UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
¥
n
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 000-28820
JONES SODA CO.
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of
incorporation or organization)
52-2336602
(I.R.S. Employer
Identification No.)
234 Ninth Avenue North
Seattle, WA 98109
(Address of principal executive offices)
(206) 624-3357
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Title of Each Class
Common Stock, no par value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes n
No ¥
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes n
No ¥
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ¥
No n
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes n
No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K. ¥
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer n
Accelerated filer n
Non-accelerated filer n
Smaller reporting company ¥
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
(Do not check if a smaller reporting company)
Act). Yes n
No ¥
As of the last business day of the second fiscal quarter, June 30, 2009, the aggregate market value of such
common stock held by non-affiliates was approximately $28,835,505 using the closing price on that day of $1.09.
As of March 10, 2010, there were 26,424,796 shares of the Company’s common stock issued and outstanding.
Documents Incorporated By Reference:
None
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EXPLANATORY NOTE
Unless otherwise indicated or the context otherwise requires, all references in this Annual Report on
Form 10-K to “we,” “us,” “our,” “Jones,” “Jones Soda,” and the “Company” are to Jones Soda Co.», a
Washington corporation, and our wholly-owned subsidiaries Jones Soda Co. (USA) Inc., Jones Soda (Canada)
Inc., myJones.com Inc. and Whoopass USA Inc.
In addition, unless otherwise indicated or the context otherwise requires, all references in this Annual
Report to “Jones Soda” and “Jones Pure Cane Soda” refer to our premium soda sold under the trademarked
brand name “Jones Soda Co.”
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform
Act of 1995. This Annual Report on Form 10-K (Report) contains a number of forward-looking statements
that reflect management’s current views and expectations with respect to our business, strategies, products,
future results and events and financial performance. All statements made in this Report other than statements
of historical fact, including statements that address operating performance, the economy, events or develop-
ments that management expects or anticipates will or may occur in the future, including statements related to
potential strategic transactions, distributor channels, volume growth, revenues, profitability, new products,
adequacy of funds from operations, cash flows and financing, our ability to continue as a going concern,
statements expressing future operating results and non-historical information, are forward-looking statements.
In particular, the words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” “can,”
“plan,” “predict,” “could,” “future,” variations of such words, and similar expressions identify forward-looking
statements, but are not the exclusive means of identifying such statements and their absence does not mean
that the statement is not forward-looking.
Readers should not place undue reliance on these forward-looking statements, which are based on
management’s current expectations and projections about future events, are not guarantees of future perfor-
mance, are subject to risks, uncertainties and assumptions and apply only as of the date of this Report. Our
actual results, performance or achievements could differ materially from historical results as well the results
expressed in, anticipated or implied by these forward-looking statements. Except as required by law, we
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
In particular, our business, including our financial condition and results of operations and our ability to
continue as a going concern may be impacted by a number of factors, including, but not limited to, the
following:
(cid:129) Our ability to successfully execute on our 2010 operating plan and obtain financing before 2011;
(cid:129) Whether our efforts to explore strategic transactions result in a definitive transaction, and the risks and
uncertainties associated with the evaluation and negotiation of any proposed transaction, including
management distraction and the effect of market assumptions regarding a proposed transaction on the
price of our common stock;
(cid:129) Our ability to establish and maintain distribution arrangements with distributors, retailers, brokers and
national retail accounts, on which our business plan and future growth are dependent in part;
(cid:129) Our ability to manage our inventory levels and to predict the timing and amount of our sales;
(cid:129) The inability of our exclusive manufacturer and distributor (National Beverage Corp.) of Jones Soda
12-ounce cans in the grocery and mass merchant channel to perform adequately, which could impair
our ability to meet demand;
(cid:129) Our ability to modify our sponsorship arrangements in a timely manner to reduce our obligations or
make any other changes or to realize the benefits expected from our sponsorship agreements, to which
we have dedicated significant resources;
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(cid:129) Our reliance on third-party packers of our products, which could make management of our marketing
and distribution efforts inefficient or unprofitable;
(cid:129) Our ability to secure a continuous supply and availability of raw materials, as well as other factors
affecting our supply chain;
(cid:129) Our ability to source our flavors on acceptable terms from our key flavor suppliers;
(cid:129) Our ability to maintain brand image and product quality and the risk that we may suffer other product
issues such as product recalls;
(cid:129) Our ability to attract and retain key personnel, which would directly affect our efficiency and results of
operations;
(cid:129) Our inability to protect our trademarks, patents and trade secrets, which may prevent us from
successfully marketing our products and competing effectively;
(cid:129) Litigation or legal proceedings (including pending securities class actions), which could expose us to
significant liabilities and damage our reputation;
(cid:129) Our inability to build and sustain proper information technology infrastructure;
(cid:129) Our inability to regain compliance with the continued listing requirements of The Nasdaq Capital
Market, including the $1 minimum bid price requirement, or our inability to appeal the Nasdaq Staff’s
determination to delist our common stock which may adversely affect our market price and liquidity;
(cid:129) Our inability to create and maintain brand name recognition and acceptance of our products, which are
critical to our success in our competitive, brand-conscious industry;
(cid:129) Our ability to compete successfully against much larger, well-funded, established companies currently
operating in the beverage industry;
(cid:129) Our inability to continue developing new products to satisfy our consumers’ changing preferences;
(cid:129) Global economic conditions that may adversely impact our business and results of operations;
(cid:129) Our ability to comply with the many regulations to which our business is subject.
For a discussion of some of the factors that may affect our business, results and prospects, see “Item 1A.
Risk Factors.” Readers are also urged to carefully review and consider the various disclosures made by us in
this Report and in our other reports we file with the Securities and Exchange Commission, including our
periodic reports on Forms 10-Q and current reports on Form 8-K, and those described from time to time in
our press releases and other communications, which attempt to advise interested parties of the risks and factors
that may affect our business, prospects and results of operations.
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ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
JONES SODA CO.
Table of Contents
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
[Reserved.] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . .
Item 9.
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Item 12.
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
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PART I
ITEM 1. BUSINESS.
Overview
We develop, produce, market and distribute a range of premium beverages, including the following four
brands as of the date of this Report:
(cid:129) Jones Pure Cane Soda», a premium carbonated soft drink with three new extensions launched in
targeted markets during 2009:
(cid:129) Jones Refresco De Caña Pura,
(cid:129) Jones JumbleTM, our seasonal soda, and
(cid:129) Jones ZilchTM, our zero calorie offering;
(cid:129) Jones 24C», an enhanced water beverage;
(cid:129) Jones GABA», a functional tea juice blend; and
(cid:129) WhoopAss Energy Drink», a citrus energy drink.
We sell and distribute our products primarily throughout the United States (U.S.) and Canada through our
network of independent distributors, which we refer to as our direct store delivery (DSD) channel and national
retail accounts, which we refer to as our direct to retail (DTR) channel, and we sell concentrate through an
exclusive manufacturing and distribution agreement. We do not directly manufacture our products but instead
outsource the manufacturing process to third party contract packers. We also sell various products on-line,
which we refer to as our interactive channel, including soda with customized labels, wearables, candy and
other items, and we license our trademarks for use on products sold by other manufacturers. In addition, we
are expanding our international business outside of North America and have secured distribution through
independent distributors in Ireland, the United Kingdom, Australia, Japan and the United Arab Emirates.
Our company is a Washington corporation formed in 2000 as a successor to Urban Juice and Soda
Company Ltd., a Canadian company formed in 1986. Our principal place of business is located at 234 Ninth
Avenue North, Seattle, Washington 98109. Our telephone number is (206) 624-3357.
As we discuss in this Report under the heading “Liquidity and Capital Resources,” the challenges and
uncertainties we face in our business, including our liquidity position, our inability to implement further
meaningful cost containment measures beyond those we have already undertaken and the extremely difficult
environment in which to obtain additional equity or debt financing, continue to raise substantial doubt about
our ability to continue as a going concern. In light of this, we have evaluated a broad range of strategic
alternatives over the last months. On March 9, 2010, we announced that we had entered into a Letter of Intent
(LOI) with Reed’s, Inc. (Reed’s), maker of sodas sold in natural food stores nationwide, regarding a potential
merger transaction in which Reed’s would acquire Jones Soda for a combination of cash and Reed’s common
stock. On March 22, 2010, we announced that we had terminated the exclusivity provisions of the LOI in
order to explore an unsolicited, nonbinding transaction proposal submitted by another third party. We intend to
continue to explore strategic transactions that may be in the best interest of the Company and our shareholders,
which may include, without limitation, mergers or other business combinations, public or private offerings of
debt or equity financings, joint ventures with one or more strategic partners and other strategic alternatives.
However, there can be no assurance that we will enter into a definitive agreement with respect to a transaction,
or that any transaction we may enter into will ultimately be consummated.
Segment Information
The Company has one operating segment with operations primarily in the United States and Canada (see
Note 14 in Item 8 of this Report).
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Products
Our four beverage brands include the following:
Jones Pure Cane Soda
In November 1995, we launched Jones Soda, a premium carbonated soft drink, under our trademarked
brand creating a new category in the New Age beverage market (see “Industry Background” below for a
description of the New Age market). Jones Soda comes in 12-ounce, clear long-neck bottles, and every bottle
label carries a photo sent to us by our consumers. Over 1,000,000 photos have been submitted to us. We
believe this unique interaction between the consumer and the brand creates a distinguishable point of
difference and strong competitive advantage for Jones Soda. Equally differentiating is the bright colorful look
of our drinks with distinctive names such as FuFu Berry» and Blue Bubble Gum. Jones Soda is made with the
highest quality ingredients and flavors. We currently sell Jones Soda in eleven flavors in the United States.
In 2003, we launched a sugar-free version of our Jones Soda line providing an alternative for consumers
to our regular Jones Soda line. We believe these sugar-free sodas, which are sweetened with Splenda» and
contain zero calories, are an important product extension, especially in light of the recent concern and media
coverage regarding obesity in young people. In the fourth quarter of 2009, we re-branded this line-up as Jones
ZilchTM. The new line-up is still sweetened with Splenda, has zero calories and now includes Vitamin C as an
added ingredient. We currently have three flavors of Jones ZilchTM, including the traditional favorite, Black
Cherry, and two new flavors: Pomegranate, and Vanilla Bean.
In 2004, we expanded the Jones Soda package lineup to include 12-ounce cans, which are produced and
distributed by National Beverage Corp. (National Beverage) primarily through the grocery channel. We believe
our can business provides our customers with an alternative method of consuming our premium soda.
In keeping with our commitment to produce the highest quality beverage, in the second quarter of 2007,
we launched Jones Pure Cane Soda by converting our sweetener system from high fructose corn syrup to pure
cane sugar, which we believe improves the taste and mouth feel of our products and is understood to digest
easier in the body.
During 2009, we launched three extensions of our Jones Pure Cane Soda including Jones ZilchTM, Jones
Refresco De Caña Pura, launched in our West coast markets, and Jones JumbleTM, our seasonal soda launched
in targeted markets. We currently have four flavors of the Jones Refresco line and treat Jones JumbleTM as a
rotating flavor for the seasonal soda.
Jones 24C
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In June 2006, we purchased the trademark rights and related assets of 24C. Jones 24C, an enhanced water
beverage sweetened with pure cane sugar, has 100% natural flavors, contains daily vitamin requirements
(including 500% RDA of Vitamin C) and is available in five flavors primarily in the Northeast region of the
country. We began production and distribution of Jones 24C in the first quarter of 2007. 24C is available in
20-ounce PET bottles.
Jones GABA
We introduced our first line of beverages containing Pharma GABA in February 2009. The product,
branded Jones GABA and offered in 12-ounce slim cans, is available in the following flavors: Lemon Honey
Tea, Fuji Apple, Nectarine and Grapefruit tea and juice blends. Pharma GABA is a naturally produced form of
the amino acid, gamma amino butyric acid (GABA), which studies have shown to be a key neurotransmitter in
the human brain that improves mental focus, balance and clarity, while reducing stress. We believe our launch
has been hampered by the persisting adverse economic conditions. Jones GABA is our first entry in the new
emerging category of Functional Beverages and is our first beverage product containing GABA.
2
WhoopAss Energy Drink
We launched WhoopAss in October 1999. WhoopAss is a citrus energy drink in a 16-ounce slim can
containing riboflavin, niacin, vitamin B6 and thiamin. WhoopAss competes in the Energy Drink category of
the New Age beverage industry.
Discontinued Product — Jones Naturals and Jones OrganicsTM
In the first quarter of 2010, due to the loss of our significant DTR accounts carrying these brands,
including Barnes & Noble Inc. and Panera Bread Company, and the costs of maintaining inventory for low
volume brands, we discontinued Jones Naturals (launched in April 2001) and Jones OrganicsTM (launched in
April 2005). Jones Naturals was a non-carbonated beverage containing 100% natural flavors and ingredients
and consisted of five flavors. Jones OrganicsTM was a ready-to-drink organic tea and consisted of four flavors.
Industry Background
The New Age or Alternative Beverage Category
Jones Pure Cane Soda, Jones 24C, and WhoopAss Energy Drink, which are classified as New Age or
alternative beverages, as well as other brands and products that we may develop in the future, compete with
beverage products of all types including soft drinks, fruit juices and drinks and bottled water.
New Age or alternative beverages are distinguishable from mainstream carbonated soft drinks in that they
tend to contain natural ingredients combined with less sugar and carbonation. As a general rule, three criteria
have been established for the New Age or alternative beverage classification: (1) relatively new introduction to
the marketplace, (2) a perception by consumers that consumption is healthful compared to mainstream
carbonated soft drinks, and (3) the use of natural ingredients and flavors in the products. According to market
research, the New Age or alternative beverage category includes: energy drinks, premium soda, ready-to-drink
(RTD) coffee, RTD tea; RTD tea (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 and vegetable/fruit juice blends.
The Carbonated Soft Drink Category
Our soda originated in the New Age category and our products meet the above mentioned definitions for
the New Age or alternative beverage classification, but over time these definitions evolve and categories
overlap and blend together. While we intend to maintain our niche alternative positioning, we also strive to
expand our sources of growth by attempting to be within the consideration set of shoppers and drinkers of
mainstream brands so that it is easier for them to switch to our brands. For that reason, we have attempted to
expand our points of availability within all stores, including the shelves that are normally restricted to national
mainstream brands manufactured by companies such as The Coca-Cola Company and PepsiCo. Our primary
package within the mainstream aisle is the 12-ounce can multi-pack, but we have also penetrated this space
with the four-pack Jones Soda glass package. These packages and shelf locations allow us to penetrate the
larger carbonated soft drink category, providing us access to the important “take home market.”
Business Strategy
Our business strategy is to increase sales by expanding distribution of our brands in new and existing
markets (primarily within North America), stimulating consumer awareness and trial of our products, thus
leading to increased relevance and purchase intent of our brands. Our business strategy focuses on:
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(cid:129) expanding points of distribution of our products;
(cid:129) creating strong alignment with our key distributors;
(cid:129) developing innovative beverage brands and products;
3
(cid:129) stimulating strong consumer demand for our existing brands and products, with primary emphasis in
the U.S. and Canada;
(cid:129) inviting consumers to participate in our brand through submission of photographs to be placed on labels
through our interactive application of myJones.com;
(cid:129) licensing our brand equity for the creation of other beverage or non-beverage products; and
(cid:129) exploring opportunities to license our patented custom-label process to non-competitive products.
Key elements of our business strategy include the following:
Building our Brand
We believe the market for alternative beverages is dependent to a large extent on image as well as taste,
and that this market is driven by trendy, young consumers between the ages of 12 and 24. Accordingly, our
strategy is to develop innovative brand names, relevant programs and trade dress. In addition to creative
labeling on our products, we provide our distributors with point-of-sale promotional materials and branded
apparel items. 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 labels. We select photos throughout the year to be placed on our
bottles in distribution. We also invite consumers to celebrate special occasions and memories by creating their
own label through myJones.com. In that space, consumers have the ability to customize their own label and
product with a photo and short caption using a patented process owned by Jones Soda. 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. Additionally, the industry continues to see a shift
towards diet or zero calorie soft drinks, and we believe the launch of Jones ZilchTM is on trend and maintains
the spirit of the Jones brand in a new zero calorie platform. We believe this launch will expand the consumer
base for our soda products and provide a healthier, fun alternative to the current options in this sector.
In-House Brand and Product Development
We understand the importance of creating new beverage items and enhancing our existing beverage items
to meet the ever changing consumer taste profile. Our strategy is to be focused on innovative products that
will be accepted by retailers, distributors and consumers. We believe this is accomplished by keeping open
dialog with our retail and distributor partners to ensure we are current with consumer trends in the beverage
industry.
We have developed and intend to continue to develop the majority of our brands and products in-house.
We used a similar process initially to create the Jones Soda brand, and we 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. 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 analyze existing and potential distribution channels, whether DSD or
DTR. 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. 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 brands and products.
Image and Design.
In light of our market, distributor and production evaluations, we create and
develop the concept for a beverage brand or product extension. Our technical services department then
works with various flavor concentrate houses to test, choose and develop product flavors for the brand.
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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.
Independent Distributor Network (DSD)
We have focused our sales and marketing resources on the expansion and penetration of our products
through our independent distributor network throughout the U.S. and Canada. We have obtained listings for
selected stock keeping units (SKUs) of our Jones Pure Cane Soda, Jones 24C, Jones GABA, and WhoopAss
Energy Drink brands with certain key retail grocery, convenience and mass merchandiser accounts, including
but not limited to Quality Food Centers (QFC), Winn Dixie Stores, Inc., Hy Vee, Inc., Target Corporation,
Meijer, Inc., 7-Eleven, Inc., The Stop and Shop Supermarket Company, Allsups Convenience Stores, The
Kroger Co., Albertsons, Speedway Super America LLC and key Canadian retailers such as Loblaw Companies
Limited, all of which are serviced through our independent distributor network.
We grant certain independent distributors the exclusive right in defined territories to distribute finished
cases of one or more of our brands through written agreements. These agreements typically include invasion
fee provisions to those distributors in the event we provide product directly to one of our national retailers
located in the distributor’s region. We are also obligated to pay termination fees for cancellations of most of
these written distributor agreements, which have terms generally ranging from one to three years. We select
distributors that we believe will have the ability to get our 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 on their perceived ability
to build our brand franchise. We currently maintain a network of approximately 150 distributors in 50 states in
the United States and nine provinces in Canada. In 2009, we secured distribution with independent distributors
in Ireland, the United Kingdom, Australia, Japan and the United Arab Emirates.
Direct to Retail National Accounts (DTR)
We launched our direct to retail business strategy in 2003 as a complementary channel of distribution to
our DSD channel, targeting large national retail accounts. Through these programs we negotiate directly with
large national retailers, primarily premier food-service based businesses, to carry our products serviced through
the retailer’s appointed distribution system. As of the date of this Report, our most significant DTR accounts
are the following:
(cid:129) Costco Canada — launched in 2000, we offer a 24-count variety pack which includes six flavors of
Jones Soda;
(cid:129) Starbucks Canada — launched in 2000, we offer two flavors of Jones Soda in all Starbucks locations;
(cid:129) Cost Plus — launched in 2005, we offer a variety of flavors of Jones Soda and occasional season
related packaging;
(cid:129) Harris Teeter — launched in 2006, we offer a variety of Jones Soda flavors.
These arrangements are not long-term and are terminable at any time by these retailers or us. There are
no minimum purchase commitments for any of these retailers. In 2010, three of our significant DTR accounts
chose not to continue with us; these are Barnes & Noble Inc., Panera Bread Company, and Alaska and
Horizon Airlines. We will continue to look for new opportunities to service and expand our DTR channel of
business.
Concentrate Soda Distribution (CSD)
In October 2004, we entered into a test of our Jones Soda product in the 12-ounce can format under a
two-year exclusive marketing and distribution agreement with Target Corporation (Target). With the expiration
of this exclusive agreement with Target in December 2006, beginning in 2007 we expanded distribution to the
grocery and mass merchant channel in the U.S. with our exclusive manufacturing and distribution agreement
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with National Beverage. This agreement continues through December 31, 2011 (Initial Term), and automat-
ically renews in perpetuity for successive five year terms (Renewal Term). Any termination by us at the end of
the Initial Term or any Renewal Term or in the event of a material transaction, results in a material termination
payment by us to National Beverage.
National Beverage purchases concentrate from us in order to manufacture our products (which we refer to
as our CSD channel), and it places orders for concentrate as required to manufacture and sell on an exclusive
basis the products directly to retailers. National Beverage is not required to place any minimum monthly or
quarterly concentrate orders with us. Through this arrangement, we identify and secure retailers across the
U.S. for our Jones Soda 12-ounce cans and are responsible for sales efforts, marketing, advertising and
promotion. National Beverage is responsible for the manufacturing, delivery and invoicing of the sales of our
products in this can package. Beginning in 2009, we have changed our strategic direction, emphasizing our
higher-margin, core products, including our Jones Pure Cane Soda glass bottle business, with less emphasis on
our CSD channel, which is a lower margin business for us.
Sponsorship Arrangements
We currently have three major sponsorship agreements with professional sports franchises. We entered
into Sponsorship Agreements with Football Northwest LLC d/b/a Seattle Seahawks of the National Football
League and First and Goal, Inc. (the Seahawks Sponsorship); Brooklyn Arena, LLC and New Jersey
Basketball, LLC, (the Nets Sponsorship); and Trail Blazers Inc. (the Trail Blazers Sponsorship), which provide
us with the beverage rights to sell our beverages at sports venues as well as signage, advertising and other
promotional benefits to enhance our brand awareness. While we believe that sponsorship arrangements are a
way to continue to increase the public awareness and strength of our brand and provide us with other cross-
selling opportunities through our licensing business strategy, given our limited cash resources, we intend to
attempt to renegotiate these sponsorship agreements as they continue to require us to make significant annual
cash payments. There can be no assurance that we will be able to modify these sponsorship arrangements in a
timely manner to reduce our obligations or make any other changes.
Effective July 2007, we entered into the Seahawks Sponsorship that provides us with exclusive beverage
rights for certain soft drinks at Qwest Field and Events Center in Seattle, Washington, as well as signage,
advertising and other promotional benefits to enhance our brand awareness, including sponsorship and
trademark rights regarding the use of Seattle Seahawks’ trademarks. In consideration for our rights under the
agreement, we are obligated to pay annual sponsorship fees.
Effective June 15, 2009, we entered into an Amended Sponsorship Agreement with the Seattle Seahawks
under which we will pay reduced annual sponsorship fees in exchange for a reduction in certain rights and
benefits provided under the original agreement. We will continue to be the exclusive provider of soft drinks,
but will no longer provide energy drinks or water at Qwest Field and Events Center. The amended agreement
expires on June 30, 2012, and continues to provide Jones Soda with a right of first renewal with respect to its
renewal or extension. Generally, either party may terminate the agreement only if the other party breaches any
material term of the agreement and fails to cure such breach within 30 days of receiving notice of the breach,
or if either party becomes insolvent or bankrupt. However, the Seattle Seahawks may terminate the agreement
without cause at the end of the 2009 National Football League season by giving written notice to Jones Soda
on or before June 30, 2010.
Effective October 2007, we entered into the Nets Sponsorship. The agreement expires on the seventh
anniversary of the date the Brooklyn Arena has obtained a temporary Certificate of Occupancy (the “Opening
Date”), which has not yet occurred, or the equivalent of seven Nets seasons, whichever is longer. This
agreement provides us with exclusive beverage rights for all carbonated soft-drinks and certain other non-
alcoholic beverages, as well as sponsorship, promotional, media, hospitality and other rights in connection
with the New Jersey Nets basketball team and a proposed new sports and entertainment arena that the
Brooklyn Arena and the New Jersey Nets intend to develop in Brooklyn, New York. In consideration for our
rights under the agreement, we are obligated to pay annual sponsorship fees. The Brooklyn Arena and the
New Jersey Nets may terminate the agreement if we commit one of several events of default and subsequently
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fail to cure such event of default within the applicable cure period. We may terminate the agreement if the
Brooklyn Arena and the New Jersey Nets commit one of several events of default and subsequently fail to
cure such event of default within the applicable cure period, but only if equitable adjustment, make-goods or
other remedies implemented by the Brooklyn Arena and the New Jersey Nets are not suitable or appropriate
for such event of default. Additionally, we may exercise our Early Expiration Option as of the fifth anniversary
of the Opening Date by providing written notice of our intent to exercise no later than 18 months prior to the
fifth anniversary date along with payment of $375,000.
Effective October 2008, we entered into the Trail Blazers Sponsorship that provides us with beverage
rights at the Rose Garden and Memorial Coliseum in Portland, Oregon as well as signage, advertising and
other promotional benefits to enhance our brand awareness, including sponsorship and trademark rights
regarding the use of Portland Trail Blazers’ trademarks. In consideration for our rights under the agreement,
we are obligated to pay annual sponsorship fees. This agreement has an effective date of October 1, 2008 and
expires on June 30, 2011 and may be extended by mutual agreement. The agreement may be terminated prior
to the expiration of the term if either party materially defaults and subsequently fails to cure such event of
default within the applicable cure period. Additionally, the Trail Blazers may terminate the agreement effective
June 30, 2010 by providing written notice to us no later than April 10, 2010.
Licensing Arrangements
We launched our licensing business strategy in 2004 as a method to extend our brand into non-alternative
beverage products and non-beverage products. We currently have licensing arrangements with three companies.
In September 2005, we entered into a licensing agreement with Big Sky Brands, Inc. to manufacture and
distribute Jones Soda Flavor Booster hard candy. In February 2007, we entered into a licensing agreement
with J&J Snack Foods for the use of our flavors and brand name for their ICEE and Slush Puppy iced
beverages. In December 2008, we entered into a licensing broker agreement with FOG Studios for the use of
hard line items such as apparel, glassware and alternative products. With these licensing agreements, we
believe that we are able to partner with companies that will manufacture Jones related products and extend our
Jones brand into select products that we feel enhance our brand image.
Marketing, Sales and Distribution
Marketing
The Jones marketing team has developed brand positioning and architecture frameworks that we believe
enable us to have disciplined control over our brand identity and other marketing parameters. The strategic
frameworks steer us in the development and selection of programs that allow direct consumer ownership and
participation in management of the brand while still maintaining brand integrity. We have also developed
channel, package, price and promotion strategies designed to allow the sales team to realize optimum price
points.
In December 2009, we introduced our new packaging for our core glass bottles, the first time our
packaging had been completely refreshed in almost 12 years. The new look is distinctly Jones updated with
higher resolution printing that is designed to provide improved shelf presence for our brand. We believe the
new packaging highlights our portfolio of flavors while also delivering a cohesive, sustainable brand message
to our consumers.
We have a successful history of positioning ourselves in alternative outlets with the intent to be where
national mainstream brands are not sold. We also have a program of sponsoring alternative sport athletes to
promote our products, and we market in youth alternative sports such as surfing, hockey, roller derby, and
snowboard, skateboard and BMX bike arenas. We believe this effort to position our products in alternative
outlets has drawn a younger generation of customers that value their independence away from the larger soft
drink brands.
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Another core marketing pillar is the open source access consumers have to define the brand. We invite
our consumers to send us photos of their lives for use on our label. Every Jones Soda glass bottle has a picture
provided to us by a consumer.
We also maintain and utilize our website to allow our Jones Soda consumers to create personalized
12-packs of Jones Soda (12-ounce bottles) with their own photos on the labels. The strategy of
www.myjones.com is to provide a personalized product offering to our consumers as well as an innovative
marketing opportunity for our Jones Soda brand. Consumers can upload their photos through our patented
web-based process and crop and create their own “myJones” labels. The personalized labels are downloaded at
our warehouse, applied to 12-packs of Jones Soda and delivered to the consumer. We believe this strategy has
increased awareness for, as well as provided for increased consumer interactivity with, the Jones Soda brand.
In December 2002, we received notice of issuance of a patent (Patent No. 6,493,677) from the U.S. Patent
and Trademark Office for our myJones.com customized branded label process. The patent is titled “Method
and Apparatus for Creating and Ordering Branded Merchandise over a Computer Network.” In January 2005,
we were granted a second patent by the U.S. Patent and Trademark Office (Patent No. 6,845,362 B2) which is
also entitled “Method and Apparatus for Creating and Ordering Branded Merchandise over a Computer
Network.”
In 2002, we launched the yourJones program, which allows the customization of the front panel of the
label of Jones Soda in a manner similar to our myJones business, but on a larger, commercial scale. The
premise behind yourJones is to create customized Jones Soda bottles, with a personalized photo or brand
image, for cross promotion and co-branding purposes or for sale in retail accounts. Like myJones.com, the
Jones Soda name always appears on the labels and customers add their own photo/brand and words. We have
negotiated arrangements with our co-packing facilities to create short-run productions for these purposes.
