10QSB 1 d10qsb.htm FORM 10-QSB FOR THE PERIOD ENDED MARCH 31, 2003 Form 10-QSB for the period ended March 31, 2003

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the Quarterly Period Ended March 31, 2003
   
o 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 0-28820

JONES SODA CO.
(Exact name of registrant as specified in its charter)

Washington   91-1696175
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)
     
234 9th Avenue North Seattle, Washington 98109   (206) 624-3357
(Address of principal executive office)   (Registrant’s telephone number, including area code)

     Check whether the issuer: (1) 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 for such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x     No  o

As of March 31, 2003, the issuer had 19,800,596 shares of common stock outstanding.

     Transitional Small Business Disclosure Format:  Yes  o     No  x

JONES SODA CO.
FORM 10-QSB

Index    
Page
       
PART I. FINANCIAL INFORMATION  
       
Item 1 Financial Statements  
  a) Interim Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
3
  b) Interim Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002
4
  c) Interim Consolidated Statement of Stockholder’s Equity and Comprehensive Loss for the three months ended March 31, 2003 and years ended December 31, 2002 and 2001
5
  d) Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
7
  e) Notes to Interim Consolidated Financial Statements
8
     
 
Item 2 Management’s Discussion and Analysis or Plan of Operation
14
     
 
Item 3 Controls and Procedures
21
     
 
PART II. OTHER INFORMATION
 
     
 
Item 1 Legal Proceedings
21
     
 
Item 6 Exhibits and Reports on Form 8-K
21

2

PART I.      FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS

JONES SODA CO. AND SUBSIDIARIES
 Interim Consolidated Balance Sheets
(Expressed in U.S. dollars)

March 31, 2003 with comparative figures for December 31, 2002          
 
      March 31,
2003		     December 31,
2002
 
      (Unaudited)          
Assets              
Current assets:              
  Cash and cash equivalents $ —     $ 50,065  
  Accounts receivable   1,849,882       932,654  
  Current portion of note receivable   75,234       73,939  
  Inventory (note 3)   1,420,491       1,760,188  
  Prepaid expenses   335,437       457,582  
 
 
        3,681,044       3,274,428  
Note receivable   130,726       153,278  
Deposit   29,464       29,464  
Fixed assets   525,445       539,758  
Intangible assets   99,959       106,434  
 
      $ 4,466,638     $ 4,103,362  
 
Liabilities and Stockholders’ Equity              
Current liabilities:              
  Bank indebtedness (note 4) $ 232,717     $ 114,833  
  Accounts payable and accrued liabilities   2,102,449       1,765,297  
  Current portion of capital lease obligations   56,706       56,706  
  Current portion of deferred revenue   51,295       50,000  
 
 
        2,443,167       1,986,836  
Capital lease obligations, less current portion   2,740       13,777  
Deferred revenue   292,043       301,979  
Stockholders’ equity              
Common stock:
    Authorized: 100,000,000 common stock, no par value Issued and outstanding: 19,800,956 common shares (2002 – 19,800,956)   11,021,231       11,021,231  
  Additional paid-in capital   625,560       625,560  
  Accumulated other comprehensive income   107,752       107,752  
  Deficit   (10,025,855 )     (9,953,773 )
 
 
        1,728,688       1,800,770  
 
      $ 4,466,638     $ 4,103,362  
 

3

Interim Consolidated Statements of Operations
(Expressed in U.S. dollars)
(Unaudited)

Three months ended March 31, 2003 and 2002

  
    2003     2002
Revenue $ 3,860,620     $ 3,973,554  
Cost of goods sold   2,569,854       2,541,449  
 
Gross profit   1,290,766       1,432,105  
Operating expenses:              
  Promotion and selling   862,425       1,106,833  
  General and administrative   478,187       647,806  
 
 
      1,340,612       1,754,639  
 
Loss from operations   (49,846 )     (322,534 )
Other income (expense):              
  Interest expense   (28,169 )     (13,750 )
  Other income   5,933       20,709  
 
 
      (22,236 )     6,959  
 
Loss for the period $ (72,082 )   $ (315,575 )
 
Loss per share:              
  Basic and diluted $ (0.00 )   $ (0.02 )
 
Weighted average number of common stock:              
  Basic and diluted   19,800,596       20,251,846  
 

See accompanying notes to interim consolidated financial statements.

