JONES SODA CO. 10-Q

ITEM 1. FINANCIAL STATEMENTS     JONES SODA CO. CONDENSED CONSOLIDATED BALANCE SHEETS       June 30, 2021     December 31, 2020       (Unaudited)               (In thousands, except share data)   ASSETS                 Current assets:                 Cash and cash equivalents   $ 3,109     $ 4,614   Accounts receivable, net of allowance of $ 84 and $ 93     2,989       1,581   Inventory     1,922       1,856   Prepaid expenses and other current assets     230       193   Total current assets     8,250       8,244   Fixed assets, net of accumulated depreciation of $ 603 and $ 554     287       305   Other assets     33       33   Right of use lease asset     418       471   Total assets   $ 8,988     $ 9,053   LIABILITIES AND SHAREHOLDERS ’ EQUITY                 Current liabilities:                 Accounts payable   $ 1,555     $ 1,385   Lease liability, current portion     106       102   Accrued expenses     1,136       853   Taxes payable     8       6   Current portion of convertible subordinated notes payable, net     664       -   Current portion of accrued interest expense     124       -   Current portion of SBA Loan     -       140   Total current liabilities     3,593       2,486   Net convertible subordinated notes payable, net of current portion     -       1,386   Accrued interest expense, net of current portion     -       232   SBA loan, net of current portion     -       195   Lease liability, net of current portion     321       375   Total liabilities     3,914       4,674   Shareholders’ equity:                 Common stock, no par value:                 Authorized — 100,000,000 ; issued and outstanding shares — 64,977,677 shares and 61,975,748 shares, respectively     75,015       73,953   Accumulated other comprehensive income     454       411   Accumulated deficit     ( 70,395 )     ( 69,985 ) Total shareholders’ equity     5,074       4,379   Total liabilities and shareholders’ equity   $ 8,988     $ 9,053     See accompanying notes to condensed consolidated financial statements.   5 Table of Contents     JONES SODA CO. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)       Three months ended June 30,     Six months ended June 30,       2021     2020     2021     2020       (In thousands, except share data)     (In thousands, except share data)   Revenue   $ 4,458     $ 3,098     $ 7,315     $ 5,890   Cost of goods sold     3,064       2,512       5,153       4,722   Gross profit     1,394       586       2,162       1,168   Operating expenses:                                 Selling and marketing     710       529       1,371       1,282   General and administrative     675       754       1,431       1,462   Total operating expenses     1,385       1,283       2,802       2,744   Income (loss) from operations     9       ( 697 )     ( 640 )     ( 1,576 ) Interest income     1       4       2       21   Interest expense     ( 24 )     ( 38 )     ( 84 )     ( 76 ) Other income (expense), net     335       1       328       14   Income (loss) before income taxes     321       ( 730 )     ( 394 )     ( 1,617 ) Income tax expense, net     ( 12 )     ( 8 )     ( 16 )     ( 12 ) Net income (loss)   $ 309     $ ( 738 )   $ ( 410 )   $ ( 1,629 )                                   Net income (loss) per share - basic   $ 0.00     $ ( 0.01 )   $ ( 0.01 )   $ ( 0.03 ) Net income (loss) per share - diluted   $ 0.00     $ ( 0.01 )   $ ( 0.01 )   $ ( 0.03 ) Weighted average basic common shares outstanding     64,550,554       61,667,668       63,857,185       61,666,552   Weighted average diluted common shares outstanding     68,413,118       61,667,668       63,857,185       61,666,552     See accompanying notes to condensed consolidated financial statements.   6 Table of Contents     JONES SODA CO. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)       Three months ended June 30,     Six months ended June 30,       2021     2020     2021     2020       (In thousands)     (In thousands)   Net income (loss)   $ 309     $ ( 738 )   $ ( 410 )   $ ( 1,629 ) Other comprehensive income (loss):                                 Foreign currency translation adjustment     35       48       43       ( 39 ) Total comprehensive income (loss)   $ 344     $ ( 690 )   $ ( 367 )   $ ( 1,668 )   See accompanying notes to condensed consolidated financial statements.   7 Table of Contents     JONES SODA CO. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY (Unaudited)       Common Stock                               Number     Amount     Accumulated Other Comprehensive Income     Accumulated Deficit     Total Shareholders ’ Equity       (In thousands, except share data)   Three months ended June 30, 2020                                         Balance as of March 31, 2020     61,667,668     $ 73,811     $ 255     $ ( 67,879 )   $ 6,187   Share based payment activity     -       32       -       -       32   Beneficial conversion feature on paid-in-kind interest     -       3       -       -       3   Net loss     -       -       -       ( 738 )     ( 738 ) Other comprehensive income     -       -       48       -       48   Balance as of June 30, 2020     61,667,668     $ 73,846     $ 303     $ ( 68,617 )   $ 5,532   Three months ended June 30, 2021                                         Balance as of March 31, 2021     64,385,806     $ 74,780     $ 419     $ ( 70,704 )   $ 4,495   Share based payment activity     -       28       -       -       28   Common stock issuance on conversion of notes payable     462,600       148       -       -       148   Exercise of stock options     129,271       58                   58   Beneficial conversion feature on paid-in-kind interest     -       1                   1   Net income     -       -       -       309       309   Other comprehensive income     -       -       35       -       35   Balance as of June 30, 2021     64,977,677     $ 75,015     $ 454     $ ( 70,395 )   $ 5,074   Six months ended June 30, 2020                                         Balance as of December 31, 2019     61,566,076     $ 73,773     $ 342     $ ( 66,988 )   $ 7,127   Share based payment activity     101,592       67       -       -       67   Beneficial conversion feature on paid-in-kind interest     -       6       -       -       6   Net loss     -       -       -       ( 1,629 )     ( 1,629 ) Other comprehensive loss     -       -       ( 39 )     -       ( 39 ) Balance as of June 30, 2020     61,667,668     $ 73,846     $ 303     $ ( 68,617 )   $ 5,532   Six months Ended June 30, 2021                                         Balance as of December 31, 2020     61,975,748     $ 73,953     $ 411     $ (69,985)     $ 4,379   Share based payment activity     -       81       -       -       81   Common stock issuance on conversion of notes payable     2,847,658       911       -       -       911   Exercise of stock options     154,271       67                   67   Beneficial conversion feature on paid-in-kind interest     -       3       -       -       3   Net loss     -       -       -       ( 410 )     ( 410 ) Other comprehensive income     -       -       43       -       43   Balance as of June 30, 2021     64,977,677     $ 75,015     $ 454     $ ( 70,395 )   $ 5,074     See accompanying notes to condensed consolidated financial statements.   8 Table of Contents     JONES SODA CO. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)       Six months ended June 30,       2021     2020       (In thousands)   OPERATING ACTIVITIES:                 Net loss   $ ( 410 )   $ ( 1,629 ) Adjustments to reconcile net loss to net cash flows from operating activities:                 Depreciation and amortization     103       53   Stock-based compensation     81       73   Change in allowance for doubtful accounts     ( 9 )     68   Forgiveness of PPP SBA loan     ( 335 )     -   Changes in operating assets and liabilities:                 Accounts receivable     ( 1,406 )     ( 1,156 ) Inventory     ( 55 )     154   Prepaid expenses and other current assets     ( 36 )     73   Accounts payable     171       448   Accrued expenses     307       131   Taxes payable     2       ( 8 ) Other liabilities     2       1   Net cash used in operating activities     ( 1,585 )     ( 1,792 ) INVESTING ACTIVITIES:                 Purchase of fixed assets     ( 30 )     ( 179 ) Net cash used in investing activities     ( 30 )     ( 179 ) FINANCING ACTIVITIES:                 Proceeds from exercise of stock options     67       -   Proceeds from PPP SBA loan     -       335   Payment of taxes on RSU withholding     -       ( 6 ) Net cash provided by (used in) financing activities     67       329   Net decrease in cash and cash equivalents     ( 1,548 )     ( 1,642 ) Effect of exchange rate changes on cash     43       ( 17 ) Cash and cash equivalents, beginning of period     4,614       5,969   Cash and cash equivalents, end of period   $ 3,109     $ 4,310   Supplemental disclosure:                 Cash paid during period for:                 Income taxes   $ 12     $ 12   Supplemental disclosure of non-cash transactions:                 Conversion of notes payable   $ 911     $ -   Recognition of lease liability and right-of-use asset     -       556   Beneficial conversion feature on convertible notes and accrued interest     3       6     See accompanying notes to condensed consolidated financial statements.   9 Table of Contents   JONES SODA CO. NOTES   TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     1. Nature of Operations and Summary of Significant Accounting Policies   Jones Soda Co. develops, produces, markets and distributes premium beverages which it sells and distributes primarily in the United States and Canada through its network of independent distributors and directly to its national and regional retail accounts.   We are a Washington corporation and have two wholly-owned operating subsidiaries, Jones Soda Co. (USA) Inc. and Jones Soda (Canada) Inc. (Subsidiaries).   