We participate in blogs and several different social media campaigns as a way of live engagement with
our consumers in order to better understand their needs and issues.
We use point-of-sale materials such as posters, stickers, hats and T-shirts to create and increase consumer
awareness of our proprietary products and brands. In response to consumer demand, we also sell our products
and our wearables on our website. In selected cities, we participate at a “grass roots” level at certain
community and sporting events in an attempt to create and increase brand awareness and loyalty. We use
recreational vehicles, vans and independent distributor vehicles painted with the Jones colors and logos to
create consumer awareness and enthusiasm at these events and 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.
Sales
Our products are sold in 50 states in the U.S. and nine provinces in Canada, primarily in convenience
stores, delicatessens, sandwich shops and selected supermarkets, as well as through our national accounts with
several large retailers. In 2009, we secured distribution with independent distributors in Ireland, the
United Kingdom, Australia, Japan and the United Arab Emirates. In 2009, sales in the U.S. represented
approximately 79% of total sales, while sales in Canada represented approximately 18%, and we had
approximately 3% in other international sales. In 2008, sales in the U.S. represented approximately 79% of
total sales, while sales in Canada represented approximately 19%, and we had approximately 2% in other
international sales.
Distribution
For the year ended December 31, 2009, we experienced an improved balance of business across the
U.S. and Canada as we developed more regions of those countries. Our top ten DSD customers by revenue
represent approximately 35% of revenue, one of which, A. Lassonde Inc., a Canadian DSD distributor,
represents 13%. We anticipate that, as consumer awareness of our brands develops and increases, we will
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continue to upgrade and expand our distributor network and DTR accounts, which may result in a decreased
dependence on any one or more of our independent distributors or national retail accounts.
We contract with independent trucking companies to have our product shipped from our contract packers
to independent warehouses and then on to our distributors and national retail accounts. Distributors then sell
and deliver our products either to sub-distributors or directly to retail outlets. We recognize revenue upon
receipt by our distributors and customers of our products, net of discount and allowances and all sales are
final; however, in limited instances, due to credit issues, quality or damage issues, or distributor changes, we
may accept returned product, which to date, have not been material.
Competition
The beverage industry is highly competitive. Principal methods of competition in the beverage industry
include:
(cid:129) distribution;
(cid:129) shelf-management;
(cid:129) sponsorships;
(cid:129) licensing;
(cid:129) brand name and image;
(cid:129) price;
(cid:129) labeling and packaging;
(cid:129) advertising;
(cid:129) product quality and taste;
(cid:129) trade and consumer promotions; and
(cid:129) 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 ours. We also compete with regional beverage producers and
“private label” soft drink suppliers. Our direct competitors in the alternative beverage industry include
Dr. Pepper Snapple (Stewarts and IBC), Boylans, Henry Weinhard’s, Thomas Kemper, and other regional
premium soft drink companies. We also compete against Coca Cola, Pepsi, Hansen’s, and other traditional soft
drink manufacturers and distributors, as well as against other category leaders such as Red Bull and Monster
for the energy drink category. As of the date of this report, we believe we are the only beverage company
manufacturing and distributing product containing Pharma GABA in the U.S.
In order to compete effectively in the beverage industry, we believe that we must convince independent
distributors that Jones Pure Cane Soda 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 Pure Cane Soda brand, we sell Jones 24C, Jones GABA, and WhoopAss
Energy Drink, as complementary products that may replace other non-carbonated single-serve fruit beverages,
ready-to-drink (RTD) teas or energy drinks. In addition, we have created Jones Pure Cane Soda in a 12-ounce
can format that allows us to compete directly in the carbonated soft drink industry. As a means of maintaining
and expanding our distribution network, we introduce new products and product extensions, and when
warranted, new brands. Although we believe that we will be able to continue to create competitive and
relevant brands to satisfy consumers’ changing preferences, 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.
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In addition, in light of the competition for product placement with independent distributors, we obtained
several national retail accounts as an additional distribution channel for our products. We believe that this
diversification strategy is helpful in alleviating the risk inherent in competition for independent distributors.
Pricing of the products is also important. We believe that our Jones Pure Cane Soda, Jones 24C, Jones
GABA, and WhoopAss Energy Drink products are priced in the same price range or higher than competitive
New Age beverage brands and products and compete on quality through our premium product offerings.
Production
Contract Packing Arrangements
We do not directly manufacture our products but instead outsource the manufacturing process to third
party bottlers and independent contract packers (co-packers). For our bottle products, we purchase certain raw
materials which are delivered to our various third party co-packers. We currently use four primary co-packers
to prepare, bottle and package our bottle products. Our contract packers are located in the Canadian Provinces
of British Columbia and Ontario as well as in Memphis, Tennessee and Los Angeles, California. Once the
product is manufactured, we store the finished product at that location or in nearby third party warehouses.
Other than minimum case volume requirements per production run for most co-packers, we do not
typically have annual minimum production commitments with our co-packers. Our co-packers may terminate
their arrangements with us at any time, in which case we could experience disruptions in our ability to deliver
products to our customers. We continually review our contract packing needs in light of regulatory compliance
and logistical requirements and may add or change co-packers based on those needs.
With respect to our 12-ounce cans of Jones Soda sold by National Beverage through the grocery products
and mass merchant channel, National Beverage is responsible for all manufacturing, packing and distribution.
Under the agreement, sales of product may be made only to our authorized retail accounts purchasing through
warehouse distribution, and we are responsible for sales efforts, marketing, advertising and promotion. We sell
concentrate to National Beverage for the manufacture of the product, and National Beverage is responsible for
the manufacture, storage, inventory, delivery, invoicing, customer credit review and approval, and receivables
collection with respect to sales of products to our authorized accounts. National Beverage carries, stores and
maintains the finished products.
Our agreement with National Beverage has an initial term of five years, expiring on December 31, 2011.
Thereafter, the agreement automatically renews in perpetuity for successive additional five-year periods unless
terminated by either party as specified in the agreement. We may not terminate the agreement prior to the end
of a five-year term unless National Beverage is in material default. National Beverage has the right to
terminate our agreement upon six months notice at any time after December 31, 2009. The agreement also
provides National Beverage the first right to pack and distribute any new canned products that we desire to
sell through warehouse distribution.
Raw Materials
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Substantially all of the raw materials used in the preparation, bottling and packaging of our bottle
products are purchased by us or by our contract packers in accordance with our specifications. The raw
materials used in the preparation and packaging of our products consist primarily of concentrate, flavors,
supplements, sugar, bottles, labels, trays, caps and packaging. These raw materials are purchased from
suppliers selected by us or by our contract packers. We believe that we have adequate sources of raw
materials, which are available from multiple suppliers.
For our Jones GABA product, which was introduced in February 2009, we obtained the key ingredient,
GABA, pursuant to our supply agreement with Pharma Foods International (PFI), Mitsubishi Corporation
(MC) and Mitsubishi International Food Ingredients (MIFI). Although we believed we could obtain adequate
supplies of GABA from other sources in synthetic form, Pharma GABA is the only naturally produced form of
GABA on the market at this time and we believed it could give us a competitive advantage over other
beverage products that may include synthetic forms of GABA. Under the supply agreement, as amended in
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March 2009, PFI agreed to manufacture and sell, using MC and MIFI as international intermediaries, Pharma
GABA to us, and granted us the non-exclusive right to use Pharma GABA in specified beverage applications
throughout the world. We had certain purchase obligations under the supply agreement including the
requirement to order $1.8 million of Pharma GABA by December 31, 2008. The supply agreement terminates
on July 31, 2010, subject to earlier termination if any party defaults in performing any of its obligations under
the agreement and fails to correct such default within one month after notice of default.
With the impact of the economic conditions during 2009 on our business which was more severe than we
expected, including on the launch of our new product, Jones GABA, we recorded a charge for the GABA
inventory that was in excess of our forecasted demand, resulting in a write-down of $1.8 million for the year
ended December 31, 2009, of which $210,000 related to GABA finished goods inventory (see Note 2 in Item 8
of this Report).
Currently, we purchase our flavor concentrate from two flavor concentrate suppliers. Generally, flavor
suppliers own the proprietary rights to the flavors. Consequently, we do not have the list of ingredients or
formulae for our flavors. In connection with the development of new products and flavors, independent
suppliers bear a large portion of the expense for product development, thereby enabling us to develop new
products and flavors at relatively low cost. We anticipate that for future flavors and additional products, we
may purchase flavor concentrate from other flavor houses with the intention of developing other sources of
flavor concentrate for each of our products. If we have to replace a flavor supplier, we could experience
disruptions in our ability to deliver products to our customers, which could have a material adverse effect on
our results of operations.
In addition, we utilize considerable quantities of pure cane sugar. We have three pure cane sugar suppliers
and have entered into one to two year supply agreements that fix prices for 12-month periods. The price of
sugar increased in 2009 compared to 2008 exerting pressure on our 2009 gross margins.
We have one glass supplier with whom we have one year remaining on a fixed price supply agreement.
We are still subject to freight surcharges in addition to these agreements, but we experienced lower surcharges
in 2009 and anticipate a continued stabilization of these costs in 2010 due to lower fuel prices.
Quality Control
Our products are made from high quality ingredients and natural and/or 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. Samples of our products from each production run undertaken by each of our contract
packers are analyzed and categorized in a reference library.
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 for reference following each production run.
Testing includes microbiological checks and other tests to ensure the production facilities meet the
standards and specifications of our quality assurance program. Water quality is monitored during production
and at scheduled testing times to ensure compliance with beverage industry standards. The water used to
produce our products is filtered and is also treated to reduce alkalinity. 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 through a program for stringent
contract packer selection, training and communication.
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 (AAFC) and the U.S. Food and Drug Administration (FDA). The
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FDA and AAFC also regulate labeling of our products. From time to time, we may receive notifications of
various technical labeling or ingredient reviews 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.
Packagers of our beverage products presently offer non-refillable, recyclable containers in the U.S. and
various other markets. Some of these packagers also offer refillable containers, which are also recyclable.
Legal requirements have been enacted in jurisdictions in the U.S. and Canada requiring that deposits or certain
eco-taxes or fees be charged for the sale, marketing and use of certain non-refillable beverage containers. The
precise requirements imposed by these measures vary. Other beverage container related deposit, recycling, eco-
tax and/or product stewardship proposals have been introduced in various jurisdictions in the U.S. and Canada.
We anticipate that similar legislation or regulations may be proposed in the future at local, state and federal
levels, both in the U.S. and Canada.
Trademarks, Flavor Concentrate Trade Secrets and Patents
We own a number of trademarks, including, in the U.S. and Canada, “Jones Soda Co.,” “Jones Pure
Cane Soda,” “Jones 24C,” “Jones GABA,” “WhoopAss Energy Drink” Jones JumbleTM and “Jones ZilchTM”. In
the U.S. our trademarks expire 10 years from the registration date and in Canada 15 years from the registration
date, although in both Canada and the U.S, they may be renewed for a nominal fee. In addition, we have
trademark protection in the U.S. and Canada for a number of other trademarks for slogans and product
designs, including “I’ve Got A Jones For A Jones»,” “Jones Soda Co. and Design»,” “WhoopAss and
Design»,” “Corn Is For Cars... Sugar Is For Soda»,” “Run with the Little Guy!»,” “Keeping it RealTM” and
“My Jones»”. We have also applied for trademark protection for several marks, including “Jones Soda Co.”,
in the United Kingdom, Germany, Japan, and other foreign jurisdictions.
We have the exclusive rights to 37 flavor concentrates developed with our current flavor concentrate
suppliers, 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 arrangements with our flavor houses,
to maintain the secrecy and proprietary nature of our flavor concentrates.
We have two patents on our “myJones.com” web-based customized branded label process. In December
2002, the U.S. Patent and Trademark Office issued us Patent No. 6,493,677, and in January 2005 they issued
to us Patent No. 6,845,365 B2, both entitled “Method and Apparatus for Creating and Ordering Customized
Branded Merchandise over a Computer Network”. The term of U.S. patents is 20 years from the date of filing.
We intend to explore potential licensing arrangements with third parties to commercialize this patented
methodology and defend against patent violations.
We consider our trademarks, patents and trade secrets to be of considerable value and importance to our
business.
Seasonality
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Our sales are seasonal and we experience significant fluctuations in quarterly results as a result of many
factors. We historically have generated a greater percentage of our revenues during the warm weather months
of April through September. Timing of customer purchases will vary each year and sales can be expected to
shift from one quarter to another. As a result, management believes that period-to-period comparisons of
results of operations are not necessarily meaningful and should not be relied upon as any indication of future
performance or results expected for the fiscal year.
Employees
As of December 31, 2009, we had 42 employees (a reduction of approximately 44% since a year ago), of
which 41 were full-time. Of our 42 employees, 17 were employed in sales and marketing capacities, 13 were
employed in administrative capacities and 12 were employed in customer service, manufacturing and quality
control capacities. None of our employees are represented by labor unions.
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Securities Exchange Act Reports and other Available Information
We make available on or through our website at www.jonessoda.com (under “About Jones — Investor
Relations — Financial Reports”) certain reports and amendments to those reports that we file with or furnish
to the Securities and Exchange Commission (SEC) in accordance with the Securities Exchange Act of 1934,
as amended (Exchange Act). These include our annual reports on Form 10-K, our quarterly reports on
Form 10-Q, our current reports on Form 8-K, and Section 16 filings and amendments thereof. We make this
information available on our website free of charge as soon as reasonably practicable after we electronically
file the information with, or furnish it to, the SEC.
In addition, the following corporate governance materials are also available on our website under “About
Jones — Investor Relations — Corporate Governance:”
(cid:129) Audit Committee Charter
(cid:129) Compensation and Governance Committee Charter
(cid:129) Nominating Committee Charter
(cid:129) Code of Conduct applicable to all directors, officers and employees of Jones Soda Co.
(cid:129) Code of Ethics for our CEO and senior financial officers.
A copy of any of the materials filed with or furnished to the SEC or copies of the corporate governance
materials described above are available free of charge and can be mailed to you upon request to Jones Soda
Co., 234 Ninth Avenue North, Seattle, Washington 98109.
ITEM 1A. RISK FACTORS.
You should carefully consider the following risk factors that may affect our business, including our
financial condition and results of operations. The risks and uncertainties described below are not the only
risks we face. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial also may impair our business. If any of the following risks actually occur, our business could be
harmed, the trading price of our common stock could decline and you could lose all or part of your investment
in us.
Risk Factors Relating to Our Company and Our Business
If we are not able to successfully execute on our 2010 operating plan, and if we are unable to obtain
financing or consummate a strategic transaction, our financial condition and results of operation will be
materially adversely affected, and we may not be able to continue as a going concern.
We have incurred net losses of $10.5 million, which included a charge of $2.2 million (consisting of
$1.8 million for the write-down of our GABA inventory and $422,000 for the impairment of fixed assets (see
Note 2 in Item 8 of this Report)), and $15.2 million for the years ended December 31, 2009 and 2008,
respectively, and have used a significant amount of our cash resources during these periods to fund our net
losses and working capital and capital expenditure requirements. As of December 31, 2009, we had cash and
cash-equivalents and short-term investments of approximately $5.0 million, compared to approximately
$12.6 million as of December 31, 2008. Additionally, we had accumulated deficits of $40.0 million and
$29.4 million as of December 31, 2009 and 2008, respectively. Cash used in operations for the years ended
December 31, 2009 and 2008 was $7.3 million and $14.5 million, respectively.
Our ability to execute on our 2010 operating plan and to manage our costs in light of persisting adverse
economic conditions continues to be critical to the success and the performance of our business. The impact of
these economic conditions during 2009 on our business, including on the launch of our new product, Jones
GABA, was more severe than we expected. We refined our 2009 operating plan each quarter to contemplate
lower case sales than we had previously contemplated, but our actual case sales continued to be lower than
our revised expectations. Despite the further refinements and cost cutting measures we implemented during
2009, we may no longer have sufficient margin in our plan to absorb further declines against our expectations
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with regard to the economy or our business. We believe our 2010 operating plan already includes the majority
of attainable cost cutting measures, which places greater emphasis on the need to meet our case sales
projections in order to effectively operate our business. The economic conditions in 2009 and the beginning of
2010 have made forecasting demand for our products extremely difficult, so there is continued uncertainty
regarding our ability to meet our revised case sales projections.
Our current 2010 operating plan does not depend upon obtaining financing and if achieved, would allow
us to meet our anticipated cash needs for the next 12 months. However, as we build inventory to prepare for
our stronger shipping months of April through September, we expect our cash balance to fall to approximately
$1 million, excluding the impact of any funding through potential debt or equity financing, before we would
expect our cash balance to increase in the second half of the year. Additionally, if our sales volumes further
decline in a material way from our expectations during 2010 as a result of worsening economic conditions or
otherwise, and since we would not likely be able to further reduce our costs by a sufficient amount, we may
be unable to generate enough cash flow from operations to cover our working capital and capital expenditure
requirements for the balance of the year. Further, based on our current projections beyond 2010, we expect
that we will deplete our cash in the first half of 2011. As such, we believe we will likely need to secure
financing during 2010 or early 2011 in order to fund our working capital requirements in 2011. Although we
believe we have financing alternatives available to us, these alternatives would likely involve significant
interest and other costs or would likely be highly dilutive to our existing shareholders. We continue to monitor
whether credit facilities may be available to us on acceptable terms. There can be no assurance any debt or
equity financing arrangement will be available to us when needed on acceptable terms, if at all. In addition,
there can be no assurance that these financing alternatives would provide us with sufficient funds to meet our
long term capital requirements. If we are unable to secure additional financing or generate sufficient cash flow
from operations to fund our working capital and capital expenditures requirements, we may be forced to
explore liquidation alternatives, including seeking protection from creditors under bankruptcy laws.
In light of our liquidity position, we have evaluated a broad range of strategic alternatives over the last
months including a potential merger transaction (see “Overview” in Item 1 of this Report). We intend to
continue to explore strategic transactions that may be in the best interest of the Company and our shareholders,
which may include, without limitation, mergers or other business combinations, public or private offerings of
debt or equity financings, joint ventures with one or more strategic partners and other strategic alternatives.
However, there can be no assurance that we will enter into a definitive agreement with respect to a transaction,
or that any transaction we may enter into will ultimately be consummated. Additionally, a transaction will
likely be subject to approval of our shareholders.
These uncertainties, together with our inability to implement further meaningful cost containment
measures beyond those we have already undertaken and the extremely difficult environment in which to obtain
additional equity or debt financing, continue to raise substantial doubt about our ability to continue as a going
concern. Our financial statements for the year ended December 31, 2009 were prepared assuming we would
continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The accompanying consolidated financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that could result should we be unable to continue as a going
concern.
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Our efforts to explore strategic transactions may not result in any definitive transaction or enhance
shareholder value, and may create a distraction for our management and uncertainty that may adversely
affect our operating results and business.
On March 9, 2010, we announced that we had entered into an LOI with Reed’s, maker of sodas sold in
natural food stores nationwide, regarding a potential merger transaction in which Reed’s would acquire Jones
Soda for a combination of cash and Reed’s common stock. On March 22, 2010, we announced that we had
terminated the exclusivity provisions of the LOI in order to explore an unsolicited, nonbinding transaction
proposal submitted by another third party. In light of our liquidity position, we intend to continue to explore
strategic transactions that may be in the best interests of the Company and our shareholders, which may
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include, without limitation, mergers or other business combinations, public or private offerings of debt or
equity financings, joint ventures with one or more strategic partners and other strategic alternatives.
There are various uncertainties and risks relating to our evaluation and negotiation of possible strategic
transactions and our ability to consummate a definitive transaction, including:
(cid:129) evaluation and negotiation of a proposed transaction may distract management from focusing our time
and resources on execution of our 2010 operating plan, which could have a material adverse effect on
our operating results and business;
(cid:129) evaluation and negotiation of a proposed transaction may distract management from exploring other
strategic alternatives, which could have a material adverse effect on our operating results and business,
particularly if we are unable to consummate a definitive transaction;
(cid:129) the current market price of our common stock may reflect a market assumption that an announced
transaction will occur, and a failure to complete the transaction could result in a negative perception by
investors in Jones Soda generally and could cause a decline in the market price of our common stock,
which could adversely affect our ability to access the equity and financial markets, as well as our
ability to explore and enter into different strategic alternatives;
(cid:129) the process of evaluating the proposed transaction may be time consuming and expensive and may
result in the loss of business opportunities;
(cid:129) perceived uncertainties as to our future direction may result in increased difficulties in retaining key
employees and recruiting new employees, particularly senior management;
(cid:129) perceived uncertainties as to our future may cause business partners to terminate, or not to renew or
enter into, arrangements with us; and
(cid:129) even if the Board of Directors of Jones Soda negotiates a definitive agreement, we may be unable to
complete the transaction due to the failure to obtain shareholder approval or the failure to satisfy other
conditions to consummate the transaction, or we may be subject to litigation regarding the transaction.
In addition, the market price of our common stock could be highly volatile during the period in which we
are evaluating and negotiating a proposed transaction, and may continue to be more volatile if we announce
that we are no longer pursuing the proposed transaction.
We rely on our distributors, retailers and brokers, and this could affect our ability to efficiently and
profitably distribute and market our products, maintain our existing markets and expand our business
into other geographic markets.
Our ability to establish a market for our 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 distributors, retailers and brokers strategically positioned to serve those areas. Most
of our distributors, retailers and brokers 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, retailers and brokers are distracted from selling our products or do not employ sufficient efforts in
managing and selling our products, including re-stocking the retail shelves with our products, our sales and
results of operations could be adversely affected. Our ability to maintain our distribution network and attract
additional distributors, retailers and brokers will depend on a number of factors, some of which are outside our
control. Some of these factors include:
(cid:129) the level of demand for our brands and products in a particular distribution area;
(cid:129) our ability to price our products at levels competitive with those of competing products; and
(cid:129) our ability to deliver products in the quantity and at the time ordered by distributors, retailers and
brokers.
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We may not 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, retailers and brokers in that particular
geographic area, thus limiting our ability to expand our market, which will likely adversely affect our revenues
and financial results.
We generally do not have long-term agreements with our distributors, and we incur significant time and
expense in attracting and maintaining key distributors.
Our marketing and sales strategy depends in large part on the availability and performance of our
independent distributors. We have entered into written agreements with many of our distributors in the U.S. and
Canada, with terms ranging from one to five years. 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. In
addition, despite the terms of the written agreements with many of our top distributors, there are no minimum
levels of purchases under many of those agreements, and most of the agreements may be terminated at any
time by us, generally with a termination fee. We may not 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 maintain key distributors in one or more of our geographic distribution areas in order to profitably exploit
our geographic markets.
If we lose any of our key distributors or national retail accounts, our financial condition and results of
operations could be adversely affected.
In 2009, sales in the U.S. represented approximately 79% of total sales, sales in Canada represented
approximately 18%, and we had approximately 3% in other international sales. Our top ten DSD customers by
revenue represent approximately 35% of revenue, one of which, A. Lassonde Inc., a Canadian DSD distributor,
represents 13%. Although we anticipate that, as consumer awareness of our brands develops and increases, we
will continue to upgrade and expand our distributor network and DTR accounts, we cannot be assured that we
will be able to maintain our key distributor base which may result in an adverse effect on our revenues and
financial results, our ability to retain our relationships with our distributors and our ability to expand our
market and will place an increased dependence on any one or more of our independent distributors or national
accounts.
Because our distributors are not required to place minimum orders with us, we need to manage our
inventory levels, and it is difficult to predict the timing and amount of our sales.
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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 volumes as they may have done in the past. In order to be able to deliver our products on a
timely basis, we need to maintain adequate inventory levels of the desired products, but we cannot predict the
number of cases sold by any of our distributors. If we fail to meet our shipping schedules, we could damage
our relationships with distributors and/or retailers, increase our shipping costs or cause sales opportunities to
be delayed or lost, which would unfavorably impact our future sales and adversely affect our operating results.
In addition, if the inventory of our products held by our distributors and/or retailers is too high, they will not
place orders for additional products, which would also unfavorably impact our future sales and adversely affect
our operating results.
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Our business plan and future growth is dependent in part on our distribution arrangements directly with
retailers and national retail accounts. If we are unable to establish and maintain these arrangements, our
results of operations and financial condition could be adversely affected.
We currently have distribution arrangements with a few national retail accounts to distribute our products
directly through their venues; however, there are several risks associated with this distribution strategy. First,
we do not have long-term agreements in place with any of these accounts and thus, the arrangements are
terminable at any time by these retailers or us. Accordingly, we may not be able to maintain continuing
relationships with any of these national accounts. A decision by any of these retailers, or any other large retail
accounts we may obtain, to decrease the amount purchased from us or to cease carrying our products could
have a material adverse effect on our reputation, financial condition or results of operations. For example, our
primary DTR customers from a year ago (Barnes & Noble, Panera Bread Company, Ruby Tuesday and
Alaska & Horizon Airlines), are no longer carrying the Jones brand in 2010. We believe that our DTR
program has increased our national visibility among consumers; however, the loss of these significant DTR
accounts is expected to negatively impact our sales and results of operations in 2010. In addition, we may not
be able to establish additional distribution arrangements with other national retailers.
Second, our dependence on national retail chains may result in pressure on us to reduce our pricing to
them or seek significant product discounts. In general, our margins are lower on our sales to these customers
because of these pressures. Any increase in our costs for these retailers to carry our product, reduction in
price, or demand for product discounts could have a material adverse effect on our profit margin.
Finally, our DTR distribution arrangements may have an adverse impact on our existing relationships with
our independent regional distributors, who may view our DTR accounts as competitive with their business,
making it more difficult for us to maintain and expand our relationships with independent distributors.
We are dependent on National Beverage’s production capacity and capabilities to meet the demand for
Jones products in the grocery and mass merchant channel in the U.S.
In 2006, we entered into an agreement with National Beverage pursuant to which, beginning in 2007,
National Beverage generally has the exclusive right in the U.S. to manufacture and distribute Jones Soda
12-ounce cans in the grocery and mass merchant channel. The agreement has an initial term of five years,
expiring on December 31, 2011, and we may not terminate the agreement prior to that date unless National
Beverage is in material default. As a result, our success in the CSD industry will depend to a significant extent
on the performance of National Beverage. If National Beverage fails to perform adequately, because, for
example, it is unable to manufacture our products in sufficient quantities to meet demand in a timely manner
(due to a shortfall in agreed upon capacity in one or all of their factories or significantly increased demand or
other reasons) or does not provide acceptable customer service to our grocery and mass merchant customers,
our ability to gain market acceptance in the CSD industry could be materially adversely affected and our
results of operations would suffer. In addition, National Beverage may be unable to pass cost increases to
retailers, thereby reducing our profits from sales in the CSD channel.
Moreover, National Beverage has the right to terminate our agreement upon six months notice. If National
Beverage were to terminate the agreement, we would need to find alternative manufacturing and distribution
arrangements for the CSD channel, which we may be unable to do in a timely manner or on favorable terms,
which could adversely affect our results of operations.
Finally, National Beverage purchases concentrate from us in order to manufacture our products, and it
places orders for concentrate as required by its production and inventory needs. National Beverage is not
required to place any minimum monthly or quarterly concentrate orders with us. This could lead to fluctuating
sales of concentrate during any given quarter or year and have an adverse effect on our results of operations.
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We have dedicated, and will continue to dedicate, significant resources to our sponsorship agreements
and may not realize the benefits expected from those agreements.
Our sponsorship agreements with the Seattle Seahawks, the New Jersey Nets, and to a lesser extent, the
Portland Trail Blazers, require us to make substantial annual payments in exchange for certain promotional
and branding benefits. There can be no assurance, however, that the benefit we anticipate from those and
similar agreements, including exclusive beverage rights in two of these agreements and other branding
opportunities, will compensate for the annual payment commitments required by the agreements. These
commitments are significant, totaling approximately $9.6 million over the remaining terms of the agreements
as of December 31, 2009 (see “Contractual Obligations” in Item 7 of this Report). Given our limited cash
resources, we intend to continue attempting to renegotiate these sponsorship agreements in order to reduce our
payment obligations. However, there can be no assurance that we will be able to modify these sponsorship
arrangements in a timely manner to reduce our obligations or make any other changes. Moreover, there can be
no assurance that our association with these particular teams will have a positive effect on our image and
brand. There is a risk that we will be unable to recover the costs associated with our sponsorship agreements,
which would have an adverse effect on our results of operations.
We rely on independent contract packers of our products, and this dependence could make management
of our marketing and distribution efforts inefficient or unprofitable.