4

JONES SODA CO. AND SUBSIDIARIES
Interim Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(Expressed in U.S. dollars)

 Three months ended March 31, 2003 (Unaudited)
Years ended December 31, 2002 and 2001

 
                                   Additional     Accumulated other                     Total  
  Common stock         Treasury stock     paid-in     comprehensive     Accumulated     Comprehensive     stockholder’s  
  Number     Amount     Number     Amount     capital     income (loss)     deficit     income (loss)   equity
 
Balance,
December 31, 2000
 19,303,378     $ 10,718,519     —     $ —     $ 407,455     $ 107,752     $ (7,067,317 )   $ 1,596,356     $ 4,156,409  
Options exercised
 35,000       17,931     —       —       —       —       —               17,931  
Warrants exercised
 913,468       542,969     —       —       —       —       —               542,969  
Stock-based compensation
 —       —     —       —       118,500       —       —               118,500  
Repurchase escrow shares
 —       —     (200,000 )     (13,333 )     —       —       —               (13,333 )
Comprehensive loss:
                                                                  
Loss for the year
 —       —     —       —       —               (1,702,228 )   $ (1,702,228 )     (1,702,228 )
Total comprehensive income
                                                                  
 
Balance,
December 31, 2001
 20,251,846     $ 11,269,419     (200,000 )   $ (13,333 )   $ 525,955     $ 107,752     $ (8,769,545 )           $ 3,120,248  
Stock-based compensation
                                                                  
(recovery)
 —       —     —       —       (118,500 )     —       —       —       (118,500 )
Repurchase escrow shares
 —       —     (251,250 )     (16,750 )     —       —       —       —       (16,750 )
Cancelled escrow shares
(451,250 )     (248,188 )   451,250       30,083       218,105       —       —       —       —  
Comprehensive loss:
                                                                  
Loss for the year
 —       —     —       —       —       —       (1,184,228 )     (1,184,228 )     (1,184,228 )
Balance,
December 31, 2002
 19,800,596     $ 11,021,231     —     $ —     $ 625,560     $ 107,752     $ (9,953,773 )           $ 1,800,770  
Comprehensive loss:
                                
Loss for the period
 —       —     —       —       —       —       (72,082 )     (72,082 )     (72,082 )
Balance, March 31, 2003
 19,800,596     $ 11,021,231     —     $ —     $ 625,560     $ 107,752     $ (10,025,855 )           $ 1,728,688  

See accompanying notes to consolidated interim financial statements.

5

JONES SODA CO. AND SUBSIDIARIES
Interim Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
(Unaudited)

     Three months ended March 31, 2003 and 2002

  
      2003     2002
 
Cash flows from (used in) operating activities:              
  Loss for the period $ (72,082 )   $ (315,575 )
  Items not involving cash:              
    Depreciation and amortization   39,107       45,288  
  Changes in assets and liabilities:              
    Accounts receivable   (917,228 )     271,878  
    Note receivable   21,257       —  
    Inventory   339,697       (458,179 )
    Prepaid expenses   122,145       28,780  
    Accounts payable and accrued liabilities   337,152       664,919  
  Net cash from (used in) operating activities   (129,952 )     237,111  
Cash flows used in investing activities:              
  Purchase of fixed assets   (14,572 )     (12,784 )
  Purchase of intangible assets   (3,747 )     (9,938 )
  Net cash used in investing activities   (18,319 )     (22,722 )
Cash flows from financing activities:              
  Net borrowing (repayment) under line of credit   79,958       (347,464 )
  Bank indebtedness   37,926       160,448  
  Repayment of capital lease obligations   (11,037 )     (14,873 )
  Deferred revenue   (8,641 )     (12,500 )
  Proceeds from exercise of options   —       —  
  Cash flows provided by (used in) financing activities   98,206       (214,389 )
 
Net decrease in cash and cash equivalents   (50,065 )     —  
Cash and cash equivalents, beginning of year   50,065       —  
 
Cash and cash equivalents, end of period $ —     $ —  
Supplemental information:              
    Cash paid during year for:              
    Interest payments $ 28,169     $ 13,753  
 

See accompanying notes to interim consolidated financial statements.

7

JONES SODA CO. AND SUBSIDIARIES
 Notes to Interim Consolidated Financial Statements
(Expressed in U.S. dollars)
Unaudited – Prepared by Management

Three months ended March 31, 2003

1. Nature and continuance of operations:
   
  Jones Soda Co. (the “Company” or “Jones Soda”) develops, produces, markets, and distributes “alternative” or “new age” beverages. The Company’s main product lines include the brands: Jones Soda Co.®, Jones Naturals™, a non-carbonated juice & tea drink, Jones Energy, a high energy drink, WhoopAss™, a high energy drink, and Whoopass Shots. Urban Juice and Soda Company Limited, the Company’s predecessor, was incorporated in 1986 under the Company Act (British Columbia). Effective December 31, 1999, Urban Juice continued its incorporation in Wyoming. On August 3, 2000, Urban Juice reincorporated as a Washington corporation under the name Jones Soda Co. The Company has three operating subsidiaries, Jones Soda Co. (USA) Inc., Jones Soda (Canada) Inc., and myJones.com Inc., as well as one non-operating subsidiary, Whoopass USA Inc.
   
