enter into a consulting agreement with the Company for a period not less than the balance of the time then remaining under the
Employment Agreement and for compensation of not less than his then-current salary. In addition, at any time after 14 days from the date
of a "change of control" of the Company or a change in the Company's management or reporting structure, Mr. van Stolk may terminate
the Employment Agreement. Upon such termination, Mr. Van Stolk will be entitled to receive from the Company (a) a payment equal to
one month of his annual salary in effect at the time of his termination multiplied by the amount of months remaining under the Employment
Agreement, payable in equal monthly installments over a 12-month period (but in no case shall the amount payable be less than one year's
base salary), and (b) any stock options he is entitled to receive for the year of termination. For purposes of the Employment Agreement, a
"change of control" will be deemed to occur when a majority of the directors elected at any shareholders' meeting are not individuals
nominated by the Company's then-incumbent Board of Directors.
In the event the Employment Agreement is terminated by Mr. van Stolk due to breach by the Company, or by the Company
without cause, Mr. van Stolk will be entitled to receive from the Company the same amount as if the agreement were terminated upon a
change of control. The Company may terminate the Employment Agreement for cause.
The Employment Agreement contains certain restrictive covenants, including confidentiality provisions and provisions precluding
Mr. van Stolk from competing with the Company for up to 12 months following the term of the agreement or from soliciting employees,
suppliers or distributors of the Company for up to 18 months following the term of the agreement.
In addition to the Employment Agreement, in early 2002 Mr. van Stolk elected not to receive any of the bonuses owed to him but
not paid by the Company under his previous employment arrangements, and Mr. van Stolk entered into an agreement with the Company
waiving his rights to, and releasing the Company from any obligations to pay, those cash bonuses. ITEM 11. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of April 4, 2002, certain information
regarding the beneficial ownership of the Company's outstanding Common Stock by: (i) each person who, to the knowledge of
management, owned beneficially more than 5% of the Common Stock; (ii) the Company's Chief Executive Officer; (iii) each current
director and director nominee of the Company, and (iv) all directors and executive officers of the Company as a group. As of such date,
there were 19,799,996 shares of Common Stock issued and outstanding. Unless otherwise indicated, each person's address is: c /o Jones
Soda Co., 234 9th Avenue North, Seattle, WA 98109.
Name and Address
Number of Shares(1)
Percent
5% Owners:
Arnhold & S. Bleichroeder, Inc.
1345 Avenue of the Americas
New York, NY 10105-4300
Gilbert E. LeVasseur Jr. Revocable Trust
26 Corporate Plaza, Suite 280
Newport Beach, California 92660
Officers and Directors:
Peter M. van Stolk(2).............................................................................................................
Jennifer L. Cue(3) ..................................................................................................................
Matthew Kellogg(4)...............................................................................................................
Ron B. Anderson(5)
3953 West 38th Avenue
Vancouver, B.C. V6N 2Y7 CANADA.
Michael M. Fleming(6)
1420 Fifth Avenue, Suite 4100
Seattle, WA 98101
Peter Cooper(7)
26 Corporate Plaza, Suite 280
Newport Beach, CA 92660
William Collin(8)
400 Eastover Road
Charlotte, NC 28207
All current directors and executive officers as a group (8 persons)(9) .................................
1,745,216
8.8%
1,114,200
5.6
2,025,894
715,134
110,000
144,600
10.0
3.5
**
**
85,000
**
1,165,800
5.9
10,000
**
4,281,428
19.6%
___________
**
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Less than one percent
The above table is based upon information supplied by executive officers, directors and principal shareholders. Unless otherwise
indicated in the footnotes to this table and subject to community property laws where applicable, the Company believes that the
each of the shareholders named in this table has sole voting and investment power with respect to the shares shown as beneficially
owned by him or her.
Includes 130,000 shares subject to stock options that are exercisable within 60 days of April 4, 2002 ("Vested Options") held by
Mr. van Stolk, and 320,000 Vested Options held of record by 543608 BC Ltd., a British Columbia corporation for which Mr. van
Stolk serves as sole shareholder. Also includes 911,250 shares held in escrow, pursuant to the terms of that certain Performance
Share Escrow Agreement dated March 29, 1993, as amended.
Includes 520,000 shares subject to Vested Options held by Ms. Cue, and 120,000 shares subject to Vested Options held of record
by 548919 BC Ltd., a British Columbia corporation for which Ms. Cue serves as sole shareholder. Also includes 12,500 shares
held in escrow, pursuant to the terms of that certain Performance Escrow Share Agreement dated March 29, 1993, as amended.
Includes 60,000 shares subject to Vested Options held by Mr. Kellogg.
Includes 85,000 shares subject to Vested Options held by Mr. Anderson.
Includes 85,000 shares subject to Vested Options held by Mr. Fleming.