We do not own the plants or the majority of the equipment required to manufacture and package our
beverage products, and do not directly manufacture our products but instead outsource the manufacturing
process to third party bottlers and independent contract packers (co-packers). We do not anticipate bringing
the manufacturing process in-house in the future. We currently use four primary co-packers to prepare, bottle
and package our bottle products. Our contract packers are located in the Canadian Provinces of British
Columbia and Ontario as well as in Memphis, Tennessee and Los Angeles, California. As a consequence, we
depend on independent contract packers to produce our beverage products and deliver them to distributors.
Our ability to attract and maintain effective relationships with contract packers and other third parties 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. Competition for contract packers’
business is intense, especially in the western U.S., and this could make it more difficult for us to obtain new
or replacement packers, or to locate back-up contract packers, in our various distribution areas, and could also
affect the economic terms of our agreements with our packers. Our contract packers may terminate their
arrangements with us at any time, in which case we could experience disruptions in our ability to deliver
products to our customers. We may not be able to maintain our relationships with current contract packers or
establish satisfactory relationships with new or replacement contract packers, whether in existing or new
geographic distribution areas. 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 any of 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 product than warranted by the actual demand for it, resulting in
higher storage costs 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 effect on our ability to maintain effective
relationships with those distributors and key accounts.
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Our business and financial results depend on the continuous supply and availability of raw materials.
The principal raw materials we use include aluminum cans and glass bottles, labels and cardboard
cartons, aluminum and steel closures, juices, flavorings, sucrose/inverted cane sugar and sucralose, and
fortification ingredients which include vitamins and minerals. The costs of our ingredients are subject to
fluctuation. In addition, with our shift to production using pure cane sugar instead of high fructose corn syrup,
we utilize considerable quantities of pure cane sugar. If our supply of these raw materials is impaired or if
prices increase significantly, our business would be adversely affected.
Due to the consolidations that have taken place in the glass industry over the past few years, the prices of
glass bottles continue to increase. The price of pure cane sugar increased in 2009. In addition, certain of our
contract packing arrangements allow such contract packers to increase their charges based on certain of their
own cost increases. Although we believe we have mitigated this risk for 2010 through fixed-price purchase
commitments for sugar and glass, we are uncertain whether the prices of any of the above or any other raw
materials or ingredients will continue to rise in the future and whether we will be able to pass any such
increases on to our customers.
We may not correctly estimate demand for our products. Our ability to estimate demand for our products
is imprecise, particularly with new products, and may be less precise during periods of rapid growth,
particularly in new markets. If we materially underestimate demand for our products or are unable to secure
sufficient ingredients or raw materials including, but not limited to, cans, glass, labels, flavors, supplements,
and certain sweeteners, or sufficient packing arrangements, we might not be able to satisfy demand on a short-
term basis. Moreover, industry-wide shortages of certain concentrates, supplements and sweeteners have been
experienced and could, from time to time in the future, be experienced, which could interfere with and/or
delay production of certain of our products and could have a material adverse effect on our business and
financial results.
Disruption of our supply chain could have an adverse effect on our business, financial condition and
results of operations.
Our ability and that of our suppliers, business partners (including packagers), contract manufacturers,
independent distributors and retailers to make, move and sell products is critical to our success. Damage or
disruption to manufacturing or distribution capabilities due to weather, natural disaster, fire or explosion,
terrorism, pandemics such as avian flu, strikes or other reasons, could impair our ability to manufacture or sell
our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to
effectively manage such events if they occur, could adversely affect our business, financial condition and
results of operations, as well as require additional resources to restore our supply chain.
We rely upon our ongoing relationships with our key flavor suppliers. If we are unable to source our
flavors on acceptable terms from our key suppliers, we could suffer disruptions in our business.
Currently, we purchase our flavor concentrate from two flavor concentrate suppliers, and we anticipate
that we will purchase flavor concentrate from other flavor houses for future flavors and additional products,
with the intention of developing other sources of flavor concentrate for each of our products. The price of our
concentrates is determined by our flavor houses and us, and may be subject to change. Generally, flavor
suppliers hold the proprietary rights to their flavors. Consequently, we do not have the list of ingredients or
formulae for our flavors and concentrates and we may be unable to obtain these flavors or concentrates from
alternative suppliers on short notice. If we have to replace a flavor supplier, we could experience disruptions
in our ability to deliver products to our customers, which could have a material adverse effect on our results of
operations.
If we are unable to maintain brand image and product quality, or if we encounter other product issues
such as product recalls, our business may suffer.
Our success depends on our ability to maintain brand image for our existing products and effectively
build up brand image for new products and brand extensions. There can be no assurance, however, that
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additional expenditures and our advertising and marketing will have the desired impact on our products’ brand
image and on consumer preferences. Product quality issues, real or imagined, or allegations of product
contamination, even when false or unfounded, could tarnish the image of the affected brands and may cause
consumers to choose other products.
In addition, because of changing government regulations or implementation thereof, allegations of product
contamination, we may be required from time to time to recall products entirely or from specific markets.
Product recalls could affect our profitability and could negatively affect brand image. Adverse publicity
surrounding obesity concerns, water usage and other concerns could negatively affect our overall reputation
and our products’ acceptance by consumers.
The inability to attract and retain key personnel would directly affect our efficiency and results of
operations.
Our success depends on our ability to attract and retain highly qualified employees in such areas as
production, distribution, sales, marketing and finance. We compete to hire new employees, and, in some cases,
must train them and develop their skills and competencies. Our operating results could be adversely affected
by increased costs due to increased competition for employees, higher employee turnover or increased
employee benefit costs. In addition, there has been high turnover among our senior level positions, including
the recent resignation by our President and Chief Executive Officer, which will be effective April 2, 2010. We
expect that given our continued exploration of strategic alternatives, we may be further impacted by turnover
among employees. Any unplanned turnover, particularly involving one of our key personnel, could negatively
impact our operations, financial condition and employee morale.
Our inability to protect our trademarks, patents and trade secrets may prevent us from successfully
marketing our products and competing effectively.
Failure to protect our intellectual property could harm our brand and our reputation, and adversely affect
our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including
our trademarks, patents, copyrights and trade secrets, could result in the expenditure of significant financial
and managerial resources. We regard our intellectual property, particularly our trademarks, patents and trade
secrets to be of considerable value and importance to our business and our success. We rely on a combination
of trademark, patent, 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 U.S., 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, patented processes, trade
secrets or similar proprietary rights. In addition, there can be no assurance that other parties will not assert
infringement claims against us, and 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 effect on our ability to
market or sell our brands, profitably exploit our products or recoup our associated research and development
costs.
As part of the licensing strategy of our brands, we enter into licensing agreements under which we grant
our licensing partners certain rights to use our trademarks and other designs. Although our agreements require
that the licensing partner’s use of our trademarks and designs is subject to our control and approval, any
breach of these provisions, or any other action by any of our licensing partners that is harmful to our brands,
goodwill and overall image, could have a material adverse impact on our business.
We have obtained two U.S. patents on our “myJones.com” methodology. While the number of business
method patents issued by the U.S. Patent and Trademark Office has been growing substantially in recent years,
there is still a significant degree of uncertainty associated with these patents. It is possible that our patent may
be construed by a court of competent jurisdiction in a very limited manner such that it offers little or no basis
for us to deter competitors from employing similar processes or does not allow us to defend against third party
claims of patent infringement.
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Litigation or legal proceedings (including pending securities class actions) could expose us to significant
liabilities and damage our reputation.
Securities class action derivative lawsuits have been filed against us and current and former officers and
members of the Board of Directors (see “Legal Proceedings” in Item 3 and Note 12 in Item 8 of this Report).
We may also become party to other litigation claims and legal proceedings. Litigation involves significant
risks, uncertainties and costs, including distraction of management attention away from our current business
operations. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable
outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and
estimates, we establish reserves and/or disclose the relevant litigation claims or legal proceedings, as
appropriate. These assessments and estimates are based on the information available to management at the
time and involve a significant amount of management judgment. We caution you that actual outcomes or
losses may differ materially from those envisioned by our current assessments and estimates. Our policies and
procedures require strict compliance by our employees and agents with all United States and local laws and
regulations applicable to our business operations, including those prohibiting improper payments to govern-
ment officials. Nonetheless, there can be no assurance that our policies and procedures will always ensure full
compliance by our employees and agents with all applicable legal requirements. Improper conduct by our
employees or agents could damage our reputation in the United States and internationally or lead to litigation
or legal proceedings that could result in civil or criminal penalties, including substantial monetary fines, as
well as disgorgement of profits.
Changes in accounting standards and subjective assumptions, estimates and judgments by management
related to complex accounting matters could significantly affect our financial results.
Generally accepted accounting principles and related pronouncements, implementation guidelines and
interpretations with regard to a wide variety of matters that are relevant to our business, such as, but not
limited to, revenue recognition, stock-based compensation, trade promotions, sports sponsorship agreements
and income taxes are highly complex and involve many subjective assumptions, estimates and judgments by
our management. Changes to these rules or their interpretation or changes in underlying assumptions, estimates
or judgments by our management could significantly change our reported results.
If we are unable to build and sustain proper information technology infrastructure, our business could
suffer.
We depend on information technology as an enabler to improve the effectiveness of our operations and to
interface with our customers, as well as to maintain financial accuracy and efficiency. If we do not allocate
and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we
could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or
the loss of or damage to intellectual property through security breach. Our information systems could also be
penetrated by outside parties intent on extracting information, corrupting information or disrupting business
processes. Such unauthorized access could disrupt our business and could result in the loss of assets.
We face currency risks associated with fluctuating foreign currency valuations.
For the year ended December 31, 2009, approximately 18% of our sales were denominated in the
Canadian dollar which exposes us to foreign currency exchange rate risk with respect to our sales, expenses,
profits, assets and liabilities. As of December 31, 2009, we have not entered into foreign currency contracts or
other derivatives to mitigate the potential impact of foreign currency fluctuations. As a result, our reported
earnings may be affected by changes in the Canadian dollar.
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Risk Factors Related to Our Common Stock
The price of our common stock may be volatile, and a shareholder’s investment in our common stock
could suffer a decline in value.
There has been significant volatility in the volume and market price of our common stock, and this
volatility may continue in the future, especially in light of any strategic transaction announcements. In
addition, factors such as quarterly variations in our operating results, whether we enter into a strategic
transaction, changes in financial estimates by securities analysts or our failure to meet projected financial and
operating results, litigation involving us, general trends relating to the beverage industry, actions by
governmental agencies, national economic and stock market considerations as well as other events and
circumstances beyond our control could have a significant impact on the future market price of our common
stock and the relative volatility of such market price.
If we are not able to achieve our objectives for our business, the value of an investment in our company
could be negatively affected.
In order to be successful, we believe that we must, among other things:
(cid:129) increase the sales volume and gross margins for our brands and products;
(cid:129) achieve and maintain efficiencies in operations;
(cid:129) manage our operating expenses to sufficiently support operating activities;
(cid:129) maintain fixed costs at or near current levels; and
(cid:129) avoid significant increases in variable costs relating to production, marketing and distribution.
We may not be able to meet these objectives, which could have a material adverse affect on our results of
operations. We have incurred significant operating expenses in the past and may do so again in the future and,
as a result, will need to increase revenues in order to improve our results of operations. Our ability to increase
sales will depend primarily on success in expanding our current markets, improving our distribution base,
entering into DTR arrangements with national accounts, and introducing new brands, products or product
extensions to the market. Our ability to successfully enter new distribution areas and obtain national accounts
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
competitive levels, 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 may not be able to maintain the listing of our common stock on the Nasdaq Capital Market, which
would make it more difficult for investors to sell shares of our common stock.
Our common stock is listed on the Nasdaq Capital Market. The Nasdaq Capital Market has several
quantitative and qualitative requirements with which companies must comply in order to maintain this listing,
including a $1.00 per share minimum bid price and $35 million minimum value of listed securities. On
March 16, 2010, we received a staff determination letter from the Nasdaq Stock Market indicating that we
have not complied with Nasdaq Listing Rule 5550(a)(2) and that the Nasdaq Staff has determined to delist our
common stock from the Nasdaq Capital Market. We had been initially notified on September 15, 2009, that
the bid price for our common stock had closed below the $1.00 per share minimum bid price requirement for
continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). In accordance with
Nasdaq Listing Rule 5810(c)(3)(A), we were provided 180 calendar days to regain compliance with Nasdaq
Listing Rule 5550(a)(2). The 180 calendar day compliance period expired on March 15, 2010. Additionally,
because we were not able to demonstrate compliance with the initial listing criteria set forth in Nasdaq Listing
Rule 5505, we were not eligible for an additional 180 calendar day compliance period under Nasdaq Listing
Rule 5810(c)(3)(A)(ii) to demonstrate compliance with the bid requirement.
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We have appealed the Nasdaq Staff’s determination to a Nasdaq Hearings Panel (the “Panel”), pursuant to
the procedures set forth in the Nasdaq Listing Rule 5800 Series. We were advised that in connection with any
such appeal, we would be asked to provide a plan for regaining compliance to the Panel. Our request for a
hearing stayed the suspension of our common stock and the filing of a Form 25-NSE pending the Panel’s
decision. If the Panel rejects our appeal, our common stock would not be immediately eligible to trade on the
OTC Bulletin Board or in the “Pink Sheets.” Our common stock may become eligible if a market maker
makes application to register in and quote our common stock in accordance with Rule 15c2-11 under the
Exchange Act of 1934, as amended, and such application (a Form 211) is cleared. Only a market maker, not
the Company, may file a Form 211.
The level of trading activity of our common stock may decline if it is no longer listed on the Nasdaq
Capital Market. As such, if our common stock ceases to be listed for trading on the Nasdaq Capital Market for
any reason, it may harm our stock price, increase the volatility of our stock price, lead to decreases in analyst
coverage, investor demand and information available concerning trading prices and volume, or make it more
difficult for investors to buy or sell shares of our common stock. Further, we may no longer qualify for
exemptions from state securities registration requirements. Without an exemption from registration, we may
need to file time-consuming and costly registration statements for future securities transactions and issuances
and to amend our stock option and stock purchase plans. Furthermore, if our common stock is delisted, we
would be required to utilize the long-form registration statement on SEC Form S-1 in order to register any
future securities under the Securities Act either for sale by us or for resale by investors who previously
acquired securities from us in a private placement. The SEC Form S-1 requires more information than SEC
Form S-3 and will take longer and be more costly to prepare and keep current than SEC Form S-3. If our
common stock is delisted, there can be no assurance whether we will satisfy the standards for listing on an
exchange or that an exchange will approve our listing in the future.
Risk Factors Relating to Our Industry
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 target market, consumers between the ages of 12 and 24. In addition, our business depends on
acceptance by our independent distributors and retailers of our brands as beverage brands that have the
potential to provide incremental sales growth. Although we believe that we have been relatively successful in
establishing our brands as recognizable brands in the New Age beverage industry, the product life cycle of
these brands and the ability to bring fresh packaging and revitalization of our brand and product offerings are
important elements in determining 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 24C, Jones GABA, and WhoopAss brands will also be substantially dependent upon acceptance of the
Jones Pure Cane Soda brand. Accordingly, any failure of our Jones Pure Cane Soda brand to maintain or
increase acceptance or market penetration would likely have a material adverse effect on our revenues and
financial results.
Competition 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 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 a wide range of drinks produced by
a relatively large number of manufacturers, most of which have substantially greater financial, marketing and
distribution resources than ours. Some of these competitors are placing severe pressure on independent
distributors not to carry competitive alternative or New Age beverage brands such as ours. We also compete
with regional beverage producers and “private label” soft drink suppliers.
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Our direct competitors in the alternative beverage industry include Dr. Pepper Snapple (Stewarts and
IBC), Boylans, Henry Weinhard’s, Thomas Kemper, and other regional premium soft drink companies. We
also compete against Coca Cola, Pepsi, Hansen’s and other traditional soft drink manufacturers and distribu-
tors. We compete against other category leaders such as Red Bull and Monster for the energy drink category.
These national and international competitors have advantages such as lower production costs, larger marketing
budgets, greater financial and other resources and more developed and extensive distribution networks than
ours. There can be no assurance that we will be able to grow our volumes or be able to maintain our selling
prices in existing markets or as we enter new markets.
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 ours, could have a material adverse effect on our existing markets, as
well as on our ability to expand the market for our products.
We compete in an industry characterized by rapid changes in consumer preferences and public
perception, so our ability to continue developing new products to satisfy our consumers’ changing
preferences will determine our long-term success.
Our current market distribution and penetration may be too 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, in general, 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, although some brands or products have longer lives. In light of the limited life of
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 could prevent us from achieving long-term profitability.
In addition, customer preferences also are affected by factors other than taste, such as health and nutrition
considerations and obesity concerns, shifting consumer needs, changes in consumer lifestyles, increased
consumer information and competitive product and pricing pressures. Sales of our products may be adversely
affected by the negative publicity associated with these issues. If we do not adjust to respond to these and
other changes in customer preferences, our sales may be adversely affected.
Our results of operations may fluctuate from quarter to quarter for many reasons, including seasonality.
Our sales are seasonal and we experience significant fluctuations in quarterly results as a result of many
factors. We historically have generated a greater percentage of our revenues during the warm weather months
of April through September. Timing of customer purchases will vary each year and sales can be expected to
shift from one quarter to another. As a result, management believes that period-to-period comparisons of
results of operations are not necessarily meaningful and should not be relied upon as any indication of future
performance or results expected for the fiscal year.
In addition, our operating results may fluctuate due to a number of other factors including, but not limited to:
(cid:129) Our ability to develop and expand distribution channels for current and new products, develop favorable
arrangements with third party distributors of our products and minimize or reduce issues associated
with engaging new distributors and retailers, including, but not limited to, transition costs and expenses
and down time resulting from the initial deployment of our products in each new distributor’s network;
(cid:129) Our ability to manage our operating expenses to sufficiently support general operating activities,
slotting fees, promotion and sales activities, and capital expansion, and our ability to sustain
profitability;
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(cid:129) Our ability to meet the competitive response by much larger, well-funded and established companies
currently operating in the beverage industry, as we introduce new competitive products, such functional
tea juice blends and enter into sponsorship agreements;
(cid:129) Our ability to develop, expand and implement our direct-to-retail sales channels and national retail
accounts, as well as our “myJones” programs;
(cid:129) Our ability to increase distribution in our four core regions consisting of the Northwest, the Southwest,
the Midwest and Canada, and our ability to expand and manage distributor growth in areas outside of
the core regions;
(cid:129) Unilateral decisions by distributors, grocery store chains, specialty chain stores, club stores, mass
merchandisers and other customers to discontinue carrying all or any of our products that they are
carrying at any time;
(cid:129) Competitive products and pricing pressures and our ability to gain or maintain share of sales in the
marketplace as a result of actions by competitors; and
(cid:129) Our ability to develop and market various products under our sports sponsorship agreements.
Due to these and other factors, our results of operations have fluctuated from period to period and may
continue to do so in the future, which could cause our operating results in a particular quarter to fail to meet
market expectations.
Global economic conditions may continue to adversely impact our business and results of operations.
The beverage industry has been affected by macro economic factors, including changes in national,
regional, and local economic conditions, employment levels and consumer spending patterns. The recent
disruptions in the overall economy and financial markets as a result of the global economic crisis have
adversely impacted our two primary markets: the U.S. and Canada. This has reduced consumer confidence in
the economy and could negatively affect consumers’ willingness to purchase our products as they continue to
reduce their discretionary spending. Moreover, current economic conditions may adversely affect the ability of
our distributors to obtain the credit necessary to fund their working capital needs, which could negatively
impact their ability or desire to continue to purchase products from us in the same frequencies and volumes as
they have done in the past. We also may be unable to access credit markets on favorable terms or at all. There
can be no assurances that government responses to the disruptions in the financial markets will restore
consumer confidence, stabilize the markets or increase liquidity and the availability of credit. If the current
economic conditions persist or deteriorate, sales of our products could be adversely affected, the credit status
of our customers could be impacted, collectibility of accounts receivable may be compromised and we may
face obsolescence issues with our inventory, any of which could have a material adverse impact on our
operating results and financial condition.
We could be exposed to product liability claims for personal injury or possibly death.
Although we have product liability insurance in amounts we believe are adequate, there can be no
assurance 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 effect
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. Additionally, we may be required from time to time to recall products entirely
or from specific co-packers, markets or batches. Product recalls could adversely affect our profitability and our
brand image. We do not maintain recall insurance.
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Our business is subject to many regulations and noncompliance is costly.
The production, marketing and sale of our 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
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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
condition and results of 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.
Significant additional labeling or warning requirements may inhibit sales of affected products.
Various jurisdictions may seek to adopt significant additional product labeling or warning requirements
relating to the chemical content or perceived adverse health consequences of certain of our products. These
types of requirements, if they become applicable to one or more of our major products under current or future
environmental or health laws or regulations, may inhibit sales of such products. In California, a law requires
that a specific warning appear on any product that contains a component listed by the state as having been
found to cause cancer or birth defects. This law recognizes no generally applicable quantitative thresholds
below which a warning is not required. If a component found in one of our products is added to the list, or if
the increasing sensitivity of detection methodology that may become available under this law and related
regulations as they currently exist, or as they may be amended, results in the detection of an infinitesimal
quantity of a listed substance in one of our beverages produced for sale in California, the resulting warning
requirements or adverse publicity could affect our sales.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We lease approximately 13,534 feet square of office space in Seattle, Washington for our principal
executive and administrative offices, and for warehouse purposes. The lease term of five years expires in
August 2011, and does not include an option to extend the lease. We believe our leased premises are suitable
and adequate for their use. We do not own real property.
ITEM 3. LEGAL PROCEEDINGS.
On September 4, 2007, a putative class action complaint was filed against us, our then serving chief
executive officer, and our then serving chief financial officer in the U.S. District Court for the Western District of
Washington, alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 promulgated thereunder. The case was entitled Saltzman v. Jones Soda Company, et al., Case
No. 07-cv-1366-RSL, and purported to be brought on behalf of a class of purchasers of our common stock during
the period March 9, 2007 to August 2, 2007. Six substantially similar complaints subsequently were filed in the
same court, some of which alleged claims on behalf of a class of purchasers of our common stock during the
period November 1, 2006 to August 2, 2007. Some of the subsequently filed complaints added as defendants
certain current and former directors and another former officer of the Company. The complaints generally alleged
violations of federal securities laws based on, among other things, false and misleading statements and omissions
about our financial results and business prospects. The complaints sought unspecified damages, interest, attorneys’
fees, costs, and expenses. On October 26, 2007, these seven lawsuits were consolidated as a single action entitled
In re Jones Soda Company Securities Litigation, Case No. 07-cv-1366-RSL. On March 5, 2008, the Court
appointed Robert Burrell lead plaintiff in the consolidated securities case. On May 5, 2008, the lead plaintiff filed
a First Amended Consolidated Complaint, which purports to allege claims on behalf of a class of purchasers of
our common stock during the period of January 10, 2007, to May 1, 2008, against the Company and Peter van
Stolk, our former Chief Executive Officer, former Chairman of the Board, and former director. The First Amended
Consolidated Complaint generally alleges violations of federal securities laws based on, among other things, false
and misleading statements and omissions about our agreements with retailers, allocation of resources, and business
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prospects. Defendants filed a motion to dismiss the amended complaint on July 7, 2008. After hearing oral
argument on February 3, 2009, the Court granted the motion to dismiss in its entirety on February 9, 2009.
Plaintiffs filed a motion for leave to file an amended complaint on March 25, 2009. On June 22, 2009, the Court
issued an order denying plaintiffs’ motion for leave to amend and dismissed the case with prejudice. On July 7,
2009, the Court entered judgment in favor of the Company and Mr. van Stolk. On August 5, 2009, plaintiffs filed
a notice of appeal of the Court’s orders dismissing the complaint and denying plaintiffs’ motion for leave to
amend, and the resulting July 7, 2009 judgment. The parties’ briefing on the appeal was completed on March 4,
2010. The Court has not yet scheduled a date for oral argument on the appeal.
In addition, on September 5, 2007, a shareholder derivative action was filed in the Superior Court for
King County, Washington, allegedly on behalf of and for the benefit of the Company, against certain of our
former officers and current and former directors. The case is entitled Cramer v. van Stolk, et al., Case
No. 07-2-29187-3 SEA (Cramer Action). The Company also was named as a nominal defendant. Four other
shareholders filed substantially similar derivative cases. Two of these actions were filed in Superior Court for
King County, Washington. One of these two Superior Court actions has been voluntarily dismissed and the
other has been consolidated with the Cramer Action under the caption In re Jones Soda Co. Derivative
Litigation, Lead Case No. 07-2-31254-4 SEA. On April 28, 2008, plaintiffs in the consolidated action filed an
amended complaint based on the same basic allegations of fact as in the federal securities class actions and
alleging, among other things, that certain of our current and former officers and directors breached their
fiduciary duties to the Company and were unjustly enriched in connection with the public disclosures that are
the subject of the federal securities class actions. On May 2, 2008, the Court signed a stipulation and order
staying the proceedings in the consolidated Cramer Action until all motions to dismiss in the consolidated
federal securities class action have been adjudicated.
The two remaining shareholder derivative actions were filed in the U.S. District Court for the Western
District of Washington. On April 10, 2008, the Court presiding over the federal derivative cases consolidated
them under the caption Sexton v. van Stolk, et al., Case No. 07-1782RSL (Sexton Action), and appointed
Bryan P. Sexton lead plaintiff. The Court also established a case schedule, which, among other things, set the
close of fact discovery as January 4, 2009, and set a trial date of May 4, 2009. The actions comprising the
consolidated Sexton Action are based on the same basic allegations of fact as in the securities class actions
filed in the U.S. District Court for the Western District of Washington and the Cramer Action, filed in the
Superior Court for King County. The actions comprising the Sexton Action allege, among other things, that
certain of our current and former directors and officers breached their fiduciary duties to the Company and
were unjustly enriched in connection with the public disclosures that are the subject of the federal securities
class actions. The complaints seek unspecified damages, restitution, disgorgement of profits, equitable and
injunctive relief, attorneys’ fees, costs, and expenses. The Court has approved a stipulation by the parties to
stay the Sexton Action until the resolution of the appeal in the securities class action described above.
The Cramer Action and Sexton Action are derivative in nature and do not seek monetary damages from
the Company. However, the Company may be required, throughout the pendency of the action, to advance
payment of legal fees and costs incurred by the defendants and the litigation may result in significant
obligations for payment of defense costs and indemnification.
On March 12, 2010, a shareholder filed suit against Jones Soda, its Chief Executive Officer, and its
directors, alleging that the defendants breached their fiduciary duties to the Company, or aided and abetted
such breaches, by entering into a March 9, 2010 letter of intent to merge Jones Soda with Reed’s, Inc. The
case is entitled Gharabikou v. Jones Soda Co., et al., King County Superior Court Case No. 10-2-10226-4 SEA
(March 12, 2010). A substantially similar case was initiated on March 19, 2010, entitled Bates v. Jones Soda
Co., et al., King County Superior Court Case No. 10-2-10932-3 SEA (March 19, 2010). Both cases purport to
have been brought on behalf of a class comprising all current Jones Soda shareholders. The shareholder
plaintiffs seek to prevent a merger of Jones Soda and Reed’s, Inc. on the terms announced in the
March 9th letter of intent, and also request attorneys’ fees and costs. Although neither case seeks monetary
damages against the Company, the Company may be required throughout the pendency of the actions to
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advance payment of legal fees and costs incurred by the defendants, and the litigation may result in significant
obligations for payment of defense costs and indemnification.
We are unable to predict the outcome of the actions described above.
In addition to the matters above, we are or may be involved from time to time in various claims and legal
actions arising in the ordinary course of business, including proceedings involving product liability claims and
other employee claims, and tort and other general liability claims, for which we carry insurance, as well as
trademark, copyright, and related claims and legal actions. In the opinion of our management, the ultimate
disposition of these matters will not have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
ITEM 4.
[RESERVED].
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is currently traded on the NASDAQ Capital Market under the symbol “JSDA”.
Effective February 20, 2009, we delisted from the TSX Venture Exchange in Canada (symbol “JSD”).
The following table shows, for each quarter of fiscal 2009 and 2008, the high and low closing sales prices
as reported by the NASDAQ Capital Market.
Nasdaq Capital
Market
High
Low
2009:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.93
1.10
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.40
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.06
2008:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.55
3.17
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.82
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.41
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.43
0.66
0.81
0.30
$0.31
1.28
2.72
2.38
As of March 10, 2010, there were 26,424,796 shares of common stock issued and outstanding, held by
approximately 424 holders of record, although there are a much larger number of beneficial owners. The last
reported sale price per share on March 10, 2010 was $0.54.