  The Company’s future operations are dependent upon the market’s acceptance of its products. There can be no assurance the Company will be able to secure sufficient market acceptance for its products to generate income from operations. Operations to date have primarily been financed through the issuance of common stock and short-term debt. These consolidated financial statements have been prepared on a basis that assumes the realization of assets and settlement of liabilities in the normal course of business. During the three month period ended March 31, 2003, the Company incurred a loss of $72,082 and generated negative cash flows from operating activities. The Company’s ability to continue as a going concern is dependent upon its ability to raise additional financing and its ability to generate future profitable operations.
     
2. Significant accounting policies:
     
  (a) Basis of presentation:
     
    These interim consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America.
     
    The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
     
    The accompanying unaudited interim consolidated financial statements are prepared in accordance with United States generally accepted accounting principles but do not include all information and footnotes required by United States generally accepted accounting principles for annual statements. However, in the opinion of management, all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the relevant periods have been made. Results for the interim period are not necessarily indicative of the results to be expected for the year or for any other period. These financial statements should be read in conjunction with the summary of accounting policies and the notes to the consolidated financial statements for the year ended December 31, 2002 included in the Company’s annual report on Form 10-KSB.

8

JONES SODA CO. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Expressed in U.S. dollars)
Unaudited – Prepared by Management

Three months ended March 31, 2003

  (b) Use of estimates:
     
    The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Areas of significant estimate include the assessment of collectibility of accounts receivable, net realizable value of inventory, and valuation allowance against deferred income tax assets. Accordingly, actual results may differ from these estimates.
     
  (c) Foreign currency translation:
     
    At December 31, 1999, the Company migrated its primary operations to Seattle, Washington, and subsequently the majority of the Company’s transactions are originally denominated in US dollars. Accordingly, for the years ended December 31, 2002, 2001 and 2000, the functional currency of all companies within the group is the US dollar. As such, all foreign exchange gains or losses, including those arising from translating Canadian operations to US dollars, have been included in income. For the period ended March 31, 2003, the Company incurred a foreign exchange gain of $5,933 (2002 - $20,709 gain).
     
  (d) Cash and cash equivalents:
     
    The Company considers all short-term investments with a term to maturity at purchase of three months or less to be cash equivalents.
     
  (e) Inventory:
     
    Inventory has been stated at the lower of cost and estimated net realizable value and includes adjustments for estimated obsolescence. Cost includes laid-down cost and is determined principally using actual cost on a first-in first-out basis.
     
  (f) Fixed assets:
     
    Fixed assets are recorded at cost and are depreciated on the declining balance basis over the estimated useful lives of the assets as follows:
       
Asset
 Rate
 Equipment 20% to 50%
 Automobile and computers 30%
 Equipment under capital lease Lease term

9

JONES SODA CO. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Expressed in U.S. dollars)
Unaudited – Prepared by Management

Three months ended March 31, 2003

  (g) Intangible assets:
     
    The Company’s intangible assets include costs associated with attaining trademarks and patents for the Company’s products and are amortized on a straight-line basis over 5 years.
     
  (h) Impairment of long-lived assets and long-lived assets to be disposed of:
     
    Long-lived assets, which include fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
     
  (i) Revenue recognition:
     
    Sales are recorded when title passes, which is when goods are received by the customer, and represent amounts realized net of provisions for sales returns, discounts and allowances which are recognized at the time of sale. Cash received in advance of delivery is recorded as deferred revenue in the consolidated balance sheet. Consideration paid to the customer is accounted for as a reduction in revenue.
     
    For sales returns, the Company issues a credit note to the customer once it has obtained the returned goods. Discounts are offered to customers via promotional events. Discounts are recorded at the time of sale by issuing a credit note for the discount relating to the shipment.
     
  (j) Research and development:
     
    Research and development costs, which consist primarily of product development costs, are expensed in the period incurred and are included in general and administrative expenses. During the period ended March 31, 2003, the Company incurred research and development costs of $nil (2002- nil).
     
  (k) Stock-based compensation:
     
    The Company accounts for its stock-based compensation arrangements with employees in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. As such, compensation expense under fixed plans is recorded on the date of grant only if the market value of the underlying stock at that date exceeds the exercise price.
     