Basis of presentation, consolidation and use of estimates   The accompanying condensed consolidated balance sheet as of December 31, 2020, which has been derived from our audited consolidated financial statements, and unaudited interim condensed consolidated financial statements as of June 30, 2021, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting. The condensed consolidated financial statements include our accounts and the accounts of our subsidiaries. All intercompany transactions between us and our subsidiaries have been eliminated in consolidation.   In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments, consisting only of those of a normal and recurring nature, considered necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods presented.  Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Significant items subject to such estimates and assumptions include, but are not limited to, inventory valuation, depreciable lives and valuation of capital assets, valuation allowances for receivables, trade promotion liabilities, stock-based compensation expense, valuation allowance for deferred income tax assets, contingencies, and forecasts supporting the going concern assumption and related disclosures. Actual results could differ from those estimates. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10 -K for the fiscal year ended December 31, 2020.   Liquidity   As of June 30, 2021, we had cash and cash-equivalents of approximately $ 3.1 million and working capital of approximately $ 4.7 million. Net cash used in operations during the six months ended June 30, 2021 and 2020 totaled approximately $ 1.6 million and $ 1.8 million, respectively.   We have experienced recurring losses from operations and negative cash flows from operating activities.  This situation creates uncertainties about our ability to execute our business plan, finance operations, and indicates substantial doubt about the Company’s ability to continue as a going concern. On July 14, 2021, we received proceeds of $ 2 million in connection with the issuance of an unsecured convertible debenture to SOL Verano Blocker 1 LLC (the “Convertible Debenture”). We believe that the recent financing helps alleviate the conditions which initially indicated substantial doubt about our ability to continue as a going concern. However, we have experienced and continue to experience negative cash flows from operations, as well as an ongoing requirement for additional capital to support working capital needs. Therefore, even with these proceeds, we may require additional financing to support our working capital needs in the future. The amount of additional capital we may require, the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including our strategic initiatives and operating plans, the performance of our business and the market conditions for available debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our sales goals and otherwise successfully execute our operating plan. We believe it is imperative that we meet these sales objectives in order to lessen our reliance on external financing in the future. We intend to continually monitor and adjust our operating plan as necessary to respond to developments in our business, our markets and the broader economy. In addition, the continuation of the COVID- 19 pandemic and uncertain market conditions may limit our ability to access capital, may reduce demand for certain products, and may negatively impact our supply chain.   10 Table of Contents   Although we believe various debt and equity financing alternatives will be available to us to support our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. In addition, the terms of the Convertible Debenture restrict, among other things, the amount of additional debt the Company can incur, as well as the number of shares of common stock the Company may issue, without the consent of the debentureholder.  Moreover, any debt or equity financing alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic transactions that we consider to be in the best interest of our company and our shareholders, which may include, without limitation, public or private offerings of debt or equity securities, a rights offering, and other strategic alternatives; however, these options may not ultimately be available or feasible when needed.   As of the date of this Report, as a result of our cash on hand as well as the issuance of the Convertible Debenture, we believe that our current cash and cash equivalents will be sufficient to meet the Company’s funding requirements for one year after these consolidated financial statements are issued.   Seasonality and other fluctuations   Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. We historically have generated a greater percentage of our revenues during the warm weather months of April through September. Sales may fluctuate materially on a quarter to quarter basis or an annual basis when we launch a new product or fill the “pipeline” of a new distribution partner or a large retail partner. Sales results may also fluctuate based on the number of SKUs selected or removed by our distributors and retail partners through the normal course of serving consumers in the dynamic, trend-oriented beverage industry. As a result, management believes that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the fiscal year.   