Dividends
We have never declared or paid any cash dividends with respect to our common stock. We do not
anticipate paying cash dividends on our 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 require-
ments and other factors deemed relevant by the Board of Directors.
Stock Repurchases
The following table contains information for shares repurchased during the fourth quarter of 2009:
Fiscal Period
Total Number of
Shares Purchased(1)
Average Price
Paid per Share(1)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
October 1 to October 31, 2009 . . .
November 1 to November 30,
2009 . . . . . . . . . . . . . . . . . . .
December 1 to December 31,
2009 . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . .
—
—
71
71
—
—
$2.24
$2.24
—
—
—
—
Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under the Plans or
Programs
(in $ ‘000)
—
—
—
—
(1) The number of shares reported above as purchased are attributable to shares withheld by the Company as
payment for withholding taxes due in connection with the vesting of restricted stock awards issued under
the Jones Soda Co. 2002 Stock Option and Restricted Stock Plan. The average price paid per share reflects
the average market value per share of the shares withheld for tax purposes.
Sales of Unregistered Securities
None.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial and operating data are derived from our consolidated financial statements
and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements.
2009
Year Ended December 31,
2007
(Dollars in thousands, except per share data)
2008
2006
2005
Consolidated statements of operations data:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of excess GABA inventory and
$ 26,013
(19,875)
$ 35,918
(28,551)
$ 39,831
(30,387)
$ 39,035
(23,730)
$ 33,511
(21,916)
impairment of fixed assets . . . . . . . . . . . . . . . .
(2,248)
—
—
—
—
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing revenue . . . . . . . . . . . . . . . . . . . . . . . .
Promotion and selling expenses . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . .
Operating (loss) income . . . . . . . . . . . . . . . . . . . .
Other (expense) income, net. . . . . . . . . . . . . . . . .
(Loss) income before income taxes . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . .
3,890
81
(7,820)
(6,596)
(10,445)
(30)
(10,475)
(72)
7,367
170
(12,292)
(10,661)
(15,416)
384
(15,032)
(203)
9,444
334
(11,857)
(8,893)
(10,972)
1,498
(9,474)
(2,155)
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net (loss) income per share . . . .
(10,547)
$ (0.40)
(15,235)
(0.58)
$
(11,629)
(0.45)
$
$
15,305
684
(8,480)
(4,750)
2,759
913
3,672
902
4,574
0.19
11,595
724
(7,667)
(3,347)
1,305
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1,334
(51)
1,283
0.06
$
2009
2008
As of December 31,
2007
(Dollars in thousands)
2006
2005
Consolidated balance sheet data:
Cash and cash equivalents, short term investments and
accounts receivable . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,483
807
13,534
219
8,530
$15,054
2,099
24,315
396
17,674
$32,268
2,498
41,625
474
31,482
$37,139
2,171
47,952
15
39,474
2009
Year Ended December 31,
2007
2006
2008
$ 4,876
663
10,453
88
5,699
2005
288-ounce equivalent case sales:
Finished products case sales . . . . . . . . . . . . . 2,057,000
816,000
Concentrate case sales . . . . . . . . . . . . . . . . .
2,886,000
1,501,000
3,126,000
2,670,000
2,592,000
2,167,000
2,569,000
—
Total case sales . . . . . . . . . . . . . . . . . . . . . . 2,873,000
4,387,000
5,796,000
4,759,000
2,569,000
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations contains forward-looking
statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and
intentions. As described at the beginning of this Annual Report on Form 10-K, our actual results could differ
materially from those anticipated in these forward-looking statements. Factors that could contribute to such
differences include those discussed at the beginning of this Annual Report, below in this section and in the
section above entitled “Risk Factors.” You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Annual Report on Form 10-K. Except as required by law,
we undertake no obligation to update any forward-looking statements to reflect new information, events or
circumstances after the date of this Report, or to reflect the occurrence of unanticipated events. You should
read the following discussion and analysis in conjunction with our consolidated financial statements and the
accompanying notes thereto included elsewhere in this Report.
Overview
We develop, produce, market and distribute a range of premium beverages, including the following four
brands as of the date of this Report:
(cid:129) Jones Pure Cane Soda, a premium carbonated soft drink with three new extensions launched in targeted
markets during 2009:
(cid:129) Jones Refresco De Caña Pura,
(cid:129) Jones JumbleTM, our seasonal soda, and
(cid:129) Jones ZilchTM, our zero calorie offering;
(cid:129) Jones 24C, an enhanced water beverage;
(cid:129) Jones GABA, a functional tea juice blend; and
(cid:129) WhoopAss Energy Drink, a citrus energy drink.
We sell and distribute our products primarily throughout the United States (U.S.) and Canada through our
network of independent distributors, which we refer to as our direct store delivery (DSD) channel, national
retail accounts, which we refer to as our direct to retail (DTR) channel, as well as through licensing
arrangements. We do not directly manufacture our products but instead outsource the manufacturing process to
third party contract packers.
In 2007, we expanded our distribution to the grocery and mass merchant channel in the U.S. with our
exclusive manufacturing and distribution agreement with National Beverage Corp. (National Beverage), which
we refer to as our concentrate soda distribution (CSD) channel. Through this arrangement, we identify and
secure retailers across the U.S. for Jones Soda 12-ounce cans, and we are responsible for sales efforts,
marketing, advertising and promotion. Using concentrate supplied by Jones, National Beverage both manufac-
tures and sells on an exclusive basis the products directly to retailers. However, beginning in 2009, we have
changed our strategic direction, emphasizing our higher-margin, core products, including our Jones Pure Cane
Soda glass bottle business, with less emphasis on our CSD channel, which is a lower margin business for us.
To this end, in December 2009, we introduced our new packaging for our core glass bottles, the first time
our packaging had been completely refreshed in almost 12 years. The new look is distinctly Jones updated
with higher resolution printing designed to improve shelf presence for our brand. We believe the new
packaging highlights our portfolio of flavors while also delivering a cohesive, sustainable brand message to
our consumers.
Our products are sold in 50 states in the U.S. and nine provinces in Canada, primarily in convenience
stores, delicatessens, sandwich shops and selected supermarkets, as well as through our national accounts with
several large retailers. We also sell various products on-line, which we refer to as our interactive channel,
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including soda with customized labels, wearables, candy and other items. We have focused our sales and
marketing resources on the expansion and penetration of our products through our independent distributor
network and national retail accounts in our core markets consisting of the Northwest, Southwest and Midwest
U.S. and Canada, as well as targeted expansion into our less penetrated markets consisting of the Northeast
and Southeast U.S. In addition, we are expanding our international business outside of North America and
have secured distribution with independent distributors in Ireland, the United Kingdom, Australia, Japan and
the United Arab Emirates.
Beginning in 2004, we launched our licensing business strategy as a method to extend our brand into
non-alternative beverage products and non-beverage products. We currently have licensing arrangements with
three companies. With these licensing agreements, we believe that we are able to partner with companies that
will manufacture Jones-related products and extend our Jones brand into select products that we feel enhance
our brand image. We do not expect this business to be a material part of our operations in 2010.
Our business strategy is to increase sales by expanding distribution of our brands in new and existing
markets (primarily within North America), stimulating consumer awareness and trial of our products, thus
leading to increased relevance and purchase intent of our brands. Our business strategy focuses on:
(cid:129) expanding points of distribution for our products;
(cid:129) creating strong alignment with our key distributors;
(cid:129) developing innovative beverage brands and products;
(cid:129) stimulating strong consumer demand for our existing brands and products, with primary emphasis in
the U.S. and Canada;
(cid:129) inviting consumers to participate in our brand through submission of photographs to be placed on labels
through our interactive application of myJones.com;
(cid:129) licensing our brand equity for the creation of other beverage or non-beverage products; and
(cid:129) exploring opportunities to license our patented custom-label process to non-competitive products.
In order to compete effectively in the beverage industry, we believe that we must convince independent
distributors that Jones Pure Cane Soda is a leading brand in the premium soda segment of the alternative or
New Age beverage industry. Additionally, as a means of maintaining and expanding our distribution network,
we introduce new products and product extensions, and when warranted, new brands. During the year we have
launched three new product extensions of our Jones Pure Cane Soda (listed above) and one new brand, Jones
GABA.
Launched in February 2009, Jones GABA, is our first line of beverage products containing Pharma
GABA, is offered in a 12-ounce slim can, and is part of a new emerging category of functional beverages. We
are marketing this tea and juice blended beverage by focusing on the benefits of enhanced focus and clarity
that studies have shown GABA provides. Our results with respect to Jones GABA depend in part on our ability
to market the product’s benefits. Jones GABA is our first entry into the new emerging category of functional
beverages and is our first beverage product containing GABA.
We allocated significant resources in our efforts to launch Jones GABA in 2009. Under our Pharma
GABA supply agreement, we were required to purchase a significant quantity of the GABA ingredient. We
had certain purchase obligations under the supply agreement, including the requirement to order $1.8 million
of GABA by December 31, 2008. However, the impact of the economic conditions during 2009 on our
business, was more severe than we expected, including on the launch of our new product, Jones GABA, and
limited our ability to invest in sales and marketing resources towards this launch. As a result, sales of GABA
have been lower than expected, and we recorded a charge for the GABA inventory that was in excess of our
forecasted demand resulting in a write-down of $1.8 million for the year ended December 31, 2009, of which
$210,000 related to GABA finished goods inventory.
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The beverage industry, and particularly those companies selling premium beverages like us, can be
affected by macroeconomic factors including changes in national, regional, and local economic conditions,
unemployment levels and consumer spending patterns, which together may impact the willingness of
consumers to purchase our products as they adjust their discretionary spending. The recent disruptions in the
overall economy and financial markets as a result of the global economic downturn have adversely impacted
our two primary markets: the U.S. and Canada. This has reduced consumer confidence in the economy and we
believe has negatively affected consumers’ willingness to purchase our products as they reduce their
discretionary spending. Moreover, current economic conditions may adversely affect the ability of our
distributors to obtain the credit necessary to fund their working capital needs, which could negatively impact
their ability or desire to continue to purchase products from us in the same frequencies and volumes as they
have done in the past. There can be no assurances that the financial markets will stabilize or recover in the
months ahead, that consumer confidence will be restored, or that access to the credit markets will become
available. If the current economic conditions persist or deteriorate, sales of our products could be adversely
affected, collectability of accounts receivable may be compromised and we may face obsolescence issues with
our inventory, any of which could have a material adverse impact on our operating results and financial
condition.
During 2009, we refined our 2009 operating plan each quarter to contemplate lower case sales than we
had previously contemplated, but our actual case sales continued to be lower than our revised expectations.
Despite the further refinements and cost cutting measures we implemented during 2009, we may no longer
have sufficient margin in our 2010 operating plan to absorb further declines against our expectations with
regard to the economy or our business. We believe our 2010 operating plan already includes the majority of
attainable cost cutting measures, which places greater emphasis on the need to meet our case sales projections
in order to effectively operate our business. The economic conditions in 2009 and the beginning of 2010 have
made forecasting demand for our products extremely difficult, so there is continued uncertainty regarding our
ability to meet our revised case sales projections.
Our current 2010 operating plan does not depend upon obtaining financing and if achieved, would allow
us to meet our anticipated cash needs for the next 12 months. However as we build inventory to prepare for
our stronger shipping months of April through September, we expect our cash balance to fall to approximately
$1 million, excluding the impact of any funding through potential debt or equity financing, before we would
expect our cash balance to increase in the second half of the year. Additionally, if our sales volumes further
decline in a material way from our expectations during 2010 as a result of worsening economic conditions or
otherwise, and since we would not likely be able to further reduce our costs by a sufficient amount, we may
be unable to generate enough cash flow from operations to cover our working capital and capital expenditure
requirements for the balance of the year. Further, based on our current projections beyond 2010, we expect
that we will deplete our cash in the first half of 2011. As such, we believe we will likely need to secure
financing during 2010 or early 2011 in order to fund our working capital and capital expenditure requirements
in 2011. Although we believe we have financing alternatives available to us, these alternatives would likely
involve significant interest and other costs or would likely be highly dilutive to our existing shareholders. We
continue to monitor whether credit facilities may be available to us on acceptable terms. There can be no
assurance any debt or equity financing arrangement will be available to us when needed on acceptable terms,
if at all. In addition, there can be no assurance that these financing alternatives would provide us with
sufficient funds to meet our long-term capital requirements. If we are unable to secure additional financing or
generate sufficient cash flow from operations to fund our working capital and capital expenditures require-
ments, we may be forced to explore liquidation alternatives, including seeking protection from creditors under
bankruptcy laws.
In light of our liquidity position, we have evaluated a broad range of strategic alternatives over the last
months including a potential merger transaction (see “Overview” in Item 1 of this Report). We intend to
continue to explore strategic transactions that may be in the best interest of the Company and our shareholders,
which may include, without limitation, mergers or other business combinations, public or private offerings of
debt or equity financings, joint ventures with one or more strategic partners and other strategic alternatives.
However, there can be no assurance that we will enter into a definitive agreement with respect to a transaction
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or that any transaction we may enter into will ultimately be consummated. Additionally, a transaction will
likely be subject to approval of our shareholders.
These uncertainties, together with our inability to implement further meaningful cost containment
measures beyond those we have already undertaken and the extremely difficult environment in which to obtain
additional equity or debt financing, continue to raise substantial doubt about our ability to continue as a going
concern (see “Liquidity and Capital Resources”).
Results of Operations
Years Ended December 31, 2009 and 2008
Revenue
For the year ended December 31, 2009, revenue was approximately $26.0 million, a decrease of
$9.9 million, or 27.6% from $35.9 million in revenue for the year ended December 31, 2008. The decrease in
revenue was primarily attributable to a decrease in total case sales of 34.5% to 2.9 million cases. Case sales
through our DTR and DSD channels decreased 28.7% to 2.1 million cases. A decline in case sales of our core
product, Jones Soda glass bottles, of approximately 486,000 cases contributed to the reduced case sales, and
we believe was caused primarily by the discontinuance of Jones Soda glass bottles at some of our major
retailers in our DTR channel, which occurred in 2008 as part of our realigned channel focus. In addition, we
believe reduced demand resulting from the impact of the economic downturn on consumer spending levels
negatively affected our case sales, and we expect economic conditions to continue to have a negative impact
on our business into 2010. Also contributing to the decline was a reduction in 24C shipments of 253,900
cases; 24C had stronger pull-through a year ago subsequent to its launch in 2007. Due to significant pricing
pressure we experienced with the 24C product, we are targeting more select, regionalized markets in which to
sell for 2010, which we expect to negatively impact volumes in 2010. Additionally, case sales of concentrate
to National Beverage decreased to 816,000 cases, or 45.6%, compared to 2008. As part of management’s
strategic refocus, we intend to continue to emphasize our higher-margin core products, including our Jones
Pure Cane Soda glass bottle business and the product extensions initiated in 2009 including Jones ZilchTM,
with less emphasis on our CSD channel, which is a lower margin business for us. Additionally, in early 2010,
we received notice from several of our significant DTR customers that they will no longer be carrying the
Jones brand. We have discontinued the Jones OrganicsTM and Jones Naturals brands due to this loss in
business. We expect our change in strategy to focus on our higher margin core products and the loss of these
significant DTR customers will have a negative impact on 2010 case sales compared to prior periods.
For the year ended December 31, 2009, promotion allowances and slotting fees, which are a reduction to
revenue, totaled $2.7 million, a decrease of $1.8 million, or 41.2%, from $4.5 million a year ago. The
promotion allowances and slotting fees in 2009 were primarily attributable to promoting some new distribution
points in our DSD channel. The promotion allowances and slotting fees in 2008 related primarily to price
promotion programs implemented for our DTR and CSD channels and for the continued introduction of 24C
across North America. We believe using promotional allowances as a way to promote our core products, while
judiciously using slotting fees to gain access on new products, is a more balanced strategy under current
economic conditions. We anticipate continuing this strategy in 2010, with further overall reductions in our
promotional allowance and slotting fee costs and emphasis on our higher margin business, including our core
glass bottle business.
Gross Profit
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Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2009
2008
% Change
(Dollars in thousands)
$7,367
$3,890
(47.2)%
15.0%
20.5%
For the year ended December 31, 2009, gross profit decreased by approximately $3.5 million or 47.2%,
to $3.9 million as compared to $7.4 million in gross profit for the year ended December 31, 2008. This
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decrease was primarily a result of a $2.2 million charge, of which $2.0 million was recorded in the fourth
quarter, consisting of a $1.8 million write-down of excess GABA inventory and a $422,000 impairment of
equipment located at a co-packer relating to our CSD channel. Additionally, contributing to our lower gross
profit were lower sales volumes in our DTR channel due to discontinuance of the Jones Soda glass bottles at
some of our major DTR customers and lower DSD volumes in the majority of U.S. regions, due we believe, to
softer consumer demand as a result of the economic downturn. These decreases to gross profit were offset by
a reduction in promotion allowances and slotting fees, a significant reduction in freight and storage costs per
case due to reduced fuel surcharges compared to 2008 and improved inventory management. For the year
ended December 31, 2009, gross profit as a percentage of revenue decreased to 15.0%, comprised of 23.6%
relating to our gross profit on case sales offset by (8.6%) relating to the $2.2 million in inventory write-down
and impairment charges, compared to 20.5% for the year ended December 31, 2008.
Licensing Revenue
Licensing revenue decreased 52.2%, or $89,000 to $81,000 for the year ended December 31, 2009, from
$170,000 for the year ended December 31, 2008, and consisted primarily of our exclusive licensing
arrangements with Big Sky Brands for Jones Soda Flavor Booster Hard Candy. We believe licensing revenue
was down due to the negative impact on sales resulting from the economic downturn. We do not expect
licensing revenue to represent a material portion of our overall revenues in 2010.
Promotion and Selling Expenses
Promotion and selling expenses for the year ended December 31, 2009 were approximately $7.8 million,
a decrease of $4.5 million, or 36.4%, from $12.3 million for the year ended December 31, 2008. Promotion
and selling expenses as a percentage of revenue decreased to 30.1% for the year ended December 31, 2009,
from 34.2% in 2008. The decrease in promotion and selling expenses was primarily due to a decrease in
selling expenses year over year of $3.6 million, to $4.0 million, or 15.2% of revenue. This decrease resulted
primarily from decreases in sales personnel in conjunction with the strategic refocus in the fourth quarter of
2008 and continued cost containment efforts during 2009, including reductions in workforce and our realigned
channel focus which contributed to a decrease in promotional expense, broker and invasion fees. The full year
effects of the workforce reductions on 2010 are expected to reduce ongoing promotion and selling expenses
compared to 2009. Also contributing to the decrease in promotion and selling expenses was a $905,000
decrease in trade promotion and marketing expenses from $4.8 million to $3.9 million, or 14.8% of revenue,
due in part to our cost containment efforts.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2009 were $6.6 million, a decrease
of $4.1 million or 38.1%, compared to $10.7 million for the year ended December 31, 2008. General and
administrative expenses as a percentage of revenue decreased to 25.4% for the year ended December 31, 2009
from 29.7% in the same period of 2008. The decrease in general and administrative expenses was primarily
due to (1) a decrease of salaries and benefits primarily as a result of the strategic refocus in the fourth quarter
of 2008 and continued cost containment efforts during 2009, which included reductions in workforce, and the
reduction in executive transition expenses experienced in 2008 of approximately $423,000 (2) a decrease in
bad debt expense and (3) a decrease in professional fees. The full year effects of the workforce reductions on
2010 are expected to reduce ongoing general and administrative expenses compared to 2009.
Other (Expense) Income, Net
Other (expense) income, net decreased to an expense of $30,000 for the year ended December 31, 2009,
from other income of $384,000 in 2008, primarily due to a decrease in interest income due to lower levels of
cash and short-term investments.
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Income Tax Expense
Provision for income taxes for the years ended December 31, 2009 and 2008 was $72,000 and $203,000,
respectively. The tax provision for the year ended December 31, 2009 relates primarily to the tax provision on
income from our Canadian operations. No tax benefit is recorded for the loss in our U.S. operations as we
have recorded a full valuation allowance on our U.S. net deferred tax assets. We expect to continue to record a
full valuation allowance on our U.S. net deferred tax assets until we sustain an appropriate level of taxable
income through improved U.S. operations. Our effective tax rate is based on recurring factors, including the
forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the
recording of a full valuation allowance on our U.S. net deferred tax assets.
Net Loss
Net loss for the year ended December 31, 2009 decreased to $10.5 million from a net loss of $15.2 million
for the year ended December 31, 2008. This was primarily due to a decrease in promotion and selling expense
of $4.5 million and general and administrative expense of $4.1 million as a result of decreases in salaries and
benefits primarily due to headcount reductions and cost containment efforts. Offsetting these decreases was a
reduction in gross profit of $3.5 million as a result of $2.2 million in inventory write-down and impairment
charges and lower sales in our DTR channel driven by the decline in sales of Jones Soda glass bottles, as well
as lower DSD volumes in the majority of U.S. regions we believe as a result of reduced overall demand
resulting from the economic downturn. Included in the $2.2 million charge, of which $2.0 million was
recorded in the fourth quarter, was a $1.8 million write-down of excess GABA inventory and a $422,000
impairment charge for equipment located at a co-packer relating to our CSD channel.
Liquidity and Capital Resources
As of December 31, 2009 and 2008, we had cash and cash-equivalents and short-term investments of
approximately $5.0 million and $12.6 million, respectively, and working capital of $8.5 million and
$17.7 million, respectively. Cash used in operations during 2009 and 2008 totaled $7.3 million and
$14.5 million, respectively. We used $1.1 million of cash in operations during the quarter ended December 31,
2009. Our cash flows vary throughout the year based on seasonality. We traditionally use more cash in the
first half of the year as we build inventory to support our historically seasonally-stronger shipping months of
April through September, and expect cash used by operating activities to decrease in the second half of the
year as we collect receivables generated during our stronger shipping months. In addition, the cash used in the
first half of 2009 included approximately $1.6 million to purchase raw materials under the terms of our
amended Pharma GABA supply agreement, and no GABA purchase requirements remain as of December 31,
2009.
For the years ended December 31, 2009 and 2008, net cash provided by investing activities totaled
approximately $419,000 and $8.5 million, respectively, due primarily to the sales of short-term investments,
partially offset by the purchases of fixed assets, and for 2009, by the purchase of the certificate of deposit
required to secure our promissory note referred to below. Net cash used by financing activities for the year
ended December 31, 2009, totaled approximately $129,000, due to the repayment of capital lease obligations
offset by the proceeds from the note payable resulting from the consolidation of our capital leases into one
promissory note for a lower interest rate. This compares to net cash used by financing activities for the year
ended December 31, 2008, which totaled approximately $88,000, due to the payments on our capital lease
obligations offset by the proceeds from the exercise of stock options. We incurred a net loss of $10.5 million
for the year ended December 31, 2009, which included a charge of $2.2 million consisting of a $1.8 million
write-down of our GABA inventory and $422,000 for the impairment of fixed assets (see Note 2 in Item 8 of
this Report). Our accumulated deficit increased to $40.0 million as of December 31, 2009 compared to the
prior year’s deficit of $29.4 million.
Our ability to execute on our operating plan and to manage our costs in light of persisting adverse
economic conditions continues to be critical to the success and the performance of our business. The impact of
these economic conditions during 2009 on our business, including on the launch of our new product, Jones
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GABA, was more severe than we expected. We refined our 2009 operating plan each quarter to contemplate
lower case sales than we had previously contemplated, but our actual case sales continued to be lower than
our revised expectations. As such, we took into account several factors in developing our 2010 operating plan
(which we refer to in this section as our operating plan or our plan). We considered the macroeconomic factors
stemming from the global economic downturn and its effects on our 2009 results, believing that these
economic conditions will likely continue in 2010. The beverage industry, and particularly those companies
selling premium beverages like us, can be affected by macroeconomic factors, including changes in national,
regional, and local economic conditions, unemployment levels and consumer spending patterns, which together
may impact the willingness of consumers to purchase our products as they adjust their discretionary spending.
Our case sales volumes in our operating plan, including comparable case sales volume of Jones GABA, are
based in part on our 2009 results during this economic downturn and have been further refined for the loss of
one of our significant Direct to Retail (DTR) national accounts.
Our operating plan takes into account our continued focus on higher-margin core products, including our Jones
Pure Cane Soda glass bottle business, with less emphasis on our Concentrate Soda Distribution (CSD) channel,
which is a lower margin business for us. Our operating plan also factors in the use of cash to meet our contractual
obligations for 2010 totaling approximately $4.7 million. A substantial portion of these contractual obligations
(approximately 60% of the total for 2010) consists of obligations to purchase raw materials, including sugar and
glass under our supply agreements. We enter into these supply agreements in order to fix the cost of these key raw
materials, which we expect will be used in the ordinary course of our business in 2010. Approximately 30% of these
contractual obligations relate to payments for sponsorships. Given our limited cash resources, we intend to attempt to
renegotiate these arrangements to reduce our payment obligations. However, there can be no assurance that we will
be able to modify these sponsorship arrangements in a timely manner to reduce our obligations or make any other
changes.
With respect to our operating expenses, our operating plan also takes into account the cost containment
measures we implemented in the fourth quarter of 2008 and throughout 2009, including reductions in workforce
resulting in a combined 62% headcount reduction. Additionally, our senior level positions in 2010 have been
reduced as the result of the departures of our former Chief Executive Officer, Executive Vice President of Sales,
and VP of Sales during 2009. We believe these cost containment measures and our decision to proceed with
fewer senior level positions are critical to our achieving a reduced cost structure that supports our operating
goals. Our operating expenses for 2009 were 37% lower, a reduction of $8.5 million compared to 2008, and our
operating plan for 2010 contemplates a full year of these cost reductions. With this reduced cost structure our
operating plan, if achieved, would allow us to meet our anticipated cash needs for the next 12 months. However,
as we build inventory to prepare for our stronger shipping months of April through September, we expect our
cash balance to fall to approximately $1 million, excluding the impact of any funding through potential debt or
equity financing, before we would expect our cash balance to increase in the second half of the year.
Our current 2010 operating plan does not depend upon obtaining financing. However, if our sales volumes
further decline in a material way from our expectations during 2010 as a result of worsening economic conditions
or otherwise, and since we would not likely be able to further reduce our costs by a sufficient amount, we may be
unable to generate enough cash flow from operations to cover our working capital and capital expenditure
requirements for the balance of the year. Further, based on our current projections beyond 2010, we expect that we
will deplete our cash in the first half of 2011. As such, we believe we will likely need to secure financing during
2010 or early 2011 in order to fund our working capital and capital expenditure requirements in 2011. Although
we believe we have financing alternatives available to us, these alternatives would likely involve significant interest
and other costs or would likely be highly dilutive to our existing shareholders. We continue to monitor whether
credit facilities may be available to us on acceptable terms. There can be no assurance any debt or equity financing
arrangement will be available to us when needed on acceptable terms, if at all. In addition, there can be no
assurance that these financing alternatives would provide us with sufficient funds to meet our long-term capital
requirements. If we are unable to secure additional financing or generate sufficient cash flow from operations to
fund our working capital and capital expenditures requirements, we may be forced to explore liquidation
alternatives, including seeking protection from creditors under bankruptcy laws.
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In light of our liquidity position, we have evaluated a broad range of strategic alternatives over the last
months including a potential merger transaction (see “Business” in Item 1 of this Report). We intend to
continue to explore strategic transactions that may be in the best interest of the Company and our shareholders,
which may include, without limitation, mergers or other business combinations, public or private offerings of
debt or equity financings, joint ventures with one or more strategic partners and other strategic alternatives.
However, there can be no assurance that we will enter into a definitive agreement with respect to a transaction
or that any transaction we may enter into will ultimately be consummated. Additionally, the transaction will
likely be subject to approval of our shareholders.
We intend to continually monitor and adjust our business plan as necessary to respond to developments in
our business, our markets and the broader economy. However, despite the further refinements we have made to
our operating plan and the additional cost containment measures we implemented in the third quarter 2009, we
may no longer have sufficient margin in our plan to absorb further declines against our expectations with regard
to the economy or our business. We believe our operating plan already includes the majority of attainable cost
cutting measures, which places greater emphasis on the need to meet our case sales projections in order to
effectively operate our business. The economic conditions in 2009 and the beginning of 2010 have made
forecasting demand for our products extremely difficult, so there is continued uncertainty regarding our ability to
meet our revised case sales projections. Also, there can be no assurance that we will consummate a strategic
transaction. These uncertainties, together with our inability to implement further meaningful cost containment
measures beyond those we have already undertaken and the extremely difficult environment in which to obtain
additional equity or debt financing, continue to raise substantial doubt about our ability to continue as a going
concern. Our financial statements for the year ended December 31, 2009 were prepared assuming we would
continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The accompanying consolidated financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that could result should we be unable to continue as a going concern.