    SFAS No. 123, “Accounting for Stock Based Compensation”, requires entities that continue to apply the provision of APB Opinion No. 25 for transactions with employees to provide pro forma earnings (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-value-based method in SFAS No. 123 had been applied to these transactions.

10

JONES SODA CO. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Expressed in U.S. dollars)
Unaudited – Prepared by Management

Three months ended March 31, 2003

    The Company recognizes compensation expense for stock options, common stock and other equity instruments issued to non-employees for services received based upon the fair value of the equity instruments issued at the date of performance completion.
       
    Under APB 25, compensation expense is measured as the excess, if any, of the market price of the underlying stock over the exercise price on the measurement date of the grant. Had stock compensation expense for grants to employees under the Company’s stock option plan been determined based on the fair value methodology under SFAS 123, the Company’s net earnings (loss) for each of the three-month periods ended March 31 are presented as follows:
 
  
        2003       2002
 
 Earnings (loss):               
  As reported $ (72,082 )   $ (315,575 )
  Pro forma   (80,532 )     (321,398 )
 Basic and diluted earnings (loss) per share               
  As reported   (0.00 )     (0.02 )
  Pro forma   (0.00 )     (0.02 )
 
     
    The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model, which takes into account (1) the market price of the underlying stock at the grant date, (2) the exercise price, (3) an expected life ranging from one to five years, (4) 0% dividend yield, (5) a risk-free interest rate of 1.51% (2002 – 3.75%), and (6) an estimated volatility of 76% (2002 – 75%)
     
    The weighted average fair value of options granted in the first quarter 2003 was $0.36 (2002 no options were granted) respectively.
     
  (l) Advertising:
     
    The Company expenses advertising costs as incurred. During the three-month period ended March 31, 2003, the Company incurred advertising costs of $628,320 (2002 - $804,199).
     
  (m) Income taxes:
     
    The Company follows the asset and liability method of accounting for income taxes. Under this method, current taxes are recognized for the estimated income taxes payable for the current period. Deferred income taxes are provided based on the estimated future tax effects of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases as well as the benefits of losses available to be carried forward to future years for tax purposes.

11

JONES SODA CO. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Expressed in U.S. dollars)
Unaudited – Prepared by Management

Three months ended March 31, 2003

    Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets when it is not more likely than not that such deferred tax assets will be realized.
     
  (n) Earnings (loss) per share:
     
    Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the periods, excluding treasury stock and common stock held in escrow that is subject to cancellation if certain criteria are not achieved. Diluted earnings (loss) per share is computed by adjusting the weighted average number of common shares by the effective net exercise or conversion of all dilutive securities.
     
  (o) Comprehensive income (loss):
     
    SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for reporting and disclosure of comprehensive income and its components in a full set of general-purpose financial statements. The Company discloses the comprehensive income (loss) in the Consolidated Statement of Stockholders’ Equity. Comprehensive income (loss) includes earnings (loss) and foreign currency translation adjustments.
     
  (p) Comparative figures:
     
    Certain comparative figures have been reclassified to conform to the presentation adopted in the current period.

3.     Inventory:
  March 31
  2003   2002
Finished goods $
631,467
   $
1,200,236
Raw materials  
789,024
    
559,952
  $
1,420,491
   $
1,760,188

12

JONES SODA CO. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Expressed in U.S. dollars)
Unaudited – Prepared by Management

Three months ended March 31, 2003

4. Bank indebtedness:

  March 31
  2003   2002
Bank indebtedness $
37,926
   $
—
Line of credit  
194,791
    
114,833
  $
232,717
   $
114,833
  The Company has a $ 3,000,000 bank line which expired on March 22, 2003. A temporary extension to June 30, 2003 was granted, and a new bank line is being negotiated. Borrowings under the line bear interest at the prime rate plus 1.5% (5.75% at March 31, 2003).
5. Segmented information and export sales:
   
  The Company operates in one industry segment, with operations in both the United States and Canada. During the three-month periods ended March 31, 2003 sales in the United States were approximately $3,422,324 (2002 - $3,391,827); sales in Canada were approximately $438,296 (2002 - $581,727).
   