Includes 1,105,800 shares held by Clifton Investments, L.P. Mr. Cooper is the managing member of Cooper Capital, LLC, which
serves as the sole general partner of Clifton Investments, L.P. The general partner may be deemed to have shared voting and
investment power for the shares held by Clifton Investments, L.P. Mr. Cooper disclaims beneficial ownership of all such shares
held by Clifton Investments, L.P., except to the extent of his proportionate pecuniary interests therein. Also includes 60,000
shares subject to Vested Options held by Mr. Cooper.
Consists of 10,000 shares subject to Vested Options held by Mr. Collin.
Consists of Peter van Stolk, Jennifer Cue, Matthew Kellogg, Matthew Hughes, Ron Anderson, Michael Fleming, Peter Cooper
and William Collin. Includes an aggregate of 1,405,000 shares subject to Vested Options held by such persons. ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 13. EXHIBITS AND REPORTS ON FORM
8-K.
(a)
Exhibits.
3.1(1)
3.2(1)
4.1(2)
10.1(4)††
(cid:31)
10.2(4)(cid:31)
(cid:31)
10.3(4)(cid:31)
(cid:31)
10.4(4)(cid:31)
10.5(4)(cid:31)
(cid:31)
10.6(3)
10.6A(4)
10.6B(4)
Articles of Incorporation of Jones Soda Co.
Bylaws of Jones Soda Co.
Performance Escrow Share Agreement dated March 29, 1993, between Pacific Corporate Trust Company,
International Republic Aircraft Manufacturing Corporation and the Shareholders named therein, as amended May 11,
1993
Bottling Agreement dated January 1, 2002, between Jones Soda Co. and Polaris Water Company Inc.
Bottling Agreement dated December 13, 2001, between Jones Soda Co. and J. Lieb Foods Inc.
Bottle Supply Agreement dated January 11, 2002, between Jones Soda Co. and Zuckerman-Honickman, Inc.
Distributor Agreement dated September 12, 2001, between Jones Soda Co. and Jones Soda of Michigan LLC.
Supply Agreement dated July 6, 1999, between Urban Juice & Soda Ltd. and Pro-Liquitech International
Loan and Security Agreement dated March 22, 2000, between Banc of America, Urban Juice & Soda Company Ltd.
and Jones Soda Co. (USA) Inc.
First Amendment Loan and Security Agreement, dated May 31, 2001, among Jones Soda Co., Jones Soda (USA) Inc.
and Wells Fargo Business Credit, Inc.
Second Amendment Loan and Security Agreement, dated June 25, 2001, among Jones Soda Co., Jones Soda (USA)
Inc. and Wells Fargo Business Credit, Inc.
10.7(3)
10.8(4)
10.9(4)
10.10(4)
10.11
21.1(4)
Lease Agreement dated March 14, 2000, between R2H2 LLC and Urban Juice & Soda Company Ltd.
Employment Agreement with Jennifer Cue dated January 1, 1999
Commission Agreement with Matt Hughes dated February 22, 2002.
1996 Stock option plan
Employment Agreement with Peter van Stolk dated April 25, 2002
Subsidiaries of Jones Soda Co.
___________
(1)
(2)
(3)
(4)
Previously filed as an exhibit to, and incorporated herein by reference from, the Company's annual report on Form 10-KSB for
the fiscal year ended December 31, 2000.
Previously filed as an exhibit to, and incorporated herein by reference from, the registration statement on Form SB-2, as amended
(No. 333-5156-LA).
Previously filed as an exhibit to, and incorporated herein by reference from, the Company's quarterly report on Form 10-QSB for
the quarter ended March 31, 2000.
Previously filed as an exhibit to, and incorporated herein by reference from, the Company's annual report on Form 10-KSB for
the year ended December 31, 2001.
Portions of the marked exhibits have been omitted pursuant to requests for confidential treatment filed with the SEC.
(b)
Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Amendment No. 1 on Form 10-KSB/A to
be signed on its behalf by the undersigned, thereunto duly authorized, on April 26, 2002.
JONES SODA CO.
By:
Jennifer L. Cue
Chief Financial Officer
JONES SODA CO. & SODA COMPANY LTD. Form 10-KSB Annual Report Index to Financial Statements
Independent Auditor's Report.............................................................................................................................................................
Consolidated Financial Statements:
Consolidated balance sheets as of December 31, 2001 and 2000.................................................................................................
Consolidated statements of operations for the years ended December 31, 2001, 2000................................................. and 1999
Consolidated statements of changes in shareholders' equity for the years ended December 31, 2001, 2000 and 1999 ..............
Consolidated statements of cash flows for the years ended December 31, 2001, 2000 and 1999 ...............................................
Notes to consolidated financial statements.........................................................................................................................................