Contractual Obligations
Our commitments as of December 31, 2009 with respect to known contractual obligations were as follows
(in thousands):
Contractual Obligations
Payments Due by Period
Total
Less Than 1
Year
2-3 Years
4-5 Years
More Than
5 Years
Loan obligation. . . . . . . . . . . . . . . . . . . $
Operating lease obligations . . . . . . . . . .
Sponsorships . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . .
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294
9,584
4,350
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . $14,572
$ 125
176
1,374
3,055
$4,730
$ 219
118
2,910
1,295
$4,542
$ —
—
3,236
—
$3,236
$ —
—
2,064
—
$2,064
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Our loan obligation consists of a promissory note we entered into with Key Bank in September 2009,
totaling $376,000, for the purpose of consolidating our capital leases with Key Bank, into one note for a lower
interest rate. Although our fixed assets are no longer secured, we were required, as a term of the financing, to
place $376,000 in an interest bearing restricted reserve account, invested in a certificate of deposit, to secure
the note. The terms of the arrangement include monthly payments of principal and interest for 36 months and
an annual percentage rate of prime, which was 3.25%, at December 31, 2009. Interest expense for 2010, 2011
and 2012 is expected to total approximately $9,000, $5,000 and $1,000, respectively.
Our sponsorship obligations include commitments under our Sponsorship Agreements with the Seattle Seahawks,
the New Jersey Nets and the Portland Trail Blazers. These obligations vary in terms and commit us to payments
from 2010 to 2016. We describe these arrangements in “Sponsorship Arrangements” in Item 1 of this Report.
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Purchase obligations reflected in the table above include approximately $2.8 million in sugar under our
supply agreements with our three pure cane sugar suppliers and approximately $1.2 million in glass under our
supply agreement with our glass supplier.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements.
Contingencies
We are subject to the possibility of losses from various contingencies. See Item 3 — Legal Proceedings
for disclosure of the Federal Securities Class Action, Shareholder Derivative Litigation and Shareholder
Merger Litigation. We are unable to predict the outcome of these actions. These actions could result in
significant liability and could have a material adverse effect on our business, results of operations, or financial
condition.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances, the results of which form
our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions, or
if management made different judgments or utilized different estimates. Many of our estimates or judgments are
based on anticipated future events or performance, and as such are forward-looking in nature, and are subject to
many risks and uncertainties, including those discussed below and elsewhere in this Report. We do not undertake
any obligation to update or revise this discussion to reflect any future events or circumstances.
There are certain critical accounting estimates that we believe require significant judgment in the
preparation of our consolidated financial statements. We have identified below our accounting policies and
estimates that we consider critical to our business operations and the understanding of our results of
operations. This is not a complete list of all of our accounting policies, and there may be other accounting
policies that are significant to us. For a detailed discussion on the application of these and our other
accounting policies, see Note 1 in Item 8 of this Report.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales
price is fixed or determinable and collectability is reasonably assured. Revenue is recorded net of provisions
for discounts, slotting fees and allowances. Such incentives are recognized as a reduction in revenue at the
later of the date on which the related revenue is recognized or a commitment is made, except in the case of
slotting which is recognized when the commitment is made.
With respect to our DSD and DTR channels, our products are sold on various terms for cash or credit.
Our credit terms, which are established in accordance with local and industry practices, typically require
payment within 30 days of delivery. We recognize revenue upon receipt of our products by our distributors
and retail customers in accordance with written sales terms, net of provisions for discounts and allowances.
All sales to distributors and customers are final sales; however, in limited instances, due to product quality
issues or distributor terminations, we may accept returned product. To date, such returns have not been
material.
With respect to our CSD channel, we recognize revenue from the sale of concentrate to National
Beverage on a gross basis upon receipt of concentrate by National Beverage. The selling price and terms of
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sale of concentrate to National Beverage are determined in accordance with our manufacturing and distribution
agreement with them. Our credit terms from the sale of concentrate typically require payment within 30 days
of delivery. Generally we do not accept returns on sales of concentrate to National Beverage; however, in
limited instances, due to product quality or other custom package commitments, we may accept returned
product. To date, such returns have not been material.
Licensing revenue is recorded when we receive a sale confirmation from the third party.
Inventory
We hold raw materials and finished goods inventories, which are manufactured and procured based on
our sales forecasts. We value inventory at the lower of cost or market, which is based on estimated net
realizable value, and include adjustments for estimated obsolete or excess inventory, on a first in-first out
basis. These valuations are subject to customer acceptance, planned and actual product changes, demand for
the particular products, and our estimates of future realizable values based on these forecasted demands. We
regularly review inventory detail to determine whether a write-down is necessary. We consider various factors
in making this determination, including recent sales history and predicted trends, industry market conditions
and general economic conditions. The amount and timing of write-downs for any period could change if we
make different judgments or use different estimates. We also determine whether a provision for obsolete or
excess inventory is required on products that are over 12 months from production date or any changes related
to market conditions, slow-moving inventory or obsolete products.
Impairment of long-lived assets
Long-lived assets, which include capital 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. The fair value of the assets is estimated using the higher of
discounted future cash flows of the assets or estimated net realizable value. Long-lived assets are grouped at
the lowest level for which there are identifiable cash flows when evaluating for impairment. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Disclosure not required.
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40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Consolidated balance sheets as of December 31, 2009 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of operations for the years ended December 31, 2009 and 2008. . . . . . . . . . .
Consolidated statements of shareholders’ equity for the years ended December 31, 2009 and 2008 . . .
Consolidated statements of cash flows for the years ended December 31, 2009 and 2008 . . . . . . . . . .
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
42
43
44
45
46
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41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Jones Soda Co.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of Jones Soda Co. and subsidiaries (the
“Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2009. 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 the standards of the Public Company Accounting Oversight Board
(United States). 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, such consolidated financial statements present fairly, in all material respects, the financial
position of Jones Soda Co. and subsidiaries (the “Company”) at December 31, 2009 and 2008, and the results
of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for the year ended December 31, 2009 have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company’s recurring losses from operations, negative cash flows from
operating activities, accumulated deficit, significant uncertainties in the Company’s ability to meet their 2010
operating plan, and the need to obtain additional equity or debt financing, during 2010 or early 2011, raise
substantial doubt about its ability to continue as a going concern. Management’s plans concerning these
matters are also discussed in Note 1 to the consolidated financial statements. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2009, based on
the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 31, 2010 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 31, 2010
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42
JONES SODA CO.
CONSOLIDATED BALANCE SHEETS
December 31,
2009
2008
(In thousands, except per
share amounts)
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance of $87 and $330 . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,975
—
2,508
3,711
498
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets, net accumulated depreciation of $2,951 and $3,364 . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,692
1
807
1,034
$ 11,736
890
2,428
5,654
1,410
22,118
98
2,099
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,534
$ 24,315
Current liabilities:
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations, current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,397
1,571
69
125
—
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities — other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 12)
Shareholders’ equity:
3,162
219
—
—
$ 1,469
2,788
34
—
153
4,444
—
321
75
Common stock, no par value:
Authorized — 100,000,000 issued and outstanding shares — 26,427,989 and
26,460,409 at December 31, 2009 and 2008, respectively . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit
43,925
5,771
418
(39,961)
43,924
5,044
(79)
(29,414)
Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,153
19,475
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,534
$ 24,315
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See accompanying notes to consolidated financial statements.
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JONES SODA CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
2009
2008
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of excess GABA inventory and impairment of fixed assets . . . . . . .
26,013
19,875
2,248
35,918
28,551
—
(In thousands, except per share
amounts)
$
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Promotion and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (expense) income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,890
81
7,820
6,596
14,416
(10,445)
(30)
(10,475)
(72)
7,367
170
12,292
10,661
22,953
(15,416)
384
(15,032)
(203)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(10,547)
$
(15,235)
Net loss per share
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average basic and diluted common shares outstanding. . . . . . . . . . . . .
(0.40)
26,433,645
$
(0.58)
26,339,449
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See accompanying notes to consolidated financial statements.
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JONES SODA CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2009 and 2008
Common Stock
Number
Amount
Balance, January 1, 2008 . . . . . .
Exercise of stock options . . . . . .
Stock-based compensation . . . . . .
Net loss . . . . . . . . . . . . . . . . . .
26,251,183
87,500
121,726
—
43,856
68
—
—
Accumulated
Other
Comprehensive
(Loss) Income
Additional
Paid-in
Accumulated
Deficit
Capital
(In thousands, except per share amounts)
129
3,991
—
—
—
1,053
—
—
(14,179)
—
—
(15,235)
Other comprehensive loss,
realized gain on
available-for-sale short-term
investments, net of tax . . . . .
Other comprehensive loss,
foreign currency translation
loss, net of tax . . . . . . . . . .
Comprehensive loss . . . . . . . . . .
Balance, December 31, 2008 . . . .
Exercise of stock options . . . . . .
Stock-based compensation . . . . . .
Net loss . . . . . . . . . . . . . . . . . .
Other comprehensive income,
foreign currency translation
gain, net of tax . . . . . . . . . .
Comprehensive loss . . . . . . . . . .
Balance, December 31, 2009 . . . .
—
—
—
—
—
—
26,460,409
3,215
(35,635)
—
$43,924
1
—
—
$5,044
—
727
—
(22)
(186)
$ (79)
—
—
—
—
—
$(29,414)
—
—
(10,547)
—
—
—
497
—
26,427,989
$43,925
$5,771
$ 418
$(39,961)
See accompanying notes to consolidated financial statements.
45
Total
Shareholders’
Equity
33,797
68
1,053
(15,443)
$ 19,475
1
727
(10,050)
$ 10,153
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JONES SODA CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
December 31,
2009
2008
(In thousands, except per
share amounts)
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash used by operating activities:
$(10,547)
$(15,235)
Write-down of excess GABA inventory and impairment of fixed assets . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash charges and credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities — other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on available for sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES:
Purchase of certificate of deposit, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments — net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,248
811
727
22
151
(243)
39
—
—
—
—
364
266
210
206
(165)
(1,137)
(245)
30
(7,263)
(376)
890
(100)
5
419
—
1,060
1,053
—
8
13
(159)
140
40
55
(22)
2,034
(258)
52
(329)
(514)
(2,267)
—
(169)
(14,498)
—
9,045
(581)
—
8,464
FINANCING ACTIVITIES:
Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
(474)
376
(32)
(129)
(6,973)
212
11,736
$ 4,975
68
(156)
—
—
(88)
(6,122)
—
17,858
$ 11,736
Supplemental disclosure of non-cash investing and financing activities:
Non-cash settlement of production obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid (received) during year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
132
—
(3)
(423)
$
(577)
161
See accompanying notes to consolidated financial statements.
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JONES SODA CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2009 and 2008
1. Nature of Operations and Summary of Significant Accounting Policies
Jones Soda Co. develops, produces, markets, licenses and distributes premium beverages and related
products. Our primary product lines include the brands Jones Pure Cane Soda, a premium soda; Jones 24C, an
enhanced water beverage; Jones GABA, a functional tea juice blend launched in February 2009; and WhoopAss
Energy Drink», a citrus energy drink. We are a Washington corporation and have three operating subsidiaries,
Jones Soda Co. (USA) Inc., Jones Soda (Canada) Inc., myJones.com, Inc. as well as one non-operating
subsidiary, Whoopass USA Inc.
Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions
between the Company and its subsidiaries have been eliminated in consolidation. We have evaluated
subsequent events through March 31, 2010, which is the date that these consolidated financial statements were
issued.
Liquidity
As of December 31, 2009 and 2008, we had cash and cash-equivalents and short-term investments of
approximately $5.0 million and $12.6 million, respectively, and working capital of $8.5 million and
$17.7 million, respectively. Cash used in operations during 2009 and 2008 totaled $7.3 million and
$14.5 million, respectively, of which approximately $1.1 million was used during the quarter ended
December 31, 2009. Our cash flows vary throughout the year based on seasonality. We traditionally use more
cash in the first half of the year as we build inventory to support our historically seasonally-stronger shipping
months of April through September, and expect cash used by operating activities to decrease in the second
half of the year as we collect receivables generated during our stronger shipping months. In addition, the cash
used in the first half of 2009 included approximately $1.6 million to purchase raw materials under the terms
of our amended Pharma GABA supply agreement, and no GABA purchase requirements remain as of
December 31, 2009. We incurred a net loss of $10.5 million for the year ended December 31, 2009, which
included a charge of $2.2 million consisting of $1.8 million for the write-down of our GABA inventory
($210,000 relating to GABA finished goods inventory) and $422,000 for the impairment of fixed assets (see
Note 2). Our accumulated deficit increased to $40.0 million as of December 31, 2009 over the prior year’s
deficit of $29.4 million.
Our ability to execute on our operating plan and to manage our costs in light of persisting adverse
economic conditions continues to be critical to the success and the performance of our business. The impact of
these economic conditions during 2009 on our business, including on the launch of our new product,
Jones GABA, was more severe than we expected. We refined our 2009 operating plan each quarter to
contemplate lower case sales than we had previously contemplated, but our actual case sales continued to be
lower than our revised expectations. As such, we took into account several factors in developing our 2010
operating plan (which we refer to in this section as our operating plan or our plan). We considered the
macroeconomic factors stemming from the global economic downturn and its effects on our 2009 results,
believing that these economic conditions will likely continue in 2010. The beverage industry, and particularly
those companies selling premium beverages like us, can be affected by macroeconomic factors, including
changes in national, regional, and local economic conditions, unemployment levels and consumer spending
patterns, which together may impact the willingness of consumers to purchase our products as they adjust their
discretionary spending. Our case sales volumes in our operating plan, including comparable case sales volume
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of Jones GABA, are based in part on our 2009 results during this economic downturn and have been further
refined for the loss of one of our significant Direct to Retail (DTR) national accounts.
Our operating plan takes into account our continued focus on higher-margin core products, including our
Jones Pure Cane Soda glass bottle business, with less emphasis on our Concentrate Soda Distribution (or
CSD) channel, which is a lower margin business for us. Our operating plan also factors in the use of cash to
meet our contractual obligations for 2010 totaling approximately $4.7 million. A substantial portion of these
contractual obligations (approximately 60% of the total for 2010) consists of obligations to purchase raw
materials, including sugar and glass under our supply agreements. We enter into these supply agreements in
order to fix the cost of these key raw materials, which we expect will be used in the ordinary course of our
business in 2010. Approximately 30% of these contractual obligations relate to payments for sponsorships.
Given our limited cash resources, we intend to attempt to renegotiate these arrangements to reduce our
payment obligations. However, there can be no assurance that we will be able to modify these sponsorship
arrangements in a timely manner to reduce our obligations or make any other changes.
With respect to our operating expenses, our operating plan also takes into account the cost containment
measures we implemented in the fourth quarter of 2008 and throughout 2009, including reductions in
workforce resulting in a combined 62% headcount reduction. Additionally, our senior level positions in 2010
have been reduced as the result of the departures of our former Chief Executive Officer, Executive Vice
President of Sales, and VP of Sales during 2009. We believe these cost containment measures and our decision
to proceed with fewer senior level positions are critical to our achieving a reduced cost structure that supports
our operating goals. Our operating expenses for 2009 were 37% lower, a reduction of $8.5 million compared
to 2008, and our operating plan for 2010 contemplates a full year of these cost reductions. With this reduced
cost structure our operating plan, if achieved, would allow us to meet our anticipated cash needs for the next
12 months. However, as we build inventory to prepare for our stronger shipping months of April through
September, we expect our cash balance to fall to approximately $1 million, excluding the impact of any
funding through potential debt or equity financing, before we would expect our cash balance to increase in the
second half of the year.
Our current 2010 operating plan does not depend upon obtaining financing. However, if our sales volumes
further decline in a material way from our expectations during 2010 as a result of worsening economic
conditions or otherwise, and since we would not likely be able to further reduce our costs by a sufficient
amount, we may be unable to generate enough cash flow from operations to cover our working capital and
capital expenditure requirements for the balance of the year. Further, based on our current projections beyond
2010, we expect that we will deplete our cash in the first half of 2011. As such, we believe we will likely
need to secure financing during 2010 or early 2011 in order to fund our working capital requirements in 2011.
Although we believe we have financing alternatives available to us, these alternatives would likely involve
significant interest and other costs or would likely be highly dilutive to our existing shareholders. We continue
to monitor whether credit facilities may be available to us on acceptable terms. There can be no assurance any
debt or equity financing arrangement will be available to us when needed on acceptable terms, if at all. In
addition, there can be no assurance that this would provide us with sufficient funds to meet our capital
requirements. If we are unable to secure additional financing or generate sufficient cash flow from operations
to fund our working capital and capital expenditures requirements, we may be forced to explore liquidation
alternatives, including seeking protection from creditors under bankruptcy laws.
In light of our liquidity position, we have evaluated a broad range of strategic alternatives over the last
months including a potential merger transaction (see Note 15). We intend to continue to explore strategic
transactions that may be in the best interest of the Company and our shareholders, which may include, without
limitation, mergers or other business combinations, public or private offerings of debt or equity financings,
joint ventures with one or more strategic partners and other strategic alternatives. However, there can be no
assurance that we will enter into a definitive agreement with respect to a transaction or that any transaction we
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may enter into will ultimately be consummated. Additionally, the transaction will likely be subject to approval
of our shareholders.
We intend to continually monitor and adjust our business plan as necessary to respond to developments in
our business, our markets and the broader economy. However, despite the further refinements we have made to
our operating plan and the additional cost containment measures we implemented in the third quarter 2009, we
may no longer have sufficient margin in our plan to absorb further declines against our expectations with
regard to the economy or our business. We believe our operating plan already includes the majority of
attainable cost cutting measures, which places greater emphasis on the need to meet our case sales projections
in order to effectively operate our business. The economic conditions in 2009 and the beginning of 2010 have
made forecasting demand for our products extremely difficult, so there is continued uncertainty regarding our
ability to meet our revised case sales projections. Also, there can be no assurance that we will consummate a
strategic transaction. These uncertainties, together with our inability to implement further meaningful cost
containment measures beyond those we have already undertaken and the extremely difficult environment in
which to obtain additional equity or debt financing, continue to raise substantial doubt about our ability to
continue as a going concern. Our financial statements for the year ended December 31, 2009 were prepared
assuming we would continue as a going concern, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. The accompanying consolidated
financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that could result should we be
unable to continue as a going concern.
Use of estimates
The preparation of the consolidated financial statements requires management to make a number of
estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Significant items subject to such estimates and
assumptions include, but are not limited to, inventory valuation, depreciable lives and valuation of capital
assets, valuation allowances for receivables, trade promotion liabilities, stock-based compensation expense,
valuation allowance for deferred income tax assets, contingencies, and forecasts supporting the going concern
assumption and related disclosures. Actual results could differ from those estimates.
Cash and cash equivalents
We consider all highly liquid short-term investments with an original or remaining maturity of three
months or less at the date of purchase to be cash equivalents.
Short-term investments
Short-term investments have a remaining maturity of less than twelve months. All short-term investments
are classified as available-for-sale securities and are recorded at fair value. Unrealized holding gains and losses
are recorded, net of tax, as a separate component of accumulated other comprehensive income. The estimate
of fair value is based on publicly available market information or other estimates determined by management.
Interest income on our short term investments of $31,000 and $495,000 for the years ended December 31,
2009 and 2008, respectively, was recorded in “other (expense) income, net” in our consolidated statements of
operations.
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Fair value of financial instruments
The carrying amounts for cash and cash equivalents, receivables and payables approximate fair value due
to the short-term maturity of these instruments. The carrying value of other long-term liabilities approximated
fair values because the underlying interest rates approximate market rates at the balance sheet dates.
Accounts receivable
Our accounts receivable balance includes balances from trade sales. The allowance for doubtful accounts
is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine
the allowance for doubtful accounts based primarily on historical write-off experience. Account balances that
are deemed uncollectible, are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. Allowances for doubtful accounts of $87,000,
and $330,000 as of December 31, 2009 and 2008, respectively, are netted against accounts receivable. Activity
in the allowance for doubtful accounts consists of the following as of December 31 (in thousands):
2009
2008
Balance, beginning of year: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 330
(190)
Net charges to bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(53)
Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 317
591
(607)
29
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87
$ 330
Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of cost or market and
include adjustments for estimated obsolete or excess inventory. Cost is based on actual cost on a first-in first-
out basis. Raw materials that will be used in production in the next twelve months are recorded in inventory,
and amounts to be used in production beyond twelve months are considered long-term assets and are recorded
in other assets. The provisions for obsolete or excess inventory are based on estimated forecasted usage of
inventories. A significant change in demand for certain products as compared to forecasted amounts may result
in recording additional provisions for obsolete inventory. Provisions for obsolete or excess inventory are
recorded as cost of goods sold. We recorded a charge for the write-down of excess GABA inventory during
the year ended December 31, 2009 (see Note 2).
Fixed assets
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Fixed assets are recorded at cost less accumulated depreciation and depreciated on the declining balance
basis over the estimated useful lives of the assets as follows:
Asset
Rate
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles and office and computer equipment . . . . . . .
Equipment under capital lease . . . . . . . . . . . . . . . . . Lease term which approximates its useful life
20% to 30%
30%
Impairment of long-lived assets
Long-lived assets, which include capital 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JONES SODA CO.
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. The fair value of the assets is estimated using the higher of
discounted future cash flows of the assets or estimated net realizable value. Long-lived assets are grouped at
the lowest level for which there are identifiable cash flows when evaluating for impairment. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell. We have recorded
an impairment of fixed assets during the year ended December 31, 2009 of $422,000 (see Note 2) and an
impairment of intangible assets of $140,000 in the year ended December 31, 2008. There are no outstanding
intangible assets as of December 31, 2009 and 2008.
Foreign currency translation
The functional currency of our Canadian subsidiary is the Canadian dollar. We translate assets and
liabilities related to these operations to U.S. dollars at the exchange rate in effect at the date of the
consolidated balance sheet; we convert revenues and expenses into U.S. dollars using the average monthly
exchange rates. Translation gains and losses are reported as a separate component of accumulated other
comprehensive income.
Revenue recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales
price is fixed or determinable and collectability is reasonably assured. Revenue is recorded net of provisions
for discounts, slotting fees and allowances. Such incentives are recognized as a reduction in revenue at the
later of the date on which the related revenue is recognized or a commitment is made, except in the case of
slotting which is recognized when the commitment is made. For the years ended December 31, 2009 and
2008, our revenue was reduced by $2.7 million and $4.5 million, respectively, for slotting fees and promotion
allowances. All sales to distributors and customers are final; however, in limited instances, due to product
quality issues or distributor terminations, we may accept returned product. To date, such returns have not been
material.
Licensing revenue is recorded when we receive a sale confirmation from the third party.
Shipping and handling costs
Shipping and handling amounts paid to us by customers are included in revenue and total $468,000 and
$481,000 for the years ended December 31, 2009 and 2008. The actual costs of shipping and handling paid by
us are included in cost of sales.
Advertising costs
Advertising costs, which also include promotions and sponsorships, are expensed as incurred. During the
years ended December 31, 2009 and 2008, we incurred advertising costs of $1.8 million and $4.6 million,
respectively.
We entered into sponsorship agreements with Football Northwest LLC (d/b/a Seattle Seahawks) and
First & Goal, Inc. (Seattle Seahawks) effective July 2007 which was amended effective July 2009; Brooklyn
Arena LLC and New Jersey Basketball, LLC (New Jersey Nets) effective October 2007; and with Trail Blazer
Inc, (Portland Trailblazers) effective October 2008; which provide us with the beverage rights to sell our
beverages at sports venues as well as signage, advertising and other promotional benefits to enhance our brand
awareness. We have allocated amounts under the agreements to the identifiable benefits including signage,
advertising and other promotional benefits based on their fair value and are recognizing such costs in
promotion and selling expenses based on our existing policy for such expenses. The remaining amounts due
under the agreement in excess of the fair value of the identifiable benefits, if any, are recorded as a reduction
to revenue.
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Income taxes
We account for incomes taxes by recognizing the amount of taxes payable for the current year and
deferred tax assets and liabilities for future tax consequences of events at enacted tax rates that have been
recognized in our financial statements or tax returns. We perform periodic evaluations of recorded tax assets
and liabilities and maintain a valuation allowance, if considered necessary. The determination of taxes payable
for the current year includes estimates. We believe that we have appropriate support for the income tax
positions taken, and to be taken, on our tax returns and that our accruals for tax liabilities are adequate for all
open years based on an assessment of many factors including past experience and interpretations of tax law
applied to the facts of each matter. No reserves for an uncertain income tax position have been recorded for
the years ended December 31, 2009 or 2008.
Net loss per share
Basic net loss per share is computed using the weighted average number of common shares outstanding
during the periods, excluding reacquired stock and common stock held in escrow that is subject to cancellation
if certain criteria are not achieved. Diluted earnings per share are computed by adjusting the weighted average
number of common shares by the effective net exercise or conversion of all dilutive securities. In 2009 and
2008, due to the net loss, all outstanding equity options are anti-dilutive.
Seasonality
Our sales are seasonal and we experience significant fluctuations in quarterly results as a result of many
factors. We historically have generated a greater percentage of our revenues during the warm weather months
of April through September. Timing of customer purchases will vary each year and sales can be expected to
shift from one quarter to another. As a result, management believes that period-to-period comparisons of
results of operations are not necessarily meaningful and should not be relied upon as any indication of future
performance or results expected for the fiscal year.
Recent accounting pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update
(“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). The new
standard addresses, among other things, guidance regarding disclosure of the different classes of assets and
liabilities, valuation techniques and inputs used, activity in Level 3 fair value measurements, and the transfers
between levels. ASU No. 2010-06 is effective for us for the year ending December 31, 2010. We do not expect
the impact of the adoption to have a material impact on our consolidated financial statements.
2. Write-down of Excess GABA Inventory and Impairment of Fixed Assets
Write-down of excess GABA inventory and impairment of fixed assets consists of the following as of
December 31 (in thousands):
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Write-down of excess GABA raw material inventory . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of excess GABA finished goods inventory . . . . . . . . . . . . . . . . . . . . . .
Impairment of co-packer equipment for CSD channel . . . . . . . . . . . . . . . . . . . . . . .
2009
2008
$1,616
210
422
$2,248
$—
—
—
$—
The write-down for excess inventory is based on estimated forecasted usage of inventories. A significant
change in demand for certain products as compared to forecasted amounts may result in recording additional
provisions for obsolete or excess inventory. While we believed we would be able to utilize all of the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JONES SODA CO.
$1.8 million of inventory purchased through our normal operations in 2009 and beyond, several events in the
fourth quarter of 2009 led us to evaluate the amount of inventory on hand and its valuation. With the impact
of the economic conditions during 2009 on our business which was more severe than we expected, including
on the launch of our new product, Jones GABA, and our inability to direct additional sales and marketing
resources after the product launch given our financial constraints, it became evident in the fourth quarter that
we had excess inventory beyond forecasted demand. Additionally, our product pipeline options on alternative
uses of GABA that we had been exploring during 2009 did not materialize by the end of 2009 and are not
anticipated to materialize in any significant way in the near future. Finally, based on third party evidence,
including in part, the indication of interest received from Big Red Holdings Corporation (Big Red) that we
announced on December 21, 2009, which was lower than our book value before the write-down, there has
been minimal to no value placed on the GABA ingredient. As such, in the fourth quarter of 2009, we wrote
down the GABA inventory that was in excess of our forecasted demand. As such, as of December 31, 2009,
the write-down of excess inventory totaled $1.8 million, of which $210,000 related to GABA finished goods
inventory.
We evaluate fixed assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset grouping may not be recoverable. During the fourth quarter 2009, management
determined that the CSD case sales projected in 2010 would be significantly less than 2009 levels due to a
combination of economic factors and our reduced ability to invest in meaningful sales and marketing resources
to revitalize the CSD case sales, which is a lower margin business for us. Additionally, based on third party
evidence, including in part, the offer received from Big Red which was lower than our book value before the
write-down, there has been minimal to no value placed on our CSD channel. Based on these indicators of
possible triggering events with respect to the recoverability of fixed assets, we performed impairment testing
as of December 31, 2009. In testing our fixed assets for recoverability, we reviewed the undiscounted cash
flows for our CSD channel and our combined Direct Store Delivery (DSD) and DTR channels, the lowest
level for which identifiable cash flows could be identified. This analysis indicated there was an impairment of
our CSD production assets onsite at National Beverage Corp. As such, the estimated fair value based on a
discounted cash flow and net realizable value analysis determined that a full impairment was necessary, and a
non-cash charge of $422,000 was recorded as of December 31, 2009.