6. Loss per share:
   
  The computation for basic and diluted earnings per share are as follows:
    March 31  
    2003     2002
Loss for the period $ (72,082 )   $ (315,575 )
Weighted average number of common stock outstanding:              
  Outstanding March 31, 2003   19,800,596       20,251,846  
  Basic and diluted   19,800,596       20,251,846  
Loss per share:              
  Basic and diluted $ (0.00 )   $ (0.02 )

13

ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward Looking Statements

The matters discussed in this Report contain forward-looking statements that involve known and unknown risks and uncertainties, such as statements of the Company’s plans, objectives, expectations and intentions. Generally, words such as “anticipate,” “believe,” “estimate,” “intend,” “may,” “could,” “will,” “expect,” “project,” “plan” and variations of such words and similar expressions are intended to identify such forward-looking statements. All statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, and/or the Company’s existing credit facility, statements expressing general optimism about future operating results and non-historical information, are forward looking statements within the meaning of Section 27.A of the Securities Act of 1933 as amended and Section 21.E of the Securities Exchange Act of 1934, as amended.

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below) and apply only as of the date of this report. The Company’s actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in “Other Factors that May Affect Operating Results” as well as those discussed elsewhere in this report, and the risks discussed in the Company’s most recently filed Annual Report on Form 10-KSB and in the press releases and other communications to shareholders issued by the Company from time to time which attempt to advise interested parties of the risks and factors that may affect the Company’s business. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Estimates and 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 United States. 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 including, among others, those affecting revenues, the allowance for doubtful accounts, the salability of inventory and the useful lives of tangible and intangible assets. The discussion below is intended as a brief discussion of some of the judgments and uncertainties that can impact the application of these policies and the specific dollar amounts reported on our financial statements. We base our estimates 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.

14

We have identified below some of our accounting policies 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 the Company. For a detailed discussion on the application of these and our other accounting policies, see Note 2 to the Consolidated Financial Statements included in this Report.

Revenue Recognition.     Our products are sold to distributors and various customers and retailers for cash or on credit terms. 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 by our distributors and customers of our products, in accordance with written sales terms, net of provisions for discounts and allowances. All sales to distributors and customers are final sales; there is no return policy.

We also pay lump sum slotting fees to certain of our retailers for shelf space in their stores. Effective January 1, 2002, these slotting fees have been recorded as a reduction to revenue (which resulted in a reduction in revenue of approximately $118,000 for the first three months of fiscal 2003 compared to a reduction in revenue of approximately $100,000 for the comparable period in fiscal 2002). We amortize the lump sum payment over a two-year period, which is based on historical data of product maintenance on retail shelves for that period of time. If we used a shorter amortization period (such as 18 months), we would have recognized a greater reduction in revenue for the applicable periods; and conversely, if we used a longer amortization period (such as three years), this would result in a relative increase in revenue being recognized for the period.

Allowance for Doubtful Accounts; Bad Debt Reserve.     Our management must estimate the collectibility of our accounts receivable. Management analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In general, we have historically and continue today to provide an allowance for doubtful accounts equal to 100% of any balance greater than 60 days since invoice. In addition, we accrue a bad debt reserve, which is estimated as a percentage of total sales. We believe that in general bad debt reserves for others in the beverage industry represents approximately 2% of total sales. Historically, our bad debt reserve has represented approximately 0.7% of total sales. However, due to the bad debt recorded in 2001 as a result of several of our distributors filing for bankruptcy or going out of business, for 2002 we increased our bad debt reserve. For 2002, we accrued an average bad debt reserve of approximately $14,375 per month (or $172,500 for the year), which represented approximately 0.9% of our total sales. Our actual bad debt for 2002 was less than our accrued reserve and we adjusted the accrued reserve to our bad debt experience. Currently for 2003 we are accruing a bad debt reserve of $12,000 per month, the total of which would represent approximately 0.8% of our total sales for 2002. This current accrual is management’s estimation based on historical bad debt expense and is in line with industry standards. If however there was bad debt expense in excess of that which was accrued, the bad debt expense would be adjusted monthly thereafter. Bad debt expense is classified within general and administrative expenses in our Consolidated Statements of Operations.

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Additionally, if we receive notice of a disputed receivable balance, we accrue such additional amount as management determines is reflective of the risk of non-collection. To date, other than as a result of the bankruptcies in 2001, we have not incurred material write offs of accounts receivable. In considering the amount of bad debt allowance we rely heavily on our history of no material write-offs and that our revenue is not dependent on one or several customers, but is spread among a number of customers. However, other factors which could cause management to change its estimates would be a downturn in the economy that management determines has the potential to affect collectibles or if we see a greater concentration of our receivables from fewer customers. In such events, we may be required to record additional charges to cover this exposure. Material differences may result in the amount and timing of our bad debt expenses for any period if management made different judgments or utilized different estimates.