Page
F-3
F-4
F-5
F-6
F-7
F-8
Consolidated Financial Statements (Expressed in United States dollars) JONES SODA CO. AND SUBSIDIARIES Years ended
December 31, 2001 and 2000
(cid:31)
(cid:31)
Auditors' Report
The Board of Directors and Stockholders
Jones Soda Co. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Jones Soda Co. and subsidiaries as of December 31, 2001 and
2000 and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the
years in the three year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Jones Soda Co. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of
the years in the three year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in note 1 to the financial statements, the Company has suffered recurring losses from operations and has a deficit that raise
substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in
note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Chartered Accountants
Vancouver, Canada
February 1, 2002
JONES SODA CO. AND SUBSIDIARIES Consolidated Balance Sheets (Expressed in United States dollars) December 31, 2001 and
2000
Assets
Current assets:
Cash and cash equivalents................................................................................................................
Accounts receivable (note 3)............................................................................................................
Inventory (note 4).............................................................................................................................
Prepaid expenses ..............................................................................................................................
Fixed assets (note 5) .............................................................................................................................
Intangible assets (note 6) ......................................................................................................................
Liabilities and Stockholders' Equity
Current liabilities:
Bank Indebtedness (note 7)..............................................................................................................
Accounts payable and accrued liabilities.........................................................................................
Current portion of capital lease obligations (note 8) .......................................................................
Current portion of deferred revenue (note 3)...................................................................................
Capital lease obligations (note 8) .........................................................................................................
2001
2000
$—
2,319,469
2,150,266
548,968
5,018,703
666,081
138,834
$5,823,618
$3,034,708
1,713,864
1,894,489
261,984
6,905,045
735,482
112,922
$7,753,449
$657,678
1,675,691
56,706
50,000
2,440,075
63,295
$1,566,915
1,878,980
81,116
—
3,527,011
70,029
Deferred revenue (note 3).....................................................................................................................
Stockholders' equity (note 9):
Common stock:
Authorized: 100,000,000 common stock, no par value
Issued and outstanding: 20,251,846 common stock (2000—19,303,378) .................................
Treasury stock 200,000 shares (2000—nil).....................................................................................
Additional paid-in capital.................................................................................................................
Accumulated other comprehensive income .....................................................................................
Deficit...............................................................................................................................................
200,000
—
11,269,419
(13,333)
525,955
107,752
(8,769,545)
3,120,248
$5,823,618
10,708,519
—
407,455
107,752
(7,067,317)
4,156,409
$7,753,449
Nature and continuance of operations (note 1)
Commitments (note 10)
Approved on behalf of the Board:
See accompanying notes to consolidated financial statements.
Director
Director
JONES SODA CO. Consolidated Statements of Operations (Expressed in United States dollars) Years ended December 31, 2001, 2000
and 1999
Revenue ....................................................................................................................
Cost of goods sold ....................................................................................................
Gross profit ...............................................................................................................
Operating expenses:
Promotion and selling ..........................................................................................
General and administrative (note 9).....................................................................
Loss from operations ................................................................................................
Other income (expense):
Interest income, net ..............................................................................................
Other income........................................................................................................
Litigation settlement, net (note 14) ......................................................................
Earnings (loss) for the year.......................................................................................
2001
2000
1999
$23,615,911
15,085,213
8,530,698
$19,016,496
11,404,440
7,612,056
$11,086,450
7,354,564
3,731,886
6,665,519
3,652,556
10,318,075
(1,787,377)
(83,300)
163,449
5,000
85,149
$(1,702,228)
7,647,892
2,589,005
10,236,897
(2,624,841)
70,205
58,579
4,092,413
4,221,197
$1,596,356
3,036,094
1,524,133
4,560,227
(828,341)
(1,330)
20,495
—
19,165
$(809,176)
Earnings (loss) per share:
Basic .....................................................................................................................
Diluted..................................................................................................................
$(0.09)
(0.09)
$0.08
0.08
$(0.05)
(0.05)
Weighted average common stock:
Basic .....................................................................................................................
Diluted..................................................................................................................
19,921,344
19,921,344
18,943,461
19,816,279
17,829,970
17,829,970
See accompanying notes to consolidated financial statements.
JONES SODA CO. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
Common stock
Treasury stock
Number
Amount Number Amount
Balance, December 31,
Accumulated
other
comprehensiv
e
income (loss)
Additional
paid-in
capital
Accumulated
deficit
Comprehensiv
e
income (loss)
Total
stockholders'
equity
1998 ................................ 15,150,164 $8,947,585
15,610
35,585
25,000
68,480
Options exercised .................
Warrants exercised ...............
Common stock issued for
cash ................................. 3,510,754
1,462,538
—
—
—
—
—
$—
—
—
$173,376
—
—
$95,325 $(7,854,497)
—
—
—
—
—
188,922
—
—
$1,361,789
15,610
35,585
1,651,460
—
—
—
(809,176)
$(809,176)
(809,176)
—
Comprehensive loss:
Loss for the year..............
Foreign currency
translation
adjustments................
Total comprehensive loss .....
Balance, December 31,
—
—
1999 ................................ 18,754,398 10,461,318
—
—
247,201
—
Options exercised .................
Warrants issued ....................
Warrants exercised ...............
Stock-based compensation...
Comprehensive income:
Net earnings ....................