3.
Inventory
Inventory consists of the following as of December 31 (in thousands):
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,794
917
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,709
1,945
2009
2008
$3,711
$5,654
Finished goods primarily include product ready for shipment, as well as promotional merchandise held
for sale. Raw materials primarily include ingredients, concentrate and packaging.
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4. Fixed Assets
Fixed assets consists of the following as of December 31 (in thousands):
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office and computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
428
1,907
1,423
$
447
3,525
1,491
2009
2008
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,758
(2,951)
5,463
(3,364)
$
807
$ 2,099
In September 2009, the fixed assets under lease were no longer secured with Key Bank (see Note 8).
Included in fixed assets as of December 31, 2008 were assets under capital leases with costs of $673,000 and
accumulated depreciation of $251,000.
In addition, in December 2009, an impairment charge was recorded totaling $422,000 relating to the co-
packer equipment for our CSD channel (see Note 2).
5. Other Assets
Other assets consists of the following as of December 31 (in thousands):
Certificate of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 376
239
GABA raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
GABA finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
355
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009
$1,034
2008
$ —
—
—
—
$ —
In September 2009, we were required to place $376,000 in a restricted reserve account to secure our
promissory note with Key Bank (see Note 8), invested in a certificate of deposit. Such assets have been
measured at fair value under Level 1 of the fair value hierarchy, which means that we determine the value
based on quoted market prices in active markets for identical assets.
As of December 31, 2009, $239,000 represents the amount of GABA raw materials inventory in excess of
our forecasted inventory demands for the next twelve months for the production of Jones GABA. The carrying
value reflects the lower of cost or market value.
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6. Accrued Expenses
Accrued expenses consist of the following as of December 31 (in thousands):
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 233
597
Promotion and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
741
Other accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 858
1,056
874
2009
2008
$1,571
$2,788
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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7. Line of Credit
In August 2007, we entered into a Loan Agreement providing for a revolving line of credit in principal
amount of up to $15 million. The credit facility replaced the $5 million revolving line of credit which expired
in August 2007, with no borrowings outstanding upon the expiration of the term. Although we had not
borrowed any amounts under the credit facility during 2008, in November 2008, the credit facility was
terminated prior to its original maturity date in August 2009 after discussions that were initiated by Key Bank
given the current economic climate and our financial condition and operating results. We considered different
borrowing alternatives with Key Bank but these alternatives would have required us to maintain a fully secured
position at all times on the loan, which we did not consider to be an effective lending position. As a result, we
elected not to pursue such alternatives. Through the date the line was removed, we were in compliance with
the financial covenants. Concurrently with the Loan Agreement we entered into a Security Agreement. The
Security Agreement contained customary representation and warranties, affirmative and negative covenants
and events of default.
8. Note Payable
In September 2009, we entered into a financing agreement with Key Bank for $376,000 for the purpose
of consolidating our capital leases with Key Bank, into one promissory note for a lower interest rate. Although
our fixed assets are no longer secured, we were required, as a term of the financing, to place $376,000 in an
interest bearing restricted reserve account, invested in certificate of deposit, to secure the note. The terms of
the arrangement include monthly payments of principal and interest for 36 months and an annual percentage
rate of prime which was 3.25%, at December 31, 2009. The carrying value of the note at December 31, 2009
approximates fair value. Interest expense for 2010, 2011 and 2012 is expected to total approximately $9,000,
$5,000 and $1,000, respectively.
The future minimum principal payments relating to this note as of December 31, 2009, are as follows (in
thousands):
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125
125
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9. Lease Obligations
Our scheduled payments, at December 31, 2009 are as follows (in thousands):
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$344
Operating
Leases
$176
118
$294
During the year ended December 31, 2009 and 2008, the Company incurred rental expenses of $207,000
and $208,000, respectively.
10. Shareholders’ Equity
In 2002 we adopted a stock option plan that provides for the issuance of incentive and non-qualified stock
options to officers, directors, employees and consultants (the 2002 Plan). On May 18, 2006, at the annual
shareholders meeting, the shareholders approved an amendment to the 2002 Plan to increase the total number
55
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JONES SODA CO.
of shares of common stock authorized for issuance during the life of the plan from an aggregate
3,750,000 shares to 4,500,000 shares. On May 31, 2007, at the annual shareholders meeting, the shareholders
approved the amendment to the 2002 Plan to permit awards of restricted stock grants, and the 2002 Plan was
renamed the “2002 Stock Option and Restricted Stock Plan” (Plan).
Under the terms of our Plan, our Board of Directors may grant options or restricted stock awards to
employees, officers, directors and consultants. The Plan provides for granting of options or restricted stock at
the fair market value of our stock at the grant date. Historically, options generally vested over a period of
eighteen months, with the first 25% vesting at the date of grant and the balance vesting in equal amounts
every six months thereafter. Effective during the quarter ended September 30, 2006, we changed the vesting
schedule for our prospective stock option and restricted stock grants, to vest over a period of forty-two months,
with the first 1/7th vesting six months from the grant date and the balance vesting in equal amounts every six
months thereafter. We determine the term of each option at the time it is granted, historically, options granted
generally have a five-year or ten-year term.
(a) Stock options:
A summary of our stock option activity is as follows:
Outstanding Options
Balance at January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled/expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled/expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
1,072,736
988,250
(87,500)
(514,128)
1,459,358
744,250
(3,215)
(810,897)
Balance at December 31, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable, December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested and expected to vest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,389,496
637,596
1,292,404
Average
Exercise
Price
$8.91
2.55
0.79
9.46
$4.90
0.80
0.37
4.83
$2.96
$4.38
$3.06
The following table summarizes information about stock options outstanding and exercisable under our
stock incentive plans at December 31, 2009:
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$0.25 to $0.50 . . . . . . . .
$0.51 to $1.09 . . . . . . . .
$1.10 to $2.99 . . . . . . . .
$3.00 to $4.00 . . . . . . . .
$4.01 to $9.33 . . . . . . . .
$9.34 to $22.95 . . . . . . .
Number
Outstanding
149,642
532,034
160,000
351,249
119,750
76,821
1,389,496
Weighted
Average
Remaining
Contractual
Life (Years)
8.94
9.23
8.94
6.30
1.41
2.19
7.41
56
Weighted
Average
Exercise
Price
$ 0.37
0.80
1.25
3.42
6.68
18.67
Number
Exercisable
41,077
65,375
160,000
198,375
116,892
55,877
2.96
637,596
Weighted
Average
Remaining
Contractual
Life (Years)
8.94
9.23
8.94
6.30
1.41
2.19
5.82
Weighted
Average
Exercise
Price
$ 0.37
0.81
1.25
3.53
6.66
18.67
4.38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JONES SODA CO.
(b) Restricted stock awards:
During the year ended December 31, 2009, the Board of Directors granted no restricted stock to
employees under our revised Plan. Restricted stock is valued at the grant date market price of the underlying
securities. No monetary payment is required from the employees upon receipt of restricted stock.
A summary of our restricted stock activity is as follows:
Non-vested restricted stock at January 1, 2008 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled/expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested restricted stock at December 31, 2008 . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled/expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted
Shares
129,500
68,850
(31,851)
(85,521)
80,978
—
(18,116)
(29,029)
Non-vested restricted stock at December 31, 2009 . . . . . . . . . .
33,833
Weighted-
Grant Date
Fair Value
$10.12
3.21
8.63
2.55
$ 6.48
—
6.58
6.64
$ 6.06
Weighted-
Average
Contractual
Life
3.28 yrs
2.37 yrs
8.01 yrs
Of the vested shares, a total of 4,824 shares were withheld by the Company as payment for withholding
taxes due in connection with the vesting of restricted stock awards issued under the Plan. The average price
paid per share of $2.45, reflects the average market value per share of the shares withheld for tax purposes. A
total of 8,913 shares were repurchased in 2008 and the average price paid per share was $3.07.
(c) Stock-based compensation expense:
Stock-based compensation expense is recognized using the straight-line attribution method over the
employees’ requisite service period. We recognize compensation expense for only the portion of stock options
or restricted stock that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived
from historical employee termination behavior. If the actual number of forfeitures differs from those estimated
by management, additional adjustments to stock-based compensation expense may be required in future
periods.
At December 31, 2009, the unrecognized compensation expense related to stock options and non-vested
restricted stock was $522,000 and $120,000, respectively, which is to be recognized over weighted-average
periods of 2.0 years and 1.5 years, respectively.
The following table summarizes the stock-based compensation expense (in thousands):
Type of awards:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income statement account:
Promotion and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
December 31,
2009
December 31,
2008
$591
136
$727
$180
547
$727
$ 882
171
$1,053
$ 330
723
$1,053
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We employ the following key weighted-average assumptions in determining the fair value of stock
options, using the Black-Scholes option pricing model:
Twelve Months Ended
December 31,
2009
2008
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant date fair-value . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
87.4%
2.2%
—
73.9%
2.45%
5.9 years
0.59
$
4.5 years
1.50
$
During the year ended December 31, 2009, no material modifications were made to outstanding stock
options. Additionally, there were no stock-based compensation costs capitalized as part of the cost of any asset
as of December 31, 2009.
The aggregate intrinsic value of stock options outstanding at December 31, 2009 and 2008 was $6,514
and $0 and for options exercisable was $2,465 and $0, respectively. The intrinsic value of outstanding and
exercisable stock options is calculated as the quoted market price of the stock at the balance sheet date less
the exercise price of the option. The total intrinsic value of options exercised during the year ended
December 31, 2009 and 2008 was $1,000 and $275,000. At December 31, 2009 the restricted stock had an
intrinsic value of nil.
11. Employee 401(k) Plan
We have a 401(k) plan whereby eligible employees who have completed one hour of service per month
in three consecutive months of employment may enroll. Employees can elect to contribute up to 100% of their
eligible compensation to the 401(k) plan subject to Internal Revenue Services limitations. Beginning January 1,
2009, we instituted an employee match under our safe harbor 401(k) plan and will match employee
contributions up to 4% of the employee’s compensation at the rate of 100% for the first 3% contributed and at
the rate of 50% for the next 2%. During the years ended December 31, 2009 and 2008, the total matching
contributions were $76,000 and $0, respectively.
12. Commitments and Contingencies
Commitments
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During the year ended December 31, 2009, we had commitments to various suppliers of raw materials
and commitments under our Sponsorship Agreements with the Seattle Seahawks, New Jersey Nets and
Portland Trailblazers in exchange for exclusive beverage rights for certain soft drinks at Qwest Field and the
proposed new arena in Brooklyn, New York, as well as signage, advertising and other promotional benefits to
enhance our brand awareness.
These obligations vary in terms. Purchase obligations in future periods under these commitments are
expected to occur as follows (in thousands):
Total
2010
2011
2012
2013
2014
2015 and
Thereafter
Purchase Obligations . . . . . . . . . $ 4,350
9,584
Sponsorships . . . . . . . . . . . . . . .
$3,055
1,374
$1,164
1,013
$ 131
1,897
$ — $ — $ —
2,064
1,641
1,595
Total . . . . . . . . . . . . . . . . . . . . . $13,934
$4,429
$2,177
$2,028
$1,595
$1,641
$2,064
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JONES SODA CO.
Legal proceedings
On September 4, 2007, a putative class action complaint was filed against us, our then serving chief executive
officer, and our then serving chief financial officer in the U.S. District Court for the Western District of
Washington, alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 promulgated thereunder. The case was entitled Saltzman v. Jones Soda Company, et al., Case
No. 07-cv-1366-RSL, and purported to be brought on behalf of a class of purchasers of our common stock during
the period March 9, 2007 to August 2, 2007. Six substantially similar complaints subsequently were filed in the
same court, some of which alleged claims on behalf of a class of purchasers of our common stock during the
period November 1, 2006 to August 2, 2007. Some of the subsequently filed complaints added as defendants
certain current and former directors and another former officer of the Company. The complaints generally alleged
violations of federal securities laws based on, among other things, false and misleading statements and omissions
about our financial results and business prospects. The complaints sought unspecified damages, interest, attorneys’
fees, costs, and expenses. On October 26, 2007, these seven lawsuits were consolidated as a single action entitled
In re Jones Soda Company Securities Litigation, Case No. 07-cv-1366-RSL. On March 5, 2008, the Court
appointed Robert Burrell lead plaintiff in the consolidated securities case. On May 5, 2008, the lead plaintiff filed a
First Amended Consolidated Complaint, which purports to allege claims on behalf of a class of purchasers of our
common stock during the period of January 10, 2007, to May 1, 2008, against the Company and Peter van Stolk,
our former Chief Executive Officer, former Chairman of the Board, and former director. The First Amended
Consolidated Complaint generally alleges violations of federal securities laws based on, among other things, false
and misleading statements and omissions about our agreements with retailers, allocation of resources, and business
prospects. Defendants filed a motion to dismiss the amended complaint on July 7, 2008. After hearing oral
argument on February 3, 2009, the Court granted the motion to dismiss in its entirety on February 9, 2009.
Plaintiffs filed a motion for leave to file an amended complaint on March 25, 2009. On June 22, 2009, the Court
issued an order denying plaintiffs’ motion for leave to amend and dismissed the case with prejudice. On July 7,
2009, the Court entered judgment in favor of the Company and Mr. van Stolk. On August 5, 2009, plaintiffs filed a
notice of appeal of the Court’s orders dismissing the complaint and denying plaintiffs’ motion for leave to amend,
and the resulting July 7, 2009 judgment. The parties’ briefing on the appeal was completed on March 4, 2010. The
Court has not yet scheduled a date for oral argument on the appeal.
In addition, on September 5, 2007, a shareholder derivative action was filed in the Superior Court for
King County, Washington, allegedly on behalf of and for the benefit of the Company, against certain of our
former officers and current and former directors. The case is entitled Cramer v. van Stolk, et al., Case
No. 07-2-29187-3 SEA (Cramer Action). The Company also was named as a nominal defendant. Four other
shareholders filed substantially similar derivative cases. Two of these actions were filed in Superior Court for
King County, Washington. One of these two Superior Court actions has been voluntarily dismissed and the
other has been consolidated with the Cramer Action under the caption In re Jones Soda Co. Derivative
Litigation, Lead Case No. 07-2-31254-4 SEA. On April 28, 2008, plaintiffs in the consolidated action filed an
amended complaint based on the same basic allegations of fact as in the federal securities class actions and
alleging, among other things, that certain of our current and former officers and directors breached their
fiduciary duties to the Company and were unjustly enriched in connection with the public disclosures that are
the subject of the federal securities class actions. On May 2, 2008, the Court signed a stipulation and order
staying the proceedings in the consolidated Cramer Action until all motions to dismiss in the consolidated
federal securities class action have been adjudicated.
The two remaining shareholder derivative actions were filed in the U.S. District Court for the Western
District of Washington. On April 10, 2008, the Court presiding over the federal derivative cases consolidated
them under the caption Sexton v. van Stolk, et al., Case No. 07-1782RSL (Sexton Action), and appointed
Bryan P. Sexton lead plaintiff. The Court also established a case schedule, which, among other things, set the
close of fact discovery as January 4, 2009, and set a trial date of May 4, 2009. The actions comprising the
consolidated Sexton Action are based on the same basic allegations of fact as in the securities class actions
59
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JONES SODA CO.
filed in the U.S. District Court for the Western District of Washington and the Cramer Action, filed in the
Superior Court for King County. The actions comprising the Sexton Action allege, among other things, that
certain of our current and former directors and officers breached their fiduciary duties to the Company and
were unjustly enriched in connection with the public disclosures that are the subject of the federal securities
class actions. The complaints seek unspecified damages, restitution, disgorgement of profits, equitable and
injunctive relief, attorneys’ fees, costs, and expenses. The Court has approved a stipulation by the parties to
stay the Sexton Action until the resolution of the appeal in the securities class action described above.
The Cramer Action and Sexton Action are derivative in nature and do not seek monetary damages from
the Company. However, the Company may be required, throughout the pendency of the action, to advance
payment of legal fees and costs incurred by the defendants and the litigation may result in significant
obligations for payment of defense costs and indemnification.
On March 12, 2010, a shareholder filed suit against Jones Soda, its Chief Executive Officer, and its
directors, alleging that the defendants breached their fiduciary duties to the Company, or aided and abetted
such breaches, by entering into a March 9, 2010 letter of intent to merge Jones Soda with Reed’s, Inc. The
case is entitled Gharabikou v. Jones Soda Co., et al., King County Superior Court Case No. 10-2-10226-4 SEA
(March 12, 2010). A substantially similar case was initiated on March 19, 2010, entitled Bates v. Jones Soda
Co., et al., King County Superior Court Case No. 10-2-10932-3 SEA (March 19, 2010). Both cases purport to
have been brought on behalf of a class comprising all current Jones Soda shareholders. The shareholder
plaintiffs seek to prevent a merger of Jones Soda and Reed’s, Inc. on the terms announced in the
March 9th letter of intent, and also request attorneys’ fees and costs. Although neither case seeks monetary
damages against the Company, the Company may be required throughout the pendency of the actions to
advance payment of legal fees and costs incurred by the defendants, and the litigation may result in significant
obligations for payment of defense costs and indemnification.
We are unable to predict the outcome of the actions described above. However, we do not anticipate these
actions will result in significant liability or will have a material adverse effect on our business, results of
operations, or financial condition.
On August 27, 2008, Advanced Business Strategies (“ABS”) filed a Complaint for Damages against the
Company in the Circuit Court for the State of Oregon for breach of contract and breach of implied covenant
of good faith and fair dealing, seeking damages in excess of $1.1 million. ABS alleged that we improperly
terminated their agreement to provide us with certain sales and marketing services. On October 1, 2008, we
filed a Notice of Removal from the State Court to the United States District Court, District of Oregon. Our
answer to the claims was filed on October 8, 2008; we alleged that we were entitled to terminate the
agreement due to ABS’ material breach of the agreement and that ABS had failed to mitigate its alleged
damages. We entered into a Settlement Agreement with ABS effective May 29, 2009, under which we will
make payments to ABS through July 1, 2010 totaling $225,000, plus pay a $0.05 per case royalty for cases in
excess of 2.2 million in 2010 and 3.2 million in 2011. The Settlement Agreement did not constitute any
admission of liability but was a compromise of a disputed claim. All claims between the parties have been
released and a Stipulation of Dismissal was filed on June 9, 2009. As of December 31, 2009, the remaining
accrued settlement balance was $125,000.
In addition to the matters above, we are or may be involved from time to time in various claims and legal
actions arising in the ordinary course of business, including proceedings involving product liability claims and
other employee claims, and tort and other general liability claims, for which we carry insurance, as well as
trademark, copyright, and related claims and legal actions. In the opinion of our management, the ultimate
disposition of these matters will not have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
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JONES SODA CO.
13.
Income Taxes
The provision recovery for income taxes consisted of the following for the years ended December 31 (in
thousands):
Current
2009
2008
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 65
53
50
(26)
6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
92
(20)
168
$ (10)
2
100
$ 24
2
9
35
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 72
$203
Loss before provision for income taxes was as follows for the years ended December 31 (in thousands):
2009
2008
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(10,687)
212
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(15,071)
39
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(10,475)
$(15,032)
The items accounting for the difference between income taxes computed at the federal statutory rate and
the provision for income taxes are as follows:
Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of:
2009
2008
34.00%
34%
Permanent differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
(0.27)% (0.27)%
3.00% 1.55%
(35.69)% (31.02)%
(1.73)% (5.63)%
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.69)% (1.35)%
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JONES SODA CO.
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant
components of the Company’s deferred income taxes were as follows (in thousands):
2009
2008
Deferred tax assets
Net operating loss carry forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,506
174
Capital assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
239
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
827
Inventory adjustment and reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
953
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
189
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,350
127
284
426
739
402
Total deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,888
(13,885)
10,328
(10,145)
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax asset balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Classified as current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
(2)
1
—
1
$
183
(84)
99
1
98
The Company continues to experience significant losses in its U.S. operations which are material to the
Company’s decision to maintain a full valuation allowance against its net U.S. deferred tax assets. This is due
to the fact that the relevant accounting guidance puts more weight on the negative objective evidence of
cumulative losses in recent years than the positive subjective evidence of future projections of pretax income.
As of December 31, 2008, the valuation allowance increased by $4.7 million. The amount of the excess tax
deductions from stock based compensation arrangements that is allocated to contributed capital if the future
tax benefits are subsequently recognized is $2.6 million. As of December 31, 2009, the valuation allowance
increased by $3.7 million.
The Company continually analyzes the realizability of its deferred tax assets, but reasonably expects to
continue to record a full valuation allowance on future U.S. tax benefits until the Company sustains an
appropriate level of taxable income through improved U.S. operations and tax planning strategies.
No valuation allowance was recorded for deferred tax assets recorded in the Canadian subsidiary, as this
subsidiary remains profitable.
At December 31, 2009, the Company has net operating loss carry-forwards for income tax purposes in
the United States of $34.9 million which expire at various times commencing in 2019. Net operating loss
carry-forwards may be subject to certain limitations under Section 382 of the Internal Revenue Code.
There are no uncertain tax positions to recognize as of December 31, 2009 and 2008.
The tax years that remain open to examination by the taxing authorities are 2005 - 2009, generally. The
net operating losses from prior years are subject to adjustment under examination to the extent they remain
unutilized in an open year.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JONES SODA CO.
The Company recorded a US income tax provision for the earnings of its foreign subsidiary. It is the
present intention of management to reinvest the undistributed earnings indefinitely in foreign operations.
However, given our liquidity position if we are unsuccessful in closing a transaction or obtaining debt or
equity financing, we likely would need to declare a dividend from our Canadian subsidiary to fund operations,
at which time such earnings would become subject to withholding tax in Canada. A provision has not been
made for foreign withholding taxes on the cumulative undistributed earnings from our Canadian subsidiary as
of December 31, 2009. If we were to declare a dividend for the cumulative earnings as of December 31, 2009,
the resulting withholding tax provision would not be material to our financial condition or results of
operations.
14. Segmented Information and Export Sales
We have one operating segment with operations primarily in the United States and Canada. Sales are
assigned to geographic locations based on the location of customers. Geographic information for the years
ended December 31 is as follows (in thousands):
Revenue:
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,519
4,656
838
$28,379
6,892
647
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$26,013
$35,918
2009
2008
Fixed assets:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $807
—
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,099
—
Total fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $807
$2,099
2009
2008
During the years ended December 31, 2009 and 2008, three of our customers represented approximately
29% and 26%, respectively of revenues, one of which, A. Lassonde Inc., a Canadian DSD distributor,
represented approximately 13% of revenue in 2009. In 2008, one customer represented approximately 11% of
revenue.
15. Subsequent Events
On March 8, 2010, Jonathan Ricci, our President and Chief Executive Officer delivered written notice to
the Board of Directors of the Company of his resignation as President and Chief Executive Officer and a
member of the Board of Directors of the Company, effective April 2, 2010.
On March 9, 2010, we announced that we had entered into a Letter of Intent (LOI) with Reed’s, Inc.
(Reed’s), maker of sodas sold in natural food stores nationwide regarding a potential merger transaction in
which Reed’s would acquire Jones Soda for a combination of cash and Reed’s common stock. On March 22,
2010, we announced that we had terminated the exclusivity provisions of the LOI in order to explore an
unsolicited, nonbinding transaction proposal submitted by another third party. We intend to continue to explore
strategic transactions that may be in the best interest of the Company and our shareholders, which may
include, without limitation, mergers or other business combinations, public or private offerings of debt or
equity financings, joint ventures with one or more strategic partners and other strategic alternatives. However,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JONES SODA CO.
there can be no assurance that we will enter into a definitive agreement with respect to a transaction or that
any transaction we may enter into will ultimately be consummated.
16. Selected Quarterly Financial Information (unaudited)
Summarized quarterly financial information for fiscal years 2009 and 2008 is as follows (dollars in
thousands, except per share data):
2009 quarter:
Q1
Q2
Q3
Q4
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,071
Write-down of excess GABA inventory and
impairment of fixed assets . . . . . . . . . . . . . . . . . . . .
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted loss per share . . . . . . . . . . . . . . . . . .
—
1,445
(2,649)
(2,601)
(0.10)
$ 7,482
$ 7,156
$ 4,304
—
2,056
(1,921)
(1,967)
(0.07)
(210)
1,513
(1,504)
(1,482)
(0.06)
(2,038)
(1,124)
(4,371)
(4,497)
(0.17)
Q1
Q2
Q3
Q4
2008 quarter:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,404
Write-down of excess GABA inventory and
impairment of fixed assets . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted loss per share . . . . . . . . . . . . . . . . .
—
1,922
(3,889)
(3,853)
(0.15)
$11,699
$ 8,684
$ 6,131
—
2,981
(2,670)
(2,733)
(0.10)
—
966
(5,196)
(5,260)
(0.20)
—
1,498
(3,661)
(3,389)
(0.13)
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Control and Procedures
The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended).
Management, under the supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, evaluated the effectiveness and design of the Company’s disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(b) as of December 31, 2009. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and
procedures were effective as of December 31, 2009.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f) under the Exchange Act). Internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and
the preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. Internal control over financial reporting includes those policies and
procedures that: (i) in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable
assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide
reasonable assurance that our receipts and expenditures are made in accordance with management authoriza-
tion; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisi-
tion, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting, however well designed and
operated can provide only reasonable, and not absolute, assurance that the controls will prevent or detect
misstatements. In addition, the design of any control system is based in part upon certain assumptions about
the likelihood of future events. Because of these and other inherent limitations of control systems, there is
only the reasonable assurance that our controls will succeed in achieving their goals under all potential future
conditions.
Management, under the supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of
December 31, 2009, based on the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under
the COSO framework, management concluded that our internal control over financial reporting was effective
as of December 31, 2009.
There have been no changes in the Company’s internal control over financial reporting during the quarter
ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
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Our internal control over financial reporting as of December 31, 2009 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in the following report.
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Jones Soda Co.
Seattle, WA
We have audited the internal control over financial reporting of Jones Soda Co. and subsidiaries (the
“Company”) as of December 31, 2009, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompany-
ing Report of Management on Internal Control over Financial Reporting in Item 9a. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year ended December 31, 2009 of the
Company and our report dated March 31, 2010 expressed an unqualified opinion on those consolidated
financial statements with an emphasis of matter paragraph expressing substantial doubt about the Company’s
ability to continue as a going concern.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 31, 2010
66
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors
The Directors of our Company, as of March 10, 2010, are as follows:
Director
Age
Director Since
Mills A. Brown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard S. Eiswirth Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michael M. Fleming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matthew K. Kellogg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jonathan J. Ricci . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Susan A. Schreter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
41
61
44
41
48
December 2008
August 2006
April 1997
June 2008
June 2008
June 2008
Mills A. Brown has been one of the founding principals of MainSpring Capital Group (a real estate
investment and development company) and its affiliated brokerage company, Ross Brown Partners, Inc., since
MainSpring’s inception in December 2000. Mr. Brown is also co-owner and co-operator of a new car franchise
in the Phoenix metropolitan area. Mr. Brown received a business degree from Arizona State University. We
believe Mr. Brown’s qualifications to sit on our Board of Directors include his extensive business management
and business development experience.
Richard S. Eiswirth, Jr. currently serves as the Chairman of our Board of Directors. He has served as the
Chief Financial Officer of Alimera Sciences, Inc., an ophthalmic pharmaceutical company, since October
2005. Prior to that, Mr. Eiswirth was the Chief Financial Officer and Senior Executive Vice President of
Netzee, Inc., a provider of internet banking solutions to community banks, from August 1999 to April 2002.
He is also the founder of Black River Holdings, Inc., a consulting practice. He received an accounting degree
from Wake Forest University in 1991. Mr. Eiswirth also served on the Board of Directors and was Chairman
of the Audit Committee for Color Imaging, Inc., a toner manufacturing company, from 2003 until August
2007. We believe Mr. Eiswirth’s qualifications to sit on our Board of Directors include his experience in
management and his financial and accounting expertise.
Michael M. Fleming has been an attorney with the law firm of Lane Powell PC in Seattle, Washington,
specializing in real estate, dispute resolution, securities and environmental matters, since February 2000.
Mr. Fleming has served on the Board of Directors of Big Brothers and Big Sisters of Puget Sound since
December 2002 and was elected Chairman of the Board of Directors for 2008/2009. He has also been the
President and owner of Kidcentre, Inc., a company in the business of providing child care services in Seattle,
Washington, since July 1988. 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 the University of
Washington and a law degree from the University of California, Hastings College of the Law. We believe
Mr. Fleming’s qualifications to sit on our Board of Directors include his legal expertise in matters of business
and securities law.