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 and estimated net realizable value, and includes adjustments for estimated obsolescence, on a first in-first out basis. These valuations are subject to customer acceptance and 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. Differences could result in the amount and timing of write-downs for any period if we make different judgments or use different estimates. We also determine an allowance of obsolescence products based on products that are over nine months from production date.

Results of Operations for the Three Months Ended March 31, 2003
(Expressed in U.S. Dollars)

Revenues

For the three months ended March 31, 2003, revenues were approximately $3,860,000, a decrease of $114,000, or 2.9% over the $3,974,000 in revenues for the three months ended March 31, 2002. The decrease in revenues during the three months ended March 31, 2003 from the comparable period in 2002 was primarily attributable to a slight decrease in sales of Jones Soda and Whoopass, partially offset by an increase in sales of Jones Naturals and Jones Energy. Consolidated case sales for the first quarter of 2003 were 308,000, a decrease of 4% over case sales of 322,000 for the first quarter of 2002. However, case volume for February and March 2003 improved over the case volumes of February and March 2002, which management believes may reflect a positive trend of increasing case sales for future quarters of fiscal 2003.

Management believes that the overall decrease in sales was primarily attributable to its strategy in 2002 of pulling out of non-core markets to focus selling its products into four distinct regions consisting of the U.S. Northwest, the U.S. Southwest, the U.S. Midwest and Western Canada. Sales declines in the comparable three month periods for the most part were experienced in the U.S. Northeast and U.S. Southeast markets, which were not regions of our focus for the first quarter of 2003. These sales declines were partially offset by increased sales in the comparable quarters in the U.S. Northwest and certain of the Company’s core markets. Revenues for Jones Naturals increased primarily due to the addition of a new direct retail account with Barnes & Noble, in which the Company will be selling its Jones Naturals directly to Barnes & Noble pursuant to a three-year distribution agreement. Beginning in February 2003, the Company began distributing five flavors of its Jones Naturals line in 505 Barnes & Noble existing café stores, with a sixth flavor to be added in the second quarter of this year. In addition, in April 2003, the Company began distributing Jones Naturals into its Western Canada market, which may result in improvements in sales for the second quarter of fiscal 2003.

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Gross Profit

For the three-month period ended March 31, 2003, gross profit was approximately $1,291,000 and a decrease of approximately $141,000, or 9.8% versus the $1,432,000 in gross profit for the three months ended March 31, 2002. The decrease in gross profit was attributable to decreased revenues as well as lower gross margins on Jones Soda and Jones Energy, partially offset by a higher gross margin on Jones Naturals. For the three-month period ended March 31, 2003, gross profit as a percentage of revenue decreased from 36.0% to 33.4%. The decrease in gross profit and gross profit as a percentage of revenue was attributable to a higher cost of product on Jones Soda due to a larger percentage of the mix sold in 4-packs (compared to the single serve format used for the first quarter of fiscal 2002) and a larger percentage of the Jones Energy product sold in the 16 ounce format, which has a lower gross margin than the Jones Energy 8.4 ounce format. This was however partially offset by a higher gross margin on Jones Naturals.

Total Operating Expenses

Total operating expenses for the three-month period ended March 31, 2003 were approximately $1,341,000. Total operating expenses decreased by $414,000, or 23.6%, versus operating expenses of $1,755,000 for the three months ended March 31, 2002. For the three-month period ended March 31, 2003, total operating expenses as a percentage of revenue decreased to 34.7% from 44.2% over the comparable period in 2002. The decrease in total operating expenses in absolute dollars was attributable to both a reduction in promotion and selling expenses as well as a reduction in general and administrative expenses.

Promotion and Selling Expenses

Promotion and selling expenses for the three month period ended March 31, 2003 were approximately $862,000 and a decrease of $245,000, or 22.1% versus promotion and selling expenses of $1,107,000 for the three months ended March 31, 2002. Promotion and selling expenses as a percentage of revenue decreased to 22.3% for the three months ended March 31, 2003 from 27.9% over the comparable period in 2002. The decrease in promotion and selling expenses was primarily attributable to a decrease in distributor programs associated with a more focused plan of spending on distributors, more controlled marketing programs as well as decreased salaries and wages associated with a decreased size of sales force, primarily in the Company’s non-focus markets. The reduction in sales expenses also reflects the variable nature of the Company’s sales compensation structure implemented in the first quarter of fiscal 2003.