—
—
548,980
—
—
—
Total comprehensive
income.............................
Balance, December 31,
2000 ................................ 19,303,378 10,708,519
—
—
17,931
—
542,969
—
—
— (200,000)
35,000
913,468
—
—
Options exercised .................
Warrants exercised ...............
Stock-based compensation...
Repurchase escrow shares....
Comprehensive loss:
Loss for the year..............
Total comprehensive
income.............................
Balance, December 31,
—
—
—
—
12,427
—
12,427
12,427
$(796,749)
—
—
—
—
—
—
—
—
—
—
—
—
362,298
—
9,600
—
35,557
107,752
—
—
—
—
(8,663,673)
—
—
—
2,267,695
—
9,600
247,201
35,557
—
—
1,596,356
$1,596,356
1,596,356
$1,596,356
—
—
—
—
(13,333)
407,455
—
—
118,500
—
107,752
—
—
—
—
(7,067,317)
—
—
—
—
4,156,409
17,931
542,969
118,500
(13,333)
—
—
—
—
—
(1,702,228)
$(1,702,228)
(1,702,228)
$(1,702,228)
2001 ................................ 20,251,846 $11,269,419 (200,000) $(13,333)
$525,955
$107,752 $(8,769,545)
$3,120,248
See accompanying notes to consolidated financial statements.
JONES SODA CO. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Expressed in United States dollars) Years ended
December 31, 2001 and 2000
Cash flows from operating activities:
Earnings (loss) for the year ................................................................................
Items not involving cash:
Depreciation and amortization ......................................................................
Gain on disposal of fixed assets ....................................................................
Stock-based compensation expense ..............................................................
Changes in assets and liabilities:
Accounts receivable.......................................................................................
Inventory........................................................................................................
Prepaid expenses............................................................................................
Accounts payable and accrued liabilities ......................................................
Net cash used in operating activities..................................................................
Cash flows from investing activities:
Purchase of fixed assets .....................................................................................
Purchase of intangible assets..............................................................................
Net cash used in investing activities ..................................................................
Cash flows from financing activities:
Net borrowing (repayment) under line of credit................................................
Bank indebtedness..............................................................................................
Proceeds from capital lease obligations.............................................................
Repayment of capital lease obligations..............................................................
Proceeds from deferred revenue ........................................................................
Proceeds from exercise of options .....................................................................
Proceeds from exercise of warrants ...................................................................
Repurchase of escrow shares .............................................................................
Issuance of common stock, net of issuance costs ..............................................
Cash flows provided by financing activities ......................................................
Effect of foreign exchange rate changes on cash ...................................................
Net increase (decrease) in cash and cash equivalents ............................................
Cash and cash equivalents, beginning of year........................................................
Cash and cash equivalents, end of year ..................................................................
2001
2000
1999
$(1,702,228)
$1,596,356
$(809,176)
231,669
—
118,500
(605,605)
(255,777)
(286,984)
(203,289)
(2,703,714)
(132,271)
(55,909)
(188,180)
(1,038,683)
129,446
—
(31,144)
250,000
17,931
542,969
(13,333)
—
(142,814)
—
(3,034,708)
3,034,708
$—
183,390
—
45,157
(446,762)
(547,114)
(92,491)
847,801
1,586,337
(159,936)
(94,235)
(254,171)
1,165,793
—
—
(55,003)
—
—
247,201
—
—
1,357,991
—
2,690,157
344,551
$3,034,708
191,357
(2,899)
—
(437,702)
(810,184)
48,609
141,626
(1,678,369)
(156,489)
(21,981)
(178,470)
199,165
—
82,748
(15,424)
—
15,610
35,585
—
1,651,460
1,969,144
12,427
124,732
219,819
$344,551
Supplemental disclosure of non-cash financing and investing activities:
Common stock issued for compensation ...........................................................
Increase in capital lease obligations...................................................................
$118,500
29,114
$45,157
102,581
$—
—
Cash paid during year for:
Interest payments................................................................................................
Income taxes.......................................................................................................
$162,933
—
$211,468
—
$21,400
—
See accompanying notes to consolidated financial statements.
JONES SODA CO. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended
December 31, 2001, 2000 and 1999
1. Nature and continuance of operations:
Jones Soda Co. (the "Company" or "Jones Soda") develops, produces, markets, and distributes "alternative" or "new age"
beverages. The Company's main product lines include the brands: Jones Soda Co., a carbonated soft drink; WhoopAss and Jones Energy, a
high energy drink; Jones Juice, a non carbonated Juice, and WAZU, a natural spring water. Urban Juice and Soda Company Limited, the
Company's predecessor, was incorporated in 1986 under the Company Act of British Columbia. On December 31, 1999, Urban Juice
continued its incorporation in Wyoming. On August 3, 2000, Urban Juice merged with its wholly-owned Washington subsidiary, Jones
Soda Co., and continued operations under this name. The merged company has two operating subsidiaries, Jones Soda (US) Inc., and
Wazu Products Limited, as well as a non-operating subsidiary, myJones.com.