Matthew K. Kellogg served as a director of the Company from May 1999 to August 2006 and as
Corporate Secretary (in a non-employee capacity) from March 2006 to August 2006; he returned to the
Company’s Board in June 2008. He is currently the managing member of Canal Investments LLC, an
investment firm, serving in such capacity since March 2003. In January 2008, Mr. Kellogg co-founded Point32
Development Company, a real estate development firm, where he currently serves as a principal. Mr. Kellogg
co-owns Tutta Bella Neapolitan Pizzeria, a regional casual restaurant chain. From November 2002 to March
2003, Mr. Kellogg was the manager of Kingfisher Capital LLC, an investment firm. Mr. Kellogg holds a
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Bachelor of Science degree from Skidmore College. We believe Mr. Kellogg’s qualifications to sit on our
Board of Directors include his extensive business management and business development experience.
Jonathan J. Ricci joined Jones Soda as Chief Operating Officer in January 2008 and has served as one of
the Company’s directors since June 2008 and as our President and Chief Executive Officer since May 2009.
On March 8, 2010, Mr. Ricci delivered written notice to the Board of Directors of the Company of his
resignation as President and Chief Executive Officer and a member of the Board of Directors of the Company,
effective April 2, 2010. From May 2003 to January 2008, Mr. Ricci served as General Manager of Columbia
Distributing Company, a beverage distribution company, and previously served as its Vice President of Process
Improvement and Human Resources from November 2002 to May 2003 and as its Regional Vice President of
Sales and Marketing from November 2000 until October 2002. Prior to that, Mr. Ricci spent nine years at
McNeil Consumer Products in various sales and marketing roles. Mr. Ricci received a Bachelor of Science
degree in Business Education from Oregon State University. We believe Mr. Ricci’s qualifications to sit on our
Board of Directors include his business management and beverage industry experience.
Susan A. Schreter is the founder, managing editor and Chief Executive Officer of TakeCommand
Information Media, Inc., an online entrepreneurial education and membership organization for small business
owners. In addition, she is a contributor to online and print publications in the areas of small business finance
and a weekly newspaper columnist. She served as the Chief Executive Officer and Chairman of the Board of
First Transaction Management, Inc., a general business and strategic planning consulting firm, from 1999 to
2008. Ms. Schreter received a Bachelor of Arts degree and is an honors graduate of Smith College. We believe
Ms. Schreter’s qualifications to sit on our Board of Directors include her experience and knowledge in
business finance and strategic planning.
Executive Officers
Our executive officers as of March 10, 2010 are as follows:
Name
Age
Position
Officer Since
Jonathan J. Ricci . . . . . . . . . . . . . . . . .
Michael R. O’Brien . . . . . . . . . . . . . . .
41 Chief Executive Officer
43 Chief Financial Officer and Secretary
2008
2008
Biographical information for Jonathan J. Ricci is listed above under the heading “Directors”. On March 8,
2010, Mr. Ricci delivered written notice to the Board of Directors of the Company of his resignation as
President and Chief Executive Officer and a member of the Board of Directors of the Company, effective
April 2, 2010.
Mr. O’Brien joined Jones Soda in September 2008 as Chief Financial Officer and Corporate Secretary.
Prior to joining Jones Soda, he served as Chief Financial Officer of Pyramid Breweries Inc., a craft beer
brewer, from September 2006 until August 2008. Prior to that, Mr. O’Brien served as Chief Financial Officer
of Medisystems Corporation, a designer and manufacturer of disposable medical devices, from 2002 until
September 2006. From 1999 to 2002, Mr. O’Brien held positions of Corporate Controller and Chief Financial
Officer of Flow International Corporation, which develops and manufacturers ultra high-pressure waterjet
technology and provides robotics and assembly equipment. Mr. O’Brien earned a Bachelor of Arts degree in
accounting from Western Washington University and a Masters of Business Administration degree from Seattle
University. Mr. O’Brien is also a certified public accountant.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive
officers, and persons who own more than 10% of our common stock (collectively, “Reporting Persons”) to file
with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership
of our common stock. Reporting Persons are also required by SEC regulations to furnish us with copies of all
such ownership reports they file. SEC regulations also require the Company to identify in this Proxy Statement
any Reporting Person who failed to file any such report on a timely basis.
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Based solely on our review of the copies of such reports received or written communications from certain
Reporting Persons, we believe that all Reporting Persons complied with all applicable Section 16(a) filing
requirements for fiscal year 2009.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its Chief Executive Officer, Chief Financial
Officer and other senior financial officers. Information regarding our Code of Ethics and where to find it is
included in Item 1 of Part I, and that information is incorporated by reference herein.
Audit Committee
The Audit Committee represents the Board of Directors in discharging its responsibilities relating to our
accounting, reporting, financial and internal control practices. The committee has general responsibility for
reviewing with management the financial and internal controls and the accounting, auditing and reporting
activities of our company and our subsidiaries. The committee annually reviews the qualifications and
objectivity of our independent auditors; is responsible for selecting, retaining or replacing our independent
auditors; reviews the scope, fees and result of their audit; reviews and approves any non-audit services and
related fees; is informed of their significant audit findings and management’s responses thereto; and annually
reviews the status of significant current and potential legal matters. The Audit Committee reviews the quarterly
and annual financial statements and recommends their acceptance to the Board of Directors. The Audit
Committee has a written charter, which is posted on the Company’s website at www.jonessoda.com under
“About Jones — Investor Relations — Corporate Governance.”
During 2009, the Audit Committee consisted of Messrs. Eiswirth and Kellogg and Ms. Schreter. The
Board of Directors has determined that Mr. Eiswirth qualifies as an “audit committee financial expert” within
the meaning of SEC rules. All of the directors on the Audit Committee qualify as “independent directors”
within the meaning of Securities and Exchange Commission (“SEC”) rules and the listing standards of The
Nasdaq Stock Market.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table shows all compensation awarded, earned by or paid to our Named Executive Officers
for the fiscal years ended December 31, 2009 and 2008, to the extent applicable.
Name and Principal
Position
Year
Salary
($)
Bonus
($)(1)
Stock
Awards
($)(2)
Option
Awards
($)(2)
Non-Equity
Incentive
Plan
Compensation
($)(1)
All Other
Compensation
($)
Total
($)
Jonathan J. Ricci(3) . . 2009 $245,000 $24,500 $ — $ 83,396
141,750
— 26,160
234,792
President and . . . . . 2008
Chief Executive
$19,600
—
$ 33,394
39,281
$405,890
441,983
Officer
Michael R. O’Brien. . . 2009
Chief Financial . . . . . 2008
Officer
Stephen C. Jones(4). . . 2009
. . . . . . 2008
Former Chief
Executive Officer
Thomas P. O’Neill(5). . 2009
Former Executive . . . 2008
Vice President of
Sales
200,000
66,667
10,000
—
— 47,628
9,200
740
8,000
—
— 265,628
76,607
—
101,666
142,917
—
— 6,540
— 99,351
132,150
81,614
165,000
11,550(6) — 23,656
52,500
— 12,000
—
—
—
—
— 201,017
384,207
102,600
— 116,820
242,048
12,548
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(1) Amounts under the “Bonus” column for Messrs. Ricci and O’Brien represent the cash bonus earned under
the discretionary component of the 2009 bonus plan and amounts under the “Non-Equity Incentive Plan
Compensation” column for Messrs. Ricci and O’Brien represent the cash bonus earned under the objective
component of the 2009 bonus plan.
(2) Represents the aggregate grant date fair value for awards granted in 2009 and 2008, as applicable, in
accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718
(“ASC Topic 718”). See Note 10 of the consolidated financial statements in this Report regarding the
assumptions underlying the valuation of equity awards. For Mr. Jones, amount in 2009 includes the incre-
mental fair value as a result of the modification of a stock option in connection with his termination, as
discussed below under “Narrative Disclosure to Summary Compensation Table.”
(3) Mr. Ricci served as Chief Operating Officer until May 1, 2009 when he was promoted to President and
Chief Executive Officer. On March 8, 2010, Mr. Ricci delivered written notice to the Board of Directors
of the Company of his resignation as President and Chief Executive Officer and a member of the Board of
Directors of the Company, effective April 2, 2010.
(4) Mr. Jones resigned from the Company effective May 1, 2009 and from the Board of Directors effective
May 27, 2009.
(5) Mr. O’Neill began his employment with the Company in March 2008 and terminated effective April 10,
2009.
(6) Mr. O’Neill received a discretionary cash bonus of $3,300 based on the achievement of key performance
indicators by the employees reporting to him and a retention bonus of $8,250.
Narrative Disclosure to Summary Compensation Table
The following describes the material factors necessary to understand the compensation disclosed in the
Summary Compensation Table.
Jonathan J. Ricci. Mr. Ricci serves as our President and Chief Executive Officer pursuant to an
employment agreement that was effective on January 20, 2008, as amended on December 29, 2008 and May 4,
2009. Pursuant to the employment agreement, Mr. Ricci receives an annual base salary of $245,000. In
addition, the employment agreement provides that Mr. Ricci is eligible to receive (a) an annual performance
bonus of up to 100% of his base salary based on the achievement of objectives to be agreed upon by the
Company and Mr. Ricci and subject to approval by the Compensation and Governance Committee, and (b) an
option to purchase, or a combination of stock options and restricted stock grants equivalent to, 80,000 shares
of the Company’s common stock annually (subject to approval by the Compensation and Governance
Committee). The employment agreement also provides for corporate housing in Seattle, and four weeks of
annual vacation. The employment agreement also contains certain restrictive covenants, including the
requirement that Mr. Ricci execute a confidentiality agreement.
Under the employment agreement, through January 20, 2009, Mr. Ricci was entitled to receive a lump
sum payment equal to six months of his then current salary if he was terminated without Cause more than
90 days after the beginning of his employment with the Company or if he was terminated without Cause at
any time after a material change in his reporting structure.
Alternatively, if Mr. Ricci was terminated without Cause after January 20, 2009 or if he was terminated
without Cause in connection with a Corporate Transaction, he would be entitled to receive a lump sum
payment equal to the sum of 12 months of his then current base salary plus his target bonus, COBRA
coverage for 12 months for Mr. Ricci and his family, and immediate vesting of the unvested portion of his
stock options and restricted stock grants.
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For purposes of Mr. Ricci’s employment agreement, the following terms are defined as follows:
(cid:129) “Cause” includes (i) conviction of any felony or misdemeanor; (ii) breach of the Company’s Code of
Ethics or Insider Trading Policy or Regulation FD policies, as now in effect or as modified in the
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future; (iii) theft or embezzlement from the Company; or (iv) attempt to obstruct or failure to cooperate
with any investigation authorized by the Company or any governmental or self-regulatory entity.
(cid:129) “Corporate Transaction” is any of the following events: (a) consummation of any merger or consolida-
tion of the Company in which the Company is not the continuing or surviving corporation, or pursuant
to which shares of the Company’s common stock are converted into cash, securities or other property, if
following such merger or consolidation the holders of the Company’s outstanding voting securities
immediately prior to such merger or consolidation own less than 50% of the outstanding voting
securities of the surviving corporation; (b) consummation of any sale, lease, exchange or other transfer
in one transaction, or a series of related transactions, of all or substantially all of the Company’s assets
other than a transfer of the Company’s assets to a majority-owned subsidiary corporation of the
Company; or (c) approval by the holders of the Company’s common stock of any plan or proposal for
the liquidation or dissolution of the Company.
On March 8, 2010, Mr. Ricci delivered written notice to the Board of Directors of the Company of his
resignation as President and Chief Executive Officer and a member of the Board of Directors of the Company,
effective April 2, 2010. No severance payments or benefits will be due to him as a result of his resignation.
Michael R. O’Brien. Mr. O’Brien serves as our Chief Financial Officer pursuant to an employment
agreement that was effective on September 2, 2008, as amended on December 29, 2008. Pursuant to the
employment agreement, Mr. O’Brien receives an annual base salary of $200,000. In addition, the employment
agreement provides that Mr. O’Brien is eligible to receive (a) an annual performance bonus of up to 35% of
his base salary based on the achievement of objectives to be agreed upon by the Company and Mr. O’Brien,
with higher bonus amounts possible if objectives are exceeded (all subject to approval by the Compensation
and Governance Committee) and (b) an option to purchase 40,000 shares of common stock annually and a
one-time restricted stock grant of 2,000 shares (all subject to the approval of the Compensation and
Governance Committee). The employment agreement also contains certain restrictive covenants, including the
requirement that Mr. O’Brien execute a confidentiality agreement.
Under the employment agreement, through September 2, 2009, Mr. O’Brien was entitled to receive six
months of his then current salary, payable in equal installments during the six months immediately following
his termination, if he was terminated without Cause more than 90 days after the beginning of his employment
with the Company or if he was terminated without Cause at any time after a material change in his reporting
structure.
Alternatively, if Mr. O’Brien is terminated without Cause after September 2, 2009 or if he is terminated
without Cause in connection with a Corporate Transaction, he will be entitled to receive 12 months of his then
current base salary, payable in equal installments during the 12 month period immediately following his
termination, plus a lump sum payment equal to the last target bonus paid to Mr. O’Brien, COBRA coverage
for 12 months for Mr. O’Brien and his family, and immediate vesting of the unvested portion of his stock
options and restricted stock grants.
For purposes of Mr. O’Brien’s employment agreement, the following terms are defined as follows:
(cid:129) “Cause” includes (i) conviction of any felony or misdemeanor; (ii) breach of the Company’s Code of
Ethics or Insider Trading Policy or Regulation FD policies, as now in effect or as modified in the
future; (iii) theft or embezzlement from the Company; or (iv) attempt to obstruct or failure to cooperate
with any investigation authorized by the Company or any governmental or self-regulatory entity.
(cid:129) “Corporate Transaction” is any of the following events: (a) consummation of any merger or consolida-
tion of the Company in which the Company is not the continuing or surviving corporation, or pursuant
to which shares of the Company’s common stock are converted into cash, securities or other property, if
following such merger or consolidation the holders of the Company’s outstanding voting securities
immediately prior to such merger or consolidation own less than 50% of the outstanding voting
securities of the surviving corporation; (b) consummation of any sale, lease, exchange or other transfer
in one transaction, or a series of related transactions, of all or substantially all of the Company’s assets
other than a transfer of the Company’s assets to a majority-owned subsidiary corporation of the
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Company; or (c) approval by the holders of the Company’s common stock of any plan or proposal for
the liquidation or dissolution of the Company.
Stephen C. Jones. Mr. Jones served as our Chief Executive Officer until May 1, 2009, pursuant to an
employment agreement that was effective beginning on June 3, 2008, as amended on December 29, 2008. He
resigned from his position as our Chief Executive Officer, effective May 1, 2009. Under the employment
agreement, Mr. Jones received an annual base salary of $245,000 beginning in June 2008. In addition, the
employment agreement provided that Mr. Jones was eligible to receive (a) an annual performance bonus for
the 12-month period ended April 30, 2009 in an amount up to $160,000 payable in the sole discretion of the
Board of Directors (on the recommendation of the Compensation and Governance Committee) based on the
achievement of performance objectives tied to the Company’s 2008 and 2009 budgets and operating plans and
such other factors as may have been approved by the Compensation and Governance Committee and Board of
Directors, and (b) an option to purchase 160,000 shares of the Company’s common stock, also subject to
approval of the Compensation and Governance Committee. The employment agreement also provided for
corporate housing in Seattle and four weeks of annual vacation. The employment agreement also contained
certain restrictive covenants, including the requirement that Mr. Jones execute a confidentiality agreement and
a noncompetition agreement.
Under the employment agreement, Mr. Jones was entitled to receive a lump sum payment equal to his
base salary and immediate vesting of the unvested portion of his stock options granted pursuant to his
employment if any of the following events occurred prior to May 1, 2009: (a) the Company terminated
Mr. Jones’s employment without Cause, (b) Mr. Jones terminated his own employment for Good Reason or
(c) the Company consummated a Corporate Transaction while Mr. Jones was employed by the Company.
For purposes of Mr. Jones’s employment agreement, the following terms were defined as follows:
(cid:129) “Cause” included (i) conviction of any felony or misdemeanor; (ii) breach of the Company’s Code of
Ethics or Insider Trading Policy or Regulation FD policies, provided, however, that, if the breach is
curable, it shall not constitute “Cause” if such breach is cured within 30 days after the receipt by
Mr. Jones of written notice from the Company of the breach; (iii) theft or embezzlement from the
Company; or (iv) attempt to obstruct or failure to cooperate with any investigation authorized by the
Company or any governmental or self-regulatory entity; provided, however, that, if such obstruction or
failure to cooperate is curable, it shall not constitute “Cause” if such obstruction or failure to cooperate
is cured within 30 days after the receipt by Mr. Jones of written notice from the Company of such
obstruction or failure to cooperate.
(cid:129) “Good Reason” is a material reduction in Mr. Jones’ then-current base salary unless such reduction is
part of a reduction in salary that affects all executive officers of the Company at a substantially similar
percentage of magnitude. Notwithstanding the foregoing, a termination will not be for “Good Reason”
unless (i) Mr. Jones notifies the Company in writing of the reduction which he believes constitutes
“Good Reason” within 90 days of its initial occurrence (and such reduction is, in fact, material); (ii) the
Company fails to remedy such reduction within 30 days after the date on which it receives such notice
(the “Remedial Period”); and (iii) Mr. Jones actually terminates employment within 30 days after the
expiration of the Remedial Period and before the Company has remedied such reduction.
(cid:129) “Corporate Transaction” is any of the following events: (a) consummation of any merger or consolida-
tion of the Company in which the Company is not the continuing or surviving corporation, or pursuant
to which shares of the Company’s common stock are converted into cash, securities or other property, if
following such merger or consolidation the holders of the Company’s outstanding voting securities
immediately prior to such merger or consolidation own less than 50% of the outstanding voting
securities of the surviving corporation; (b) consummation of any sale, lease, exchange or other transfer
in one transaction, or a series of related transactions, of all or substantially all of the Company’s assets
other than a transfer of the Company’s assets to a majority-owned subsidiary corporation of the
Company; or (c) approval by the holders of the Company’s common stock of any plan or proposal for
the liquidation or dissolution of the Company.
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On May 1, 2009, Mr. Jones terminated his employment with the Company. Pursuant to the Separation
Agreement and General Release between Mr. Jones and the Company, the stock option for 160,000 shares of
common stock granted to Mr. Jones on December 9, 2008 was modified so that it became fully vested on
May 27, 2009 and, unless exercised, will expire on May 27, 2012. No severance payments or other benefits
were due to him as a result of his resignation
Thomas P. O’Neill. Mr. O’Neill served as our Executive Vice President of Sales pursuant to an
employment agreement that was effective on March 31, 2008. Mr. O’Neill resigned effective April 10, 2009.
Pursuant to the employment agreement, Mr. O’Neill received an annual base salary of $220,000. In addition,
the employment agreement provided that Mr. O’Neill was eligible to receive (a) an annual performance bonus
of up to 50% of his base salary based on the achievement of objectives set by the Company and higher bonus
amounts if objectives were exceeded (all subject to approval by the Compensation and Governance Commit-
tee); (b) an option to purchase 40,000 shares of common stock or an equivalent combination of options and
restricted stock annually (all subject to the approval of the Compensation and Governance Committee); and
(c) a monthly car allowance of $750 plus gas expenses for Company business. The employment agreement
also contained certain restrictive covenants, including the requirement that Mr. O’Neill execute a confidential-
ity agreement.
Under the employment agreement, through March 31, 2009, Mr. O’Neill was entitled to receive six
months of his then current salary, payable in a lump sum payment if he was terminated without Cause more
than 90 days after the beginning of his employment with the Company or if he was terminated without Cause
at any time after a material change in his reporting structure.
Alternatively, if Mr. O’Neill was terminated without Cause after March 31, 2009 or if he was terminated
without Cause in connection with a Corporate Transaction, he was entitled to receive 12 months of his then
current base salary plus his target bonus, payable in a lump sum payment, COBRA coverage for 12 months
for Mr. O’Neill and his family and immediate vesting of the unvested portion of his stock options and
restricted stock grants.
For purposes of Mr. O’Neill’s employment agreement, the following terms were defined as follows:
(cid:129) “Cause” includes (i) conviction of any felony or misdemeanor; (ii) breach of the Company’s Code of
Ethics or Insider Trading Policy or Regulation FD policies, as now in effect or as modified in the
future; (iii) theft or embezzlement from the Company; or (iv) attempt to obstruct or failure to cooperate
with any investigation authorized by the Company or any governmental or self-regulatory entity.
(cid:129) “Corporate Transaction” is any of the following events: (a) consummation of any merger or consolida-
tion of the Company in which the Company is not the continuing or surviving corporation, or pursuant
to which shares of the Company’s common stock are converted into cash, securities or other property, if
following such merger or consolidation the holders of the Company’s outstanding voting securities
immediately prior to such merger or consolidation own less than 50% of the outstanding voting
securities of the surviving corporation; (b) consummation of any sale, lease, exchange or other transfer
in one transaction, or a series of related transactions, of all or substantially all of the Company’s assets
other than a transfer of the Company’s assets to a majority-owned subsidiary corporation of the
Company; or (c) approval by the holders of the Company’s common stock of any plan or proposal for
the liquidation or dissolution of the Company.
In January 2009, as part of a Company-wide retention bonus following a reduction in workforce,
Mr. O’Neill was awarded a retention bonus in the amount of $8,250. On April 3, 2009, Mr. O’Neill resigned
from the Company effective April 10, 2009. No severance payments or other benefits were due to Mr. O’Neill
as a result of his termination.
Equity Awards. The equity awards were granted under the terms of the Company’s 2002 Stock Option
and Restricted Stock Plan. The exercise price of all options granted in 2009 was equal to 100% of the closing
price of our common stock on the grant date.
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Except for one stock option granted to Mr. Jones, all stock options granted to executive officers in 2009
vest in equal installments every six months over forty-two months and expire ten years after the grant date.
One of the two stock options for 20,000 shares granted to Mr. Jones on March 16, 2009 provided for full
vesting one year from the date of grant.
Bonus Payments in 2009 for 2008 Performance. The Company did not have an established bonus plan for
2008. Rather, after the end of the fiscal year, the Committee reviewed our fiscal 2008 results and evaluated the
performance of each of our executives in 2008. Based on these evaluations, and particularly in light of the
Company’s financial performance in 2008, the Committee determined that no cash bonuses would be awarded to
the Named Executive Officers, with the exception of Mr. O’Neill. In recognition of his leadership and the
performance of his team, Mr. O’Neill received a discretionary cash bonus of $3,300. Mr. O’Neill’s bonus was
earned and paid in 2009. Instead of cash bonuses, on March 16, 2009 the Committee awarded stock option
grants to purchase 20,000 shares of the Company’s common stock to each of Messrs. Jones, Ricci and O’Brien.
Bonus Payments in 2010 for 2009 Performance. On April 6, 2009, the Company’s Board of Directors,
on the recommendation of the Committee, adopted a 2009 bonus plan for Messrs. Ricci and O’Brien.
The 2009 bonus plan consists of two components: (1) an objective component based on achievement of
key performance indicators relating to the Company’s operating plan (“KPIs”) that accounts for 75% of the
possible bonus at target, and (2) a subjective component, payable at the sole discretion of the Committee based
upon such factors that the Committee deems appropriate with respect to each executive officer, that accounts
for 25% of the possible bonus at target.
The first component of the 2009 bonus plan links payout to achievement of KPIs related to the
Company’s cash balance, net income (loss), operating expenses, average inventory on hand, brand development
initiatives and annual gross margin, with each KPI assigned a different weight. Depending on the level of
achievement for each KPI, Messrs. Ricci and O’Brien were eligible to receive between 0% and 100% of the
target amount allocated to achievement of each KPI.
Each executive’s target bonus under the 2009 bonus plan was set at 40% of the bonus potential
contemplated in that executive’s employment agreement, so that Mr. Ricci’s target bonus was 40% of his
annual base salary and Mr. O’Brien’s target bonus was 14% of his annual base salary. Based on the review by
the Committee of each of Messrs. Ricci and O’Brien’s designated KPIs and other achievements, they were
granted a bonus equal to 45% of their target bonus for 2009, 20% of which constituted the objective
component and 25% of which constituted the subjective component.
Because the 2009 target bonuses were set at a lower amount than contemplated in the executives’
employment agreements, on April 6, 2009, Messrs. Ricci and O’Brien received a stock option grant for 40,000
and 20,000 shares, respectively, of the Company’s common stock.
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Outstanding Equity Awards at Fiscal Year-End 2009 Table
The following table presents information about outstanding equity awards held by each of the Named
Executive Officers as of December 31, 2009. Mr. O’Neill terminated his employment with the Company on
April 10, 2009 and did not hold any equity awards at December 31, 2009.
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable Unexercisable(1)
Option
Exercise
Price
($)
Option
Expiration
Date
Number of
Shares or
Units of
Stock
That Have
Not
Vested
(#)(1)
Market
Value of
Shares or
Units of
Stock
That Have
Not
Vested
($)(2)
Name
Grant Date
Jonathan J. Ricci . . . . . . . 04/06/2009
03/16/2009
03/27/2008
03/27/2008
Michael R. O’Brien(3) . . . 04/06/2009
03/16/2009
12/09/2008
12/09/2008
5,715
14,285
32,152
—
2,858
8,574
11,428
—
Stephen C. Jones(4) . . . . . 12/09/2008(5) 160,000
34,285
85,715
42,848
—
17,142
51,426
28,572
—
—
$0.84
0.80
3.27
—
0.84
0.80
0.37
—
1.25
04/06/2019
03/16/2019
03/27/2018
04/06/2019
03/16/2019
12/09/2018
05/27/2012
—
—
—
— 4,571
—
—
—
— 1,429
—
$ —
—
—
1,966
—
—
—
614
—
(1) Unless otherwise noted below, these options and restricted stock awards vest over a period of 42 months,
with 14.29% vesting on each six-month anniversary of the grant date.
(2) The closing price of our common stock on December 31, 2009 was $0.43 per share.
(3) The option and restricted stock awards granted on December 9, 2008 vest 14.29% on March 2, 2009, with
an additional 14.29% to vest on each six month period thereafter over the following 36 months.
(4) Mr. Jones resigned from the Company effective May 1, 2009 and from the Board of Directors effective
May 27, 2009.
(5) This option became fully vested on May 27, 2009, pursuant to the Separation Agreement and General
Release with Mr. Jones effective May 15, 2009.
Additional Narrative Disclosure
As described above under “Narrative Disclosure to Summary Compensation Table,” we entered into
employment agreements with each of our Named Executive Officers and a Separation Agreement and General
Release with Mr. Jones, which provide for certain benefits in the event of termination or change of control.
In addition, our 2002 Stock Option and Restricted Stock Plan (the “2002 Plan”) provides for accelerated
vesting of all unvested awards upon a corporate transaction, irrespective of the scheduled vesting date for these
awards, unless the awards are assumed or substituted for by the successor company. For purposes of the 2002
Plan, a “corporate transaction” means any of the following events:
(cid:129) Consummation of any merger or consolidation of the Company in which the Company is not the
continuing or surviving corporation, or pursuant to which shares of the Company’s common stock are
converted into cash, securities or other property and the Company’s shareholders (immediately prior to
such merger or consolidation) own less than 50% of the outstanding voting securities of the surviving
corporation after the merger or consolidation;
(cid:129) Consummation of any sale, lease, exchange or other transfer in one transaction, or a series of related
transactions, of all or substantially all of the Company’s assets; or
(cid:129) Shareholder approval of any plan or proposal for the liquidation or dissolution of the Company.
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Director Compensation
We use a combination of cash and stock-based incentive compensation to attract and retain qualified
candidates to serve on the Board of Directors. In setting director compensation, the Board of Directors
considers the significant amount of time that directors expend in fulfilling their duties as well as the skill level
required of members of the Board of Directors.
In addition to cash and stock-based compensation, non-employee directors are reimbursed for their
out-of-pocket expenses, in accordance with our reimbursement policies, incurred in attending meetings of the
Board of Directors and committee meetings and conferences with our senior management. We also maintain
liability insurance on all of our directors and executive officers.
Mr. Ricci is currently the only member of the Board who is also a Jones Soda employee. On March 8,
2010, Mr. Ricci delivered written notice to the Board of Directors of the Company of his resignation as
President and Chief Executive Officer and a member of the Board of Directors of the Company, effective
April 2, 2010. During 2009, prior to his resignation from the Board of Directors on May 27, 2009, Mr. Jones
served as an employee director. Messrs. Ricci and Jones did not receive any additional compensation for
serving on the Board of Directors.