General and Administrative Expenses

General and administrative expenses for the three-month period ended March 31, 2003 were approximately $478,000 and a decrease of $170,000 or 26.2% from the comparable period in 2002. General and administrative expenses as a percentage of revenue decreased to 12.4% for the three months ended March 31, 2003 from 16.3% over the comparable period in 2002. The decrease in general and administrative expenses in absolute dollars is primarily due to primarily to a decrease in executive salaries and rent as well as reversal of $50,000 in bad debt expenses, partially offset by an increase in legal fees and insurance. In addition, general and administrative expenses for the first quarter of fiscal 2002 included executive compensation for the former Chief Operating Officer and former Executive Chairman, for which no compensation expenses were paid in the first quarter of 2003.

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Other expenses

Other expense for the three-month period ended March 31, 2003 was approximately $22,000, compared to other income of approximately $7,000 in the comparable period in 2002. Other expense in 2003 primarily includes accrued interest expense which was accrued despite the low use of the line of credit due to the minimum borrowing requirement. This expense was partially offset by other income in 2003 of foreign exchange gains. However, for the comparable quarters, income from foreign exchange gains decreased from $21,000 in 2002 to $6,000 in 2003.

Net Loss

Net loss for the three-month period ended March 31, 2003 was approximately $72,000 and compares to a net loss for the comparable period in 2002 of $316,000. The improvement in net loss for the comparable three-month periods was due primarily to an improvement in loss from operations, a result of a reduction in total expenses of 26.2% compared to a much lower reduction in revenue of 2.9% and reduction in gross profit of 9.8% for the period.

Liquidity and Capital Resources

The operations of the Company historically have primarily been funded through the issuance of common stock and external borrowings.

As of March 31, 2003, the Company had working capital of approximately $1,238,000 compared to working capital of $1,286,000 as at December 31, 2002. The slight decrease in working capital was primarily attributable to the reduction in inventory due to increasing sales and improved inventory turnover.

The Company currently has in place a credit facility with Wells Fargo Business Credit that provides for a revolving line of credit of up to $3,000,000. The amount available for borrowing from time to time under the revolving line of credit is dependent upon the levels of certain eligible accounts receivable and inventory. This revolving line of credit is secured by all of the Company’s assets, including accounts receivable, inventory, trademarks and other intellectual property, and certain equipment. Borrowings under the credit facility bear interest at a rate of Prime +1.5% (5.75% as of March 31, 2003). The credit facility does not impose any financial covenants. This credit facility was extended to June 30, 2003, while the Company negotiates a new line of credit. As of March 31, 2003, the Company had $232,717 outstanding under the line of credit, out of a total of $1,593,111 available for borrowing based on eligible accounts receivable and inventory at that time. Bank indebtedness represents checks outstanding.

Cash and cash equivalents were nil for the period ending March 31, 2003 compared to $50,065 as of December 31, 2002. Net cash used in operating activities was $130,000 for the three months ended March 31, 2003. A portion of the cash used in operating activities was a result of an extraordinary receivable of $108,000 from one of the Company’s suppliers for damages to product and which is anticipated to be received during the period ending June 30, 2003. The Company’s investing activities used $18,000 for the three months ended March 31, 2003 primarily for the purchase of coolers and registration of miscellaneous trademarks. Cash flow provided by financing activities was $98,000 for the three months ended March 31, 2003 and consisted primarily of borrowing under the line of credit, partially offset by the repayment of capital lease obligations.

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Seasonality

The Company has experienced significant fluctuations in quarterly results that have been the result of many factors, including the following:

• the addition or deletion of certain licensed brands to our distribution portfolio;
   
• the shift in business focus from being solely a regional distributor of licensed and unlicensed brands and products to being a developer, producer, marketer and distributor of internally developed brands and products;
   
• the seasonal demand for beverages; and
   
• competition and general economic conditions.

Due to these and other factors, the Company’s results of operations have fluctuated from period to period. 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. Like many other companies in the beverage industry, the Company generates a substantial percentage of its revenues during the warm weather months of April through September. Management believes that the demand for the Company’s products will continue to reflect such seasonal consumption patterns. While the Company looks to expand its distribution network and increase market penetration, however, such seasonality may not be easily discernible from results of operations. Due to all of the foregoing factors, the Company’s operating results in a particular quarter may fail to meet market expectations.