The Company's future operations are dependent upon the market's acceptance of its products. There can be no assurance the
Company's products will be able to secure sufficient market acceptance to generate income from operations. Operations to date have
primarily been financed through the issuance of common stock and short-term debt. There can be no assurance that such financing services
will be available in the future. These consolidated financial statements have been prepared on a basis which assumes the realization of
assets and settlement of liabilities in the normal course of business. During the years ended December 31, 2001 and 2000 (before litigation
settlement), the Company incurred losses of $1,707,228 and $2,496,057, respectively, and generated negative cash flows from operating
activities. The Company's ability to continue as a going concern is dependent upon its continuing ability to raise financing and ultimately to
generate future profitable operations.
2. Significant accounting policies:
(a)
Basis of presentation:
These consolidated financial statements have been prepared using generally accepted accounting principles in the United States of
America.
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.
(b)
Use of estimates:
The preparation of financial statements in accordance with United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Accordingly, actual results may differ from these estimates.
(c)
Foreign currency translation:
To December 31, 1999, the functional currency of the Company was the Canadian dollar, with the financial statements prepared
using the United States (U.S.) dollar as the reporting currency. Assets and liabilities were translated into U.S. dollars at the exchange rate in
effect at the balance sheet date and revenue and expenses were translated at the average rates of exchange prevailing during the year. The
translation adjustment resulting from the process was presented separately as a component of accumulated other comprehensive income
(loss) in stockholders' equity. Exchange gains or losses arising on translation or settlement of foreign currency denominated monetary items
were included in the consolidated statement of operations.
At December 31, 1999, the Company migrated its operations to Seattle, Washington, and subsequently the majority of the
Company's transactions are originally denominated in U.S. dollars. Accordingly, for the year ended December 31, 2001 and 2000 the
functional currency of all companies within the group is the US dollar. As such, all foreign exchange gains or losses, including those
arising from translating Canadian operations to US dollars, have been included in income. For the year ended December 31, 2001, the
Company incurred a foreign exchange gain of $163,449 (2000—$82,473 loss; 1999—$12,427 gain).
(d)
Cash and cash equivalents:
The Company considers all short-term investments with a maturity date at purchase of three months or less to be cash equivalents.
(e)
Inventory:
Inventory has been stated at the lower of cost and estimated net realizable value and includes adjustments for estimated
obsolescence. Cost includes laid-down cost and is determined principally using actual cost on a first-in first-out basis.
(f)
Fixed assets:
Fixed assets are recorded at cost and are depreciated on the declining balance basis over the estimated useful lives of the assets as
follows:
Asset
Rate
Equipment.....................................................................................................................................
Automobile and computers...........................................................................................................
Equipment under capital lease......................................................................................................
20% to 50%
30%
Lease term
(g)
Intangible assets:
The Company's intangible assets include costs associated with attaining trademarks and patents for the company's products and
are amortized on a straight-line basis over 5 years.
(h)
Impairment of long-lived assets and long-lived assets to be disposed of:
Long-lived assets, which include fixed assets and intangible assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the
assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(i)
Revenue recognition:
Sales are recorded when title passes, which is when goods are received by the customer, and represent amounts realized net of
provisions for sales returns, discounts and allowances which are recognized at the time of sale.
For sales returns, the Company issues a credit note to the customer once it has obtained the returned goods. Discounts are offered
to customers via promotional events. Discounts are recorded at the time of sale by issuing a credit note for the discount relating to the
shipment.
(j)
Research and development:
Research and development costs, which consist primarily of product development costs, are expensed in the period incurred and
are included in general and administrative expenses. During the year ended December 31, 2001, the Company incurred research and
development costs of nil (2000—nil; 1999—$52,836).
(k)
Stock-based compensation:
The Company accounts for its stock-based compensation arrangements with employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such,
compensation expense under fixed plans is recorded on the date of grant only if the market value of the underlying stock at that date
exceeds the exercise price.
SFAS No. 123, "Accounting for Stock Based Compensation", requires entities that continue to apply the provision of APB
Opinion No. 25 for transactions with employees to provide pro forma net income (loss) and pro forma income (loss) per share disclosures
for employee stock option grants as if the fair-value-based method in SFAS No. 123 had been applied to these transactions. This
information is provided in note 9(a).
The Company recognizes compensation expense for stock options, common stock and other equity instruments issued to non-
employees for services received based upon the fair value of the equity instruments issued at the date of performance completion.
(l)
Advertising:
The Company expenses advertising costs as incurred. During the year ended December 31, 2001, the Company incurred
advertising costs of $3,306,783 (2000—$3,899,368; 1999—$1,919,220).
(m)
Income taxes:
The Company follows the asset and liability method of accounting for income taxes. Under this method, current taxes are
recognized for the estimated income taxes payable for the current period. Deferred income taxes are provided based on the estimated future
tax effects of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases
as well as the benefits of losses available to be carried forward to future years for tax purposes.
Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is recorded for deferred tax
assets when it is not more likely than not that such deferred tax assets will be realized.
(n)
Earnings (loss) per share:
Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the periods,
excluding treasury stock and common stock held in escrow that is subject to cancellation if certain criteria are not achieved. Diluted
earnings (loss) per share is computed by adjusting the weighted average number of common shares by the effective exercise or conversion
of all dilutive securities.
(o)
Comprehensive income (loss):
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for reporting and disclosure of comprehensive income
and its components in a full set of general-purpose financial statements. The Company discloses the comprehensive income (loss) in the
Consolidated Statement of Stockholders' Equity. Comprehensive income (loss) includes earnings (loss) and foreign currency translation
adjustments.
3. Accounts receivable:
Trade .................................................................................................................
Other .................................................................................................................
Receivable from related party...........................................................................
Allowance for doubtful accounts......................................................................
2001
2000
$2,494,848
496,026
70,502
(741,907)
$2,319,469
$1,778,447
31,590
44,524
(140,697)
$1,713,864
Bad debt expense for 2001 amounted to $702,909. This was primarily associated with the bankruptcy of two of the Company's
distributors during the year. The Company has secured a new distributor to replace one of the previous distributors. As part of the
distribution agreement, the Company will receive a $250,000 cash payment from its new distributor.
4. Inventory:
Finished goods..................................................................................................
$1,545,486
$1,207,517
2001
2000
Raw materials ...................................................................................................
671,780
$2,217,266
686,972
$1,894,489
5. Fixed assets:
Automotive .......................................................................................................
Equipment.........................................................................................................
Office and computer equipment .......................................................................
Accumulated depreciation ................................................................................
2001
2000
$115,835
815,402
546,573
1,477,810
(811,729)
$666,081
$115,676
767,883
461,980
1,345,539
(610,057)
$735,482
Included in fixed assets are assets under capital leases with a net book value of $190,015 (2000—$152,124).
6. Intangible assets:
Trademarks and patents....................................................................................
Amortization .....................................................................................................
7. Bank indebtedness:
Bank indebtedness .................................................................................................
Line of credit..........................................................................................................
2001
2000
$273,469
(134,635)
$138,834
$217,560
(104,638)
$112,922
2001
2000
$129,446
528,232
$657,678
$—
1,566,915
$1,566,915
The Company has a $3,000,000 bank line expiring March 22, 2003. Borrowings under the line bear interest at the prime rate plus
1.5% (6.25% at December 31, 2001).
8. Capital lease obligations:
The Company's scheduled payments, including interest at 9.25%, at December 31, 2001 are a follows:
2002 .....................................................................................................................................................
$63,295
2003 .....................................................................................................................................................
2004 .....................................................................................................................................................
2005 .....................................................................................................................................................
2006 .....................................................................................................................................................
35,892
20,814
—
—
$120,001
9. Stockholders' equity:
(a)
Stock options:
In 1996, the Company adopted a stock option plan (the Plan) that provides for the issuance of incentive and non-qualified stock
options to officers, directors, employees and consultants to acquire up to 15% of the Company's issued and outstanding common stock.
The Board of Directors determines the terms and conditions of the options granted under the Plan, including the exercise price
and vesting schedule. The exercise price for qualified incentive stock options cannot be less than the fair market value of the underlying
stock at the date of grant, and the maximum term is five years from the date of grant. Options granted generally vest over a period of
18 months.
Under APB 25, compensation expense is measured as the excess, if any, of the market price of the underlying stock over the
exercise price on the measurement date of the grant. Had stock compensation expense for grants to employees under the Company's stock
option plan been determined based on the fair value methodology under SFAS 123, the Company's net income (loss) for each of the years
presented would have been as follows:
2001
2000
1999
Earnings (loss):
As reported .................................................................
Pro forma....................................................................
Basic and diluted earnings (loss) per share
As reported .................................................................
Pro forma....................................................................
$(1,702,228)
(1,717,648)
$1,596,356
1,446,686
$(809,176)
(1,023,088)
(0.09)
(0.09)
0.08
0.07
(0.05)
(0.05)
The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model, which takes into
account (1) the market price of the underlying stock at the grant date, (2) the exercise price, (3) an expected life ranging from one to five
years, (4) 0% dividend yield, (5) a risk-free interest rate of 4.0%, and (6) an estimated volatility of 78%.
The weighted average fair value of options granted in 2001, 2000 and 1999 was $0.42, $0.28 and $0.35, respectively.
Included in general and administrative expenses for 2001 is stock-based compensation of $118,500 (2000—$35,557; 1999—nil).
A summary of the Company's stock option activity is as follows:
Balances at December 31, 1998 ..............................................................
Options granted........................................................................................
Options exercised ....................................................................................
Options canceled......................................................................................
Balances at December 31, 1999 ..............................................................
Options granted........................................................................................