Standard Cash Compensation
Under the compensation structure effective July 1, 2006, each non-employee director is entitled to receive
the following compensation. Directors who are our employees receive no compensation for their service as
directors.
Position
Non-employee (“NE”) Director Annual Retainer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NE Director Board Meeting Attendance Fee (telephonic) . . . . . . . . . . . . . . . . . . . . . . .
NE Director Committee Meeting Attendance Fee other than Audit Committee — live
or telephonic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NE Director Audit Committee Meeting Attendance Fee — live or telephonic . . . . . . . .
Additional Chair of Audit Committee Annual Retainer . . . . . . . . . . . . . . . . . . . . . . . .
Additional Chair of Compensation and Governance Committee Annual Retainer . . . . .
Additional Chair of Nominating Committee Annual Retainer . . . . . . . . . . . . . . . . . . . .
Amount
$
12,000
1,000 (500)
500
1,000
3,500
2,000
2,000
Standard Equity Compensation
Effective March 3, 2009, each non-employee director receives an annual stock option grant for
20,000 shares of common stock, with an exercise price equal to the fair market value of the common stock on
the date of grant and a term of ten years, or an equivalent grant of shares of restricted stock. Stock options
and restricted stock awards granted prior to March 3, 2009 vest over a period of 42 months, with 14.29%
vesting on each six-month anniversary of the grant date. Effective March 3, 2009, the Board of Directors
adopted a new vesting schedule for option awards and restricted stock grants made to non-employee directors,
with the grants to vest in full one year from the date of grant.
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Non-Standard Compensation
In November 2009, the Board of Directors, upon the recommendation of the Compensation and
Governance Committee, approved additional compensation to Mr. Eiswirth in the amount of $1,000 in
recognition of the additional service, in his capacity as a director, provided to the Company in connection with
the Company’s evaluation of strategic alternatives.
In connection with Mr. van Stolk’s resignation from the Board of Directors in April 2009, the Company
entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Mr. van Stolk that settled
certain obligations under the Separation Agreement and Release that was entered into with Mr. van Stolk on
February 18, 2008 (the “Separation Agreement”) in connection with Mr. van Stolk’s resignation as the
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Company’s Chief Executive Officer. Under the Settlement Agreement, (1) Mr. van Stolk agreed to reduce his
severance payments under the Separation Agreement by approximately $100,000 (to an aggregate of
approximately $350,000) and the Company agreed to pay the remaining unpaid severance amount of $150,000
to Mr. van Stolk in a single lump sum payment, (2) the Company agreed to pay $9,500 for Mr. van Stolk’s
legal fees and (3) the Company agreed to terminate, effective immediately, Mr. van Stolk’s noncompetition
and nondisparagement obligations under the Separation Agreement and the provisions in that agreement
limiting Mr. van Stolk’s ability to discuss the Company’s business with certain third parties. The $453,881
severance amount originally due to Mr. van Stolk under the Separation Agreement was disclosed under the
“All Other Compensation” column of the “Summary Compensation Table” in the Company’s proxy statement
for the 2008 Annual Meeting of Shareholders.
2009 Director Compensation Table
The following table presents information about compensation earned by or paid to non-employee directors
during 2009.
Name
Fees Earned or
Paid in Cash
($)
Option Awards
($)(1)
Total
($)
Mills A. Brown. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard S. Eiswirth, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . .
Michael M. Fleming . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matthew K. Kellogg . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Susan A. Schreter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peter M. van Stolk(2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,000
33,000
25,250
29,000
29,000
8,500
$11,066
11,066
11,066
11,066
11,066
11,066
$35,066
44,066
36,316
40,066
40,066
19,566
(1) Represents the aggregate grant date fair value for awards granted in 2009 in accordance with ASC Topic
718. See Note 10 of the consolidated financial statements in this Report regarding the assumptions under-
lying the valuation of equity awards. As of December 31, 2009, each non-employee director had the fol-
lowing number of options outstanding: Mr. Brown, 20,000, Mr. Eiswirth, 65,000, Mr. Fleming, 50,000,
Mr. Kellogg, 35,000, Ms. Schreter, 35,000, Mr. van Stolk, 0. As of December 31, 2009, each non-
employee director had the following number of restricted stock awards outstanding: Mr. Brown, 0, Mr. Eis-
wirth, 2,857, Mr. Fleming, 2,857, Mr. Kellogg, 1,143, Ms. Schreter, 1,143, Mr. van Stolk, 0.
(2) Mr. van Stolk resigned from the Board of Directors effective April 3, 2009.
Stock Ownership Guidelines
In August 2007, the Board of Directors implemented stock ownership guidelines for its non-employee
directors to further align their interests with those of shareholders. For non-employee directors, stock
ownership guidelines are set at a value equal to three times their annual cash retainer and other Board fees
paid to such director over the prior twelve months. Under these guidelines, non-employee directors are
encouraged to increase their ownership of Company common stock to meet these ownership requirements
within three years of becoming a director, or within three years of the adoption of the guidelines, whichever is
later. The required ownership level for each director is re-calculated as of June 30 of every third year. Shares
that count toward these ownership guidelines include:
(cid:129) shares of common stock purchased on the open market;
(cid:129) common stock obtained and held through stock option exercises; and
(cid:129) vested restricted stock and in-the-money vested stock options.
For as long as a director continues to serve on the Board, he or she may sell no more than 33% of his or
her vested stock holdings in any one quarter. However, directors may sell enough shares to cover their income
tax liability on vested grants. The Board may approve exceptions to these guidelines on a case-by-case basis.
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The earliest compliance deadline under the guidelines is in August 2010. Our directors have been subject
to an extended Company-imposed trading blackout period for all of fiscal 2009 and through the date of this
Report, which has limited the directors’ ability to acquire Company common stock on the open market. As of
the date of this Report, only one director meets the ownership level under the stock ownership guidelines.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS.
The following table sets forth as of March 10, 2010 certain information regarding the beneficial
ownership of our outstanding common stock by the following persons or groups:
(cid:129) each person who, to our knowledge, beneficially owns more than 5% of our common stock;
(cid:129) the Named Executive Officers identified in the Summary Compensation Table above;
(cid:129) each of our current directors and director nominees; and
(cid:129) all of our current directors and executive officers as a group.
As of March 10, 2010, there were 26,424,796 shares of common stock issued and outstanding. Unless
otherwise indicated, each person’s address is c/o Jones Soda Co., 234 Ninth Avenue North, Seattle, WA
98109.
Beneficial ownership is determined in accordance with SEC rules and includes shares over which the
indicated beneficial owner exercises voting and/or investment power. Shares of common stock subject to
options or warrants currently exercisable or exercisable within 60 days of March 10, 2010 are deemed
outstanding for computing the percentage ownership of the person holding the options or warrants, but are not
deemed outstanding for computing the percentage ownership of any other person. Except as otherwise
indicated and subject to community property laws where applicable, we believe the beneficial owners of the
common stock listed below, based on information furnished by them, have sole voting and investment power
with respect to the shares listed opposite their names.
Beneficial Ownership of Common Stock(1)
Name and Address of Beneficial Owner
No. of Shares(2)
Named Executive Officers and Directors
Jonathan J. Ricci(3) . . . . . . . . . . . . . . . . . . . . . .
Michael R. O’Brien . . . . . . . . . . . . . . . . . . . . . .
Mills A. Brown . . . . . . . . . . . . . . . . . . . . . . . . .
Richard S. Eiswirth, Jr. . . . . . . . . . . . . . . . . . . .
Michael M. Fleming . . . . . . . . . . . . . . . . . . . . .
Matthew K. Kellogg . . . . . . . . . . . . . . . . . . . . .
Susan A. Schreter . . . . . . . . . . . . . . . . . . . . . . .
Stephen C. Jones(4). . . . . . . . . . . . . . . . . . . . . .
All current directors and executive officers as a
11,000
4,500
376,874
11,000
11,000
102,000
2,000
—
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Options/Warrants
Currently
Exercisable
or Within 60 Days
Total Beneficial
Ownership(2)
Percent
of Total
82,873
40,006
20,000
57,148
42,148
26,430
26,430
160,000
93,873
44,506
396,874
68,148
53,148
128,430
28,430
160,000
*
*
1.5%
*
*
*
*
*
3.0%
group (7 persons) . . . . . . . . . . . . . . . . . . . . .
518,374
295,035
813,409
* Less than one percent
(1) The table is based upon information supplied by such principal shareholders, executive officers and
directors.
78
(2) Includes shares of unvested restricted stock as follows: Mr. Ricci, 3,429; Mr. O’Brien, 1,143; Mr. Eiswirth,
1,999; Mr. Fleming, 1,999; Mr. Kellogg, 1,143; and Ms. Schreter, 1,143.
(3) On March 8, 2010, Mr. Ricci delivered written notice to the Board of Directors of the Company of his res-
ignation as President and Chief Executive Officer and a member of the Board of Directors of the Com-
pany, effective April 2, 2010.
(4) Mr. Jones’ employment terminated on May 1, 2009 and his membership on the Board of Directors ended
May 27, 2009.
Equity Compensation Plan Information
The following table gives information as of December 31, 2009, the end of the most recently completed
fiscal year, about shares of common stock that may be issued under our 2002 Stock Option and Restricted
Stock Plan and 2007 Employee Stock Purchase Plan, both of which have been approved by shareholders. To
date, the Board of Directors has not yet implemented the 2007 Employee Stock Purchase Plan.
Plan Category
(a)
No. of
Shares to be
Issued Upon
Exercise of
Outstanding
Stock Options,
Warrants and
Rights
(b)
Weighted
Average
Exercise
Price of
Outstanding
Stock Options,
Warrants and
Rights
(c)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a))
Equity Compensation Plans Approved by
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . .
1,389,496
Equity Compensation Plans Not Approved by
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,389,496
$2.96
N/A
$2.96
1,478,597(1)
N/A
1,478,597(1)
(1) Includes 1,178,597 shares available for issuance under the 2002 Stock Option and Restricted Stock Plan,
under which we may grant restricted stock awards in addition to stock options. Each non-employee direc-
tor receives an annual stock option grant of up to 20,000 shares of common stock, or an equivalent grant
of shares of restricted stock, pursuant to a program administered under our 2002 Stock Option and
Restricted Stock Plan. Also includes 300,000 shares available for issuance under the 2007 Employee Stock
Purchase Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
There have been no related person transactions required to be disclosed pursuant to Item 404(a) or
Item 404(d)(1) of Regulation S-K since the beginning of fiscal year 2008.
The Board of Directors, upon the recommendation of the Audit Committee, has adopted a written policy for
the review and approval or ratification of related person transactions. Under the policy, our directors and
executive officers are expected to disclose to our Chief Financial Officer (or, if the transaction involves the Chief
Financial Officer, to the Chief Executive Officer) (either, as applicable, the “Designated Officer”) the material
facts of any transaction that could be considered a related person transaction promptly upon gaining knowledge
of the transaction. A related person transaction is generally defined as any transaction required to be disclosed
under Item 404(a) of Regulation S-K, the SEC’s related person transaction disclosure rule, except that our policy
does not contain a dollar threshold for a transaction to be considered a related person transaction.
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If the Designated Officer determines that the transaction is a related person transaction under SEC’s rules,
the Designated Officer will notify the Chair of the Audit Committee and submit the transaction to the Audit
Committee, which will review and determine whether to approve or ratify the transaction.
79
When determining whether to approve or ratify a related person transaction, the Audit Committee will
review relevant facts regarding the related person transaction, including:
(cid:129) The extent of the related person’s interest in the transaction;
(cid:129) Whether the terms are comparable to those generally available in arm’s-length transactions; and
(cid:129) Whether the related person transaction is consistent with the best interests of the Company.
The related person involved in the related person transaction may participate in the approval/ratification
process only to provide additional information as needed for the Audit Committee’s review. If any Related
Person Transaction is not approved or ratified by the Committee, the Committee may take such action in
respect of the transaction as it may deem necessary or desirable in the best interests of the Company and its
shareholders. If any related person transaction is ongoing or is part of a series of transactions, the Audit
Committee may establish guidelines as necessary to appropriately review the ongoing related person transac-
tion. After initial approval/ratification of the transaction, the Audit Committee will review the related person
transaction on a regular basis (at least annually).
The Audit Committee is authorized to administer the Company’s related person transactions policy, and
may amend, modify and interpret the policy as it deems necessary or desirable. Any material amendments or
modifications to the policy will be reported to the full Board at its next regularly scheduled meeting. In
addition the Audit Committee will conduct an annual review and assessment of the policy.
Independence of the Board of Directors
The Board of Directors has reviewed the relationships between the Company and each of its directors,
including former directors who served as directors during any part of fiscal year 2009, and has determined that the
following directors and former directors are “independent” within the meaning of the listing standards of The
Nasdaq Stock Market: current directors Mills Brown, Richard Eiswirth, Jr., Michael Fleming, Matthew Kellogg,
and Susan Schreter. In making its independence determinations, the Board of Directors considered all relationships
between its directors and the Company, including a relationship with Mr. Fleming’s law firm that is not required to
be disclosed in this Annual Report on Form 10-K as a related person transaction. Mr. Fleming is a partner at the
law firm Lane Powell PC, which provides legal services to the Company. During 2009 and 2008, the Company
paid Lane Powell approximately $85,000 and $25,000, respectively, in fees and expenses. Mr. Fleming has not
provided any of the legal services rendered by Lane Powell and, because the amounts involved have not been, and
are not expected to be, material to either the Company or Lane Powell, the Board of Directors has concluded that
this relationship does not impair the independence of Mr. Fleming as a member of our Board of Directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Deloitte & Touche LLP has audited our financial statements for the years ended December 31, 2009 and
2008, and reviewed our statements for the fiscal quarter ended September 30, 2008. KPMG served as our
independent registered public accounting firm for the fiscal quarters ended March 31, 2008 and June 30, 2008
until they were dismissed September 11, 2008.
Policy for Approval of Audit and Permitted Non-Audit Services
All audit, audit-related and tax services were pre-approved by the Audit Committee, which concluded that
the provision of such services by the Company’s independent registered public accounting firm, Deloitte &
Touche LLP, was compatible with the maintenance of that firm’s independence in the conduct of its auditing
functions. The Audit Committee’s charter requires that the Committee review the scope and extent of audit
services to be provided, including the engagement letter, prior to the annual audit, and review and pre-approve
all audit fees to be charged by the independent auditors. In addition, the charter requires the Committee to
pre-approve all additional non-audit matters to be provided by the independent auditors.
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Audit and Related Fees
The following table sets forth the aggregate fees billed by Deloitte for professional services rendered in
fiscal years ended December 31, 2009 and 2008.
2009
2008
Audit Fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $374,175
7,145
Audit-Related Fees(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,500
Tax Fees(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$369,000
—
—
—
(1) “Audit Fees” represent fees for professional services provided in connection with the audit of our annual
financial statements and review of our quarterly financial statements included in our reports on Form 10-Q,
and audit services provided in connection with other statutory or regulatory filings.
(2) “Audit-Related Fees” generally represent fees for assurance and related services reasonably related to the
performance of the audit or review of our financial statements.
(3) “Tax Fees” generally represent fees for tax advice.
All the above services were pre-approved by the Audit Committee.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Documents filed as part of this Report are as follows:
PART IV
1) Financial Statements: The consolidated financial statements, related notes and report of indepen-
dent registered public accounting firm are included in Item 8 of Part II of this 2009 Annual Report on
Form 10-K.
2) Financial Statement Schedules: All schedules have been omitted because they are not applicable
or not required, or the required information is included in the financial statements or notes thereto.
3) Exhibits: The required exhibits are included at the end of this Report and are described in the
exhibit index.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
JONES SODA CO.
By:
/s/
JONATHAN J. RICCI
Jonathan J. Ricci
President and Chief Executive Officer
Dated: March 31, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacities
Date
/s/
JONATHAN J. RICCI
Jonathan J. Ricci
/s/ MICHAEL R. O’BRIEN
Michael R. O’Brien
/s/ MILLS A. BROWN
Mills A. Brown
President and Chief Executive Officer
March 31, 2010
Chief Financial Officer (Principal Financial
and Accounting Officer)
March 31, 2010
Director
March 31, 2010
/s/ RICHARD S. EISWIRTH, JR.
Director
March 31, 2010
Rick Eiswirth, Jr.
/s/ MICHAEL M. FLEMING
Michael M. Fleming
/s/ MATTHEW K. KELLOGG
Matthew K. Kellogg
/s/ SUSAN A. SCHRETER
Susan A. Schreter
Director
March 31, 2010
Director
March 31, 2010
Director
March 31, 2010
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The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein
by reference. Where an exhibit is incorporated by reference, the document to which it is cross referenced is
made.
EXHIBIT INDEX
3.1
3.2
10.1++
10.2++
10.3++
10.4++
10.5
10.6*
10.7*
10.8++
10.9++
Articles of Incorporation of Jones Soda Co. (Previously filed with, and incorporated herein by
reference to, Exhibit 3.1 to our annual report on Form 10-KSB for the fiscal year ended
December 31, 2000, filed on March 30, 2001; File No. 333-75913.)
Bylaws of Jones Soda Co. (Previously filed with, and incorporated herein by reference to,
Exhibit 3.2 to our annual report on Form 10-KSB for the fiscal year ended December 31, 2000,
filed on March 30, 2001; File No. 333-75913.)
Bottling Agreement dated January 1, 2002, between Jones Soda Co. and Polaris Water Company
Inc. (Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to our annual
report on Form 10-KSB for the year ended December 31, 2001, filed on April 1, 2002;
File No. 333-75913.)
Bottling Agreement dated December 13, 2001, between Jones Soda Co. and J. Lieb Foods Inc.
(Previously filed with, and incorporated herein by reference to, Exhibit 10.2 to our annual report on
Form 10-KSB for the year ended December 31, 2001, filed on April 1, 2002; File No. 333-75913.)
Supply Agreement dated January 1, 2004, between Jones Soda Co. and Zuckerman-Honickman, Inc.
(Previously filed with, and incorporated herein by reference to, the Company’s quarterly report on
Form 10-QSB for the quarter ended Jun 30, 2004, filed on August 6, 2004; File No. 000-28820.)
Amendment No. 1 to Supply Agreement, dated June 27, 2004, between Jones Soda Co. and
Zuckerman-Honickman, Inc. (Previously filed with, and incorporated herein by reference to, the
Company’s quarterly report on Form 10-QSB for the quarter ended June 30, 2004, filed on
August 6, 2004; File No. 000-28820.)
Lease Agreement dated September 15, 2006, between R2H2 LLC and Jones Soda Co. (Previously
filed with, and incorporated herein by reference to, Exhibit 10.1 to our current report on Form 8-K,
filed on September 22, 2006; File No. 000-28820.)
Separation Agreement and Release, dated February 13, 2008, by and between the Company and
Peter M. van Stolk. (Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to
our current report on Form 8-K, filed on February 20, 2008; File No. 000-28820)
Jones Soda Co. 2002 Stock Option and Restricted Stock Plan. (Previously filed with, and
incorporated herein by reference to, Appendix B to our definitive proxy statement for our 2007
annual meeting of shareholders, filed on April 18, 2007, File No. 000-28820.)
Co-Packers and Distribution Agreement, dated September 18, 2006, among Jones Soda Co.,
National Retail Brands Inc. and Shasta Beverages Inc. (Previously filed with, and incorporated
herein by reference to, Exhibit 10.1 to our quarterly report on Form 10-Q for the quarter ended
September 30, 2006, filed on November 14, 2006; File No. 000-28820.)
Sponsorship Agreement among Jones Soda Co., Football Northwest, LLC d/b/a Seattle Seahawks
and First & Goal, Inc., entered into May 22, 2007. (Previously filed with, and incorporated herein
by reference to, Exhibit 10.1 to our quarterly report on Form 10-Q, filed August 9, 2007;
File No. 000-28820.)
10.10++ Amended Sponsorship Agreement among Jones Soda Co., Football Northwest, LLC d/b/a Seattle
Seahawks and First & Goal, Inc., entered into July 15, 2009. (Previously filed with, and
incorporated herein by reference to, Exhibit 10.1 to our quarterly report on Form 10-Q, filed
November 9, 2009; File No. 000-28820.)
10.11++ Sponsorship and Beverage Availability Agreement among Brooklyn Arena, LLC, New Jersey
10.12*
10.13*
Basketball, LLC and Jones Soda Co., dated effective October 29, 2007. (Previously filed with, and
incorporated herein by reference to, Exhibit 10.2 to our quarterly report on Form 10-Q, filed
November 9, 2007; File No. 000-28820.)
Form of Stock Option Agreement under 2002 Stock Option and Restricted Stock Plan (Previously
filed with, and incorporated herein by reference to, Exhibit 10.24 to our annual report on
Form 10-K, filed March 17, 2008; File No. 000-28820.)
Form of Restricted Stock Purchase Agreement under 2002 Stock Option and Restricted Stock Plan.
(Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to our quarterly report
on Form 10-Q, filed August 8, 2008; File No. 000-28820.)
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10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20
10.21
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
Jones Soda Co. 2007 Employee Stock Purchase Plan. (Previously filed with, and incorporated
herein by reference to, the Company’s definitive proxy statement on Schedule 14A, filed on
April 18, 2007; File No. 000-28820.)
Compensation for Directors of Jones Soda Co. (Filed herewith.)
Employment Letter, dated January 3, 2008, between the Company and Joth Ricci. (Previously filed
with, and incorporated herein by reference to, Exhibit 99.2 to our current report on Form 8-K, filed
January 9, 2008; File No. 000-28820)
Employment Letter, dated March 10, 2008, between the Company and Tom O’Neill. (Previously
filed with, and incorporated herein by reference to, Exhibit 10.3 to our quarterly report on
Form 10-Q, filed on May 12, 2008; File No. 000-28820.)
Employment Offer Letter between Stephen C. Jones and Jones Soda Co., dated June 3, 2008.
(Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to our current report on
Form 8-K, filed June 9, 2008; File No. 000-28820.)
Employment Offer Letter between Michael O’Brien and Jones Soda Co., dated August 15, 2008.
(Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to our current report on
Form 8-K, filed August 18, 2008; File No. 000-28820.)
Pharma GABA Sales Contract, dated June 20, 2007, among Pharma Foods International Co., Ltd.,
Jones Soda Co., Mitsubishi International Food Ingredients, Inc. and Mitsubishi Corporation.
(Previously filed with, and incorporated herein by reference to, Exhibit 10.24 to our annual report
on Form 10-K for the fiscal year ended December 31, 2008, filed on March 16, 2009; File
No. 000-28820.)
Amendment Agreement, dated July 31, 2008, by an among Pharma Foods International Co., Ltd.,
Jones Soda Co., Mitsubishi International Food Ingredients, Inc. and Mitsubishi Corporation.
(Previously filed with, and incorporated herein by reference to, Exhibit 10.25 to our annual report
on Form 10-K for the fiscal year ended December 31, 2008, filed on March 16, 2009; File
No. 000-28820.)
First Amendment to Employment Offer Letter, dated December 29, 2008, between Jones Soda Co.
and Stephen C. Jones. (Previously filed with, and incorporated herein by reference to, Exhibit 10.26
to our annual report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 16,
2009; File No. 000-28820.)
First Amendment to Employment Offer Letter, dated December 29, 2008, between Jones Soda Co.
and Joth Ricci. (Previously filed with, and incorporated herein by reference to, Exhibit 10.27 to our
annual report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 16, 2009;
File No. 000-28820.)
First Amendment to Employment Offer Letter, dated December 29, 2008, between Jones Soda Co.
and Tom O’Neill. (Previously filed with, and incorporated herein by reference to, Exhibit 10.28 to
our annual report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 16,
2009; File No. 000-28820.)
First Amendment to Employment Offer Letter, dated December 29, 2008, between Jones Soda Co.
and Michael O’Brien. (Previously filed with, and incorporated herein by reference to, Exhibit 10.29
to our annual report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 16,
2009; File No. 000-28820.)
Settlement Agreement and Release, dated April 3, 2009, by and between the Company and Peter
M. van Stolk. (Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to our
quarterly report on Form 10-Q, filed May 11, 2009; File No. 000-28820.)
Summary of Jones Soda Co. 2009 Bonus Plan For Executive Officers (Previously filed with, and
incorporated herein by reference to, Exhibit 10.1 to our current report on Form 8-K, filed on
April 10, 2009; File No. 000-28820.)
Separation Agreement and General Release, dated May 4, 2009, by and between the Company and
Stephen C. Jones. (Previously filed with, and incorporated herein by reference to, Exhibit 10.3 to
our quarterly report on Form 10-Q, filed August 10, 2009; File No. 000-28820.)
Second Amendment to Employment Offer Letter, dated May 4, 2009, by and between the Company
and Joth Ricci. (Previously filed with, and incorporated herein by reference to, Exhibit 10.4 to our
quarterly report on Form 10-Q, filed August 10, 2009; File No. 000-28820.)
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21.1
23.1
31.1
31.2
32.1
32.2
Subsidiaries of Jones Soda Co. (Previously filed with, and incorporated herein by reference to,
Exhibit 21.1 to our annual report on Form 10-KSB for the year ended December 31, 2002, filed on
March 28, 2003; File No. 000-28820.)
Consent of Deloitte & Touche LLP (Filed herewith.)
Certification by Jonathan J. Ricci, Chief Executive Officer, pursuant to Rule 13a-14(a), pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)
Certification by Michael R. O’Brien, Chief Financial Officer, pursuant to Rule 13a-14(a), pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)
Certification by Jonathan J. Ricci, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)
Certification by Michael R. O’Brien, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)
* Management contract or compensatory plan or arrangement.
++ Portions of the marked exhibits have been omitted pursuant to requests for confidential treatment filed
with the SEC.
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Effective March 3, 2009, except as otherwise disclosed by the Company, non-employee directors receive the following compensation for
their service on the Board of Directors and committees of the Board of Directors:
SUMMARY OF NON-EMPLOYEE DIRECTOR COMPENSATION
Exhibit 10.15
Cash Compensation
Position
Non-employee (“NE”) Director Annual Retainer
NE Director Board Meeting Attendance Fee (Telephonic)
NE Director Committee Meeting Attendance Fee
NE Director Audit Committee Meeting Attendance
Chair of Audit Committee Annual Retainer
Chair of Compensation Committee Annual Retainer
Chair of Nomination Committee Annual Retainer
Stock options
Amount
$12,000
$ 1,000 ($500)
500
$
$ 1,000
$ 3,500
$ 2,000
$ 2,000
Each non-employee director receives an annual stock option grant of 20,000 shares of common stock, with an exercise price equal to the fair
market value of the common stock on the date of grant and a term of ten years, or an equivalent grant of shares of restricted stock. Effective
March 3, 2009, the Board adopted a new vesting schedule for option awards and restricted stock grants, with the grants to vest in full one year
from the date of grant. Stock options awarded prior to March 3, 2009 vested over a period of 42 months, with 14.29% vesting on each 6-month
anniversary of the grant date.
Expense reimbursement
Non-employee directors are reimbursed for travel, meals and accommodation expenses incurred for attending any Board meetings.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-103939, 333-109173 and 333-157978 on Form S-8 and in
Registration Statement No. 333-135603 on Form S-3 of our reports dated March 31, 2010, relating to the consolidated financial statements of
Jones Soda Co. and subsidiaries (the “Company”) (which report expresses an unqualified opinion and includes an emphasis of matter
paragraph expressing substantial doubt about the Company’s ability to continue as a going concern), and the effectiveness of the Company’s
internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31,
2009.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 31, 2010
EXHIBIT 31.1
I, Jonathan J. Ricci, certify that:
1. I have reviewed this report on Form 10-K of Jones Soda Co.;
Sarbanes-Oxley Section 302(a) Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 31, 2010
/s/ JONATHAN J. RICCI
Chief Executive Officer
EXHIBIT 31.2
I, Michael R. O’Brien, certify that:
1. I have reviewed this report on Form 10-K of Jones Soda Co.;
Sarbanes-Oxley Section 302(a) Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 31, 2010
/s/ Michael R. O’Brien
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Jones Soda Co. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2009 as
filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Jonathan J. Ricci, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
or 78o(d)); and
(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of
the Company.
/s/ JONATHAN J. RICCI
Jonathan J. Ricci
Chief Executive Officer
March 31, 2010
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Jones Soda Co. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2009 as
filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Michael R. O’Brien, Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
or 78o(d)); and
(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of
the Company.
/s/ Michael R. O’Brien
Michael R. O’Brien
Chief Financial Officer
March 31, 2010