Other Factors that May Affect Operating Results

The Company’s operating results may fluctuate due to a number of factors, including, but not limited to:

• the ability of the Company’s third party distributors to successfully promote and sell the Company’s products;
   
• the Company’s ability to (i) develop expand and improve distribution channels, (ii) develop favorable arrangements with third party distributors of the Company’s products and (iii) minimize or reduce issues associated with engaging new distributors, including, but not limited to, transition costs and expenses and down time resulting from the initial deployment of the Company’s products in each new distributor’s network;
   
• the Company’s ability to develop and implement its direct-to-retail sales channels, as well as its “yourjones” and “myjones” programs;
   
• unilateral decisions by distributors, grocery store chains, specialty chain stores, club stores, mass merchandisers and other customers to discontinue carrying all or any of the Company’s products that they are carrying at any time;
   
• competitive products and pricing pressures and the Company’s ability to gain or maintain share of sales in the marketplace as a result of actions by competitors;

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• the Company’s ability to generate sufficient cash flows to support general operating activities and capital expansion, and its ability to operate profitably;
   
• the availability of financing, whether on terms acceptable to the Company or at all, including the terms and/or availability of the Company’s credit facility and the actions of its creditors;
   
• the Company’s ability to develop and maintain favorable arrangements with third party suppliers of raw materials and packers for the Company’s products, including the outcome of the arbitration proceeding involving Pro-Liquitech (see “Legal Proceedings” below);
   
• the Company’s ability to effectively manage changes in key personnel or management;
   
• the Company’s ability to develop and maintain brand awareness for its products;
   
• the Company’s success in introducing new products to the market and the market’s acceptance of the new products (such as the launch of the new 16-ounce Jones Energy drink, and the introduction of Jones Naturals in Western Canada);
   
• the Company’s ability to comply with federal, state and provincial laws and regulations and any changes or amendments thereon, and the cost and effect of such compliance;
   
• changes in consumer tastes, preferences and demographic patterns;
   
• changes in the cost and availability of raw materials and the ability to maintain favorable supply arrangements and relationships and procure timely and/or adequate production of all or any of the Company’s products;
   
• fluctuations in foreign currency rates, interest rates and other capital market conditions;
   
• the Company’s ability to penetrate new markets;
   
• the effectiveness of the Company’s advertising, marketing and promotional programs; and
   
• adverse weather conditions, which could reduce demand for the Company’s products.

Investor Relations

During the period ending March 31, 2003, the Company completed all Investor Relations activities in-house. The Company sent out copies of news or press releases, the Company’s corporate brochure, and communicated to shareholders with a monthly newsletter and a quarterly Investor Conference Call.

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ITEM 3.      Controls and Procedures

Within the 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.

PART II. OTHER INFORMATION

ITEM 1.      Legal Proceedings

The Company is currently in dispute with Pro-Liquitech International, its primary flavor concentrate supplier, with respect to pricing, exclusivity, and other terms of and performance under the supply contract between the parties. In February 2003, Pro-Liquitech filed a request for arbitration with the American Arbitration Association claiming monetary damages, and the Company has counterclaims against Pro-Liquitech. The parties have submitted requests for arbitrators, although a date for arbitration has not been set. The Company believes it has strong claims against Pro-Liquitech and intends to pursue the matter vigorously. Management believes that this dispute will not have a material adverse effect on the Company’s ability to obtain supplies of flavor concentrate as and when needed, or on its financial condition or results of operations.

Other than described above, the Company is not a party to any pending material legal proceedings. However, from time to time, we may pursue (and have pursued in the past) litigation against third parties to enforce or protect our rights under our trademarks, trade secrets and our intellectual property rights generally.

ITEM 6.      Exhibits and Reports on Form 8-K

     
(a)  Exhibits:
     
  99.1 Certification by Peter van Stolk, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
  99.2 Certification by Jennifer Cue, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

    

  May 14, 2003    
  JONES SODA CO.
     
By: /s/ PETER VAN STOLK
   
    Peter van Stolk
    President and Chief Executive Officer

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CERTIFICATION

I, Peter van Stolk, certify that:

1.     I have reviewed this quarterly report on Form 10-QSB of Jones Soda Co.

2.     Based on my knowledge, this quarterly 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 quarterly report.

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report.

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.     designed such disclosure controls and procedures 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 quarterly report is being prepared;

b.     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c.     presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

a.     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

    

 Dated as of 14, May, 2003.  
/s/ PETER VAN STOLK
 
Peter van Stolk
President and Chief Executive Officer

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CERTIFICATION

I, Jennifer L. Cue, certify that:

1.     I have reviewed this quarterly report on Form 10-QSB of Jones Soda Co.

2.     Based on my knowledge, this quarterly 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 quarterly report.

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report.

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.     designed such disclosure controls and procedures 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 quarterly report is being prepared;

b.     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c.     presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

a.     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Dated as of 14, May, 2003.  
/s/ JENNIFER L. CUE
 
Jennifer L. Cue
Chief Financial Officer and Chief Operating Officer

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