Outstanding options
Average exercise price
Number
of shares
1,494,750
1,207,000
(25,000)
(491,250)
2,185,500
258,500
U.S. $
Cdn $
$0.76
0.63
(0.61)
(0.94)
0.66
1.05
$1.10
0.91
(0.88)
(1.36)
0.95
1.57
Options cancelled ....................................................................................
Balances at December 31, 2000 ..............................................................
Options granted........................................................................................
Options exercised ....................................................................................
Options cancelled ....................................................................................
Balances at December 31, 2001 ..............................................................
(375,000)
2,069,000
437,000
(35,000)
(170,500)
2,300,500
(1.00)
0.68
0.60
(0.51)
(0.69)
$0.63
(1.50)
1.02
0.95
(0.81)
(1.10)
$1.00
The following table summarizes information about stock options outstanding and exercisable under the Plan at December 31,
2001:
Range of
exercise
$0.47 to $0.57 ...............................
$0.63 to $0.72 ...............................
$0.94 to $1.10 ...............................
(b)
Brokers' warrants:
Weighted average
remaining
contractual life
2.9
1.8
0.3
Weighted average
exercise price
Weighted average
exercise prices
U.S. $
Cdn $
$0.52 $0.82
1.05
0.66
1.01
1.61
$0.63 $1.00
Number
exercisable
709,500
1,248,250
135,000
2,092,750
U.S. $
Cdn $
$0.52 $0.82
1.05
0.66
1.01
1.61
$0.63 $1.00
Number
outstanding
865,000
1,300,500
135,000
2,300,500
In connection with the issuances of common stock in 1997, 1998 and 1999, the Company issued, to the brokers, warrants to
purchase shares of the Company's common stock, with exercise prices ranging from $0.42 to $0.62 per share, expiring June 18, 2000 to
May 4, 2001. During the year ended December 31, 2001, warrants were exercised to purchase 75,450 shares of common stock. The
remaining warrants expired May 4, 2001. The warrants were recorded on issuance at their estimated fair market value (FMV) as a share
issuance cost. The Company estimated the FMV of all warrants to be $52,000 using the Black-Scholes option pricing model and using the
following assumptions: expected volatility of 90%, risk-free interest rate of 6.4%, expected life of two to three years, and a 0% dividend
yield.
JONES SODA CO. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Expressed in United States dollars) Years ended
December 31, 2001, 2000 and 1999
9. Stockholders' equity:
(c)
Warrants:
In March, 2000, the Company issued 25,000 warrants in connection with the provision of a $3,000,000 line of credit. The
warrants have an exercise price of $0.85 and expire on March 22, 2002. As of December, 2001, warrants to purchase 25,000 shares of
common stock remain outstanding. The Company estimated the FMV of the warrants to be $9,600 using the Black-Scholes option pricing
model and using the following assumptions: expected volatility of 70%, risk-free interest rate of 6.0%, expected life of 2 years, and a 0%
dividend yield. The value assigned has been included in interest expense for the year ended December 31, 2000.
In May, 1999, the Company issued 3,510,754 shares of common stock in exchange for net proceeds of $1,651,460, being net of
$259,108 of issuance costs. Attached to these shares were warrants to purchase 1,656,567 shares of common stock. The warrants have an
exercise price of $0.52 per share for the first year and $0.62 per share thereafter. During the year ended December 31, 2001, warrants were
exercised to purchase 838,018 shares of common stock. The remaining warrants expired May 4, 2001.
10. Commitments:
The Company has lease commitments for office and warehouse premises expiring at various dates. The agreements require base
rental payments over the next five years as follows:
2002 .....................................................................................................................................................
2003 .....................................................................................................................................................
2004 .....................................................................................................................................................
2005 .....................................................................................................................................................
170,012
60,163
3,183
—
$402,158
During the year ended December 31, 2001, the Company incurred rental expenses of $196,800 (2000—$111,735; 1999—
$58,000).
11. Income taxes:
U.S. and Canadian components of income (loss) before income taxes were:
U.S. .....................................................................................
Canadian .............................................................................
2001
2000
1999
$(1,960,800)
258,572
$(1,702,228)
$1,559,745
36,611
$1,596,356
$(479,711)
(329,465)
$(809,176)
Income tax expense attributable to income (loss) before taxes was nil for years ended December 31, 2001, 2000 and 1999
respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 35% (Canadian federal income tax
rate of 45.6% for the years ended 1999) to pretax income as a result of the following:
Computed "expected" tax expense.......................................
Increase (reduction) in income taxes resulting from:
Non-taxable litigation settlement .....................................
Other permanent differences............................................
Losses deferred to future periods.....................................
Other, net..........................................................................
2001
2000
1999
$(595,780)
$562,606
$(318,135)
—
14,571
602,643
(21,434)
$—
(1,562,710)
41,450
1,006,374
(47,720)
$—
—
77,193
163,667
77,275
$—
The Company's deferred tax expense was nil for the years ended December 31, 2001, 2000 and 1999 respectively. The tax effects of
temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and
2000, in the Company's two tax jurisdictions, are presented below:
United States:
Loss carryforwards ....................................................................................
Fixed assets................................................................................................
Intangible assets.........................................................................................
Other ..........................................................................................................
$1,996,297
17,115
569,286
(42,000)
$1,515,684
58,266
487,357
(52,901)
2001
2000
Valuation allowance ..................................................................................
Net deferred tax asset ................................................................................
2,540,698
(2,540,698)
$—
2,008,406
(2,008,406)
$—
Canadian (in Canadian dollars):
Loss carryforwards ...........................................................................................
Fixed assets.......................................................................................................
Intangible assets................................................................................................
Valuation allowance .........................................................................................
Net deferred tax asset .......................................................................................
2001
2000
$561,577
170,207
(24,866)
706,918
(706,918)
$—
$781,843
140,995
—
922,838
(922,838)
$—
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As at December 31, 2001,
the Company does not believe it meets the criteria to recognize the deferred tax asset, and has accordingly provided a full allowance.
At December 31, 2001, the Company has net operating loss carryforwards for federal income tax purposes of $5,703,706 in the
U.S., which are available to offset future federal taxable income, if any.
The net operating loss carryforwards expire as follows:
2011 ..............................................................................................................................................
2012 ..............................................................................................................................................
2018 ..............................................................................................................................................
2019 ..............................................................................................................................................
2020 ..............................................................................................................................................
2021 ..............................................................................................................................................
$274,992
205,277
487,515
465,535
2,548,550
1,721,837
$5,703,706
In Canada, net operating loss carryforwards of $1,576,578 (in Canadian dollars) are available to offset future federal taxable
income, if any.
The net operating loss carryforwards expire as follows:
2003 ..............................................................................................................................................
2004 ..............................................................................................................................................
2005 ..............................................................................................................................................
2006 ..............................................................................................................................................
$19,806
417,992
1,136,402
2,378
$1,576,578
12. Segmented information and export sales:
The Company operates in one industry segment, with operations in both the United States and Canada. During the year ended
December 31, 2001 sales in Canada were approximately $3,632,471 (2000—$3,224,317; 1999—$1,782,450). Sales in the United States
were approximately $19,860,651 (2000—$15,646,169; 1999—$9,304,000). Sales in the United Kingdom were approximately $122,789
(2000—$146,010; 1999—nil). Sales have been assigned to geographic locations based on the location of customers.
As at December 31, 2001, the net book value of long-lived assets held in the United States was $375,843 (2000—$274,686). The
net book value of long-lived assets held in Canada was $290,236 (2000—$474,638).
13. Financial instruments:
(a)
Fair values:
As at December 31, 2001, the carrying amounts reported in the consolidated balance sheets for cash and cash equivalents,
accounts receivable, line of credit, accounts payable and accrued liabilities and capital lease obligations, approximate their fair values due
to the short-term to maturity of these instruments.
(b)
Concentration of credit risk:
The Company mainly sells its products to customers in the United States and Canada. Customers in the United States represent
85% (2000—83%; 1999—83%) while customers in Canada represent 15% (2000—17%; 1999—17%) of year end accounts receivable
balances. No single customer represents in excess of 10% of revenues for the years ended December 31, 2001, 2000 and 1999.
14. Litigation settlement:
During the year ended December 31, 2001, the Company received $5,000 in settlement of litigation against the Company that was
deemed to be frivolous.
In September 2000, the Company signed a settlement agreement with a former ingredient supplier, who agreed to pay $4,510,350
in settlement of all litigation the Company was pursuing against them. The Company had previously recorded a receivable (net of valuation
allowance) of $45,464 and incurred costs of $372,473 in relation to the litigation, resulting in net settlement income in 2000 of $4,092,413.
15. Recent accounting pronouncements:
In April 2001, the FASB issued Emerging Issue Task Force 00-25 "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products" ("EITF 00-25"). The abstract sets out the FASB's interpretation of United States GAAP with
respect to a vendor's income statement characterization of consideration paid to a reseller of the vendor's products. Specifically, these types
of payments are considered to be a reduction of revenue when recognized in the vendor's income statement. The Company's current
policies with respect to these types of payments is to characterize them as a cost when recognized in the Company's income statement.
Adoption of EITF 00-25 is required for periods beginning after December 15, 2001 and requires reclassification of prior periods presented
for comparative proposes. The Company plans to adopt EITF 00-25 effective January 1, 2002. Adoption of EITF will have no impact on
the Company's net earnings (loss) for any period although retroactive reclassification of amounts between revenue and operating expenses
will be required. These reclassifications are not expected to be material to the line items presented.
16. Subsequent events:
Subsequent to December 31, 2001, the Company repurchased 251,250 performance escrow shares as permitted by the Escrow
Agreement of May 27, 1993.
The Company then cancelled these shares, along with 200,000 treasury shares held at December 31, 2001.