Revenue recognition   We recognize revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC 606” ). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We only apply the five -step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods and services transferred to the customer. The following five steps are applied to achieve that core principle:   Step 1: Identify the contract with the customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when the company satisfies a performance obligation   See Note 6, Segment Information, for information on revenue disaggregated by geographic area.   Because our agreements have an expected duration of one year or less, we have elected the practical expedient in ASC 606 - 10 - 50 - 14 (a) to not disclose information about our remaining performance obligations.   Our contracts have a single performance obligation which is satisfied at the point in time when the customer has title and the significant risks and rewards of ownership of the product. Effective March 1, 2021, title and the significant risk and rewards of ownership are deemed to transfer when products are loaded onto a truck for shipment or Free on Board (“FOB”) shipping point. Prior to March 1, 2021, shipping terms varied from customer to customer. We primarily receive fixed consideration for sales of product, subject to adjustment as described below. Shipping and handling amounts paid by customers are primarily for online orders, and are included in revenue, and totaled $ 40,000 and $ 22,000 for the three months ended June 30, 2021 and 2020, respectively, and $ 55,000 and $ 38,000 for the six months ended June 30, 2021 and 2020, respectively. Sales tax and other similar taxes are excluded from revenue.   11 Table of Contents   Revenue is recorded net of provisions for discounts, slotting fees payable by us to retailers to stock our products and promotion allowances. Discounts, slotting fees and promotional allowances vary the consideration we are entitled to in exchange for the sale of products to distributors. We estimate these discounts, slotting fees and promotional allowances in the same period that the revenue is recognized for product sales to customers. These estimates are based on contract terms and our historical experience with similar programs and require management judgement with respect to estimating customer participation and performance levels. Differences between estimated expense and actual costs are normally insignificant and are recognized in earnings in the period such differences are determined. The amount of revenue recognized represents the amount that will not be subject to a significant future reversal of revenue. The liability for promotional allowances is included in accrued expenses on the consolidated balance sheets. Amounts paid for slotting fees are recorded as prepaid expenses on the consolidated balance sheets and amortized over the corresponding term. For the quarters ended June 30, 2021 and 2020, our revenue was reduced by $ 454,000 and $ 407,000 , respectively, and for the six months ended June 30, 2021 and 2020, by $ 804,000 and $ 704,000 , respectively, in each case for slotting fees and promotion allowances.   All sales to distributors and customers are generally final. In limited instances we may accept returned product due to quality issues or distributor terminations, and in such situations we would have variable consideration. To date, returns have not been material. Our customers generally pay within 30 days from the receipt of a valid invoice. We offer prompt pay discounts of up to 2 % to certain customers typically for payments made within 15 days. Prompt pay discounts are estimated in the period of sale based on experience with sales to eligible customers. Early pay discounts are recorded as a deduction to the accounts receivable balance presented on the condensed consolidated balance sheets.   The accounts receivable balance primarily includes balances from trades sales to distributors and retail customers. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in existing accounts receivable. 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 $ 84,000 and $ 93,000 as of June 30, 2021  and December 31, 2020, respectively, were netted against accounts receivable. No impairment losses were recognized as of June 30, 2021  and December 31, 2020. Changes in accounts receivable are primarily due to the timing and magnitude of orders for products, the timing of when control of products is transferred to distributors and the timing of cash collections.   As of June 30, 2021, A. Lassonde Inc. (“Lassonde”), one of our independent distributors, made up 18 % of our outstanding accounts receivable. As of December 31, 2020, Lassonde made up 18 % of our outstanding accounts receivable.   Net income (loss) per share   The computation for basic and diluted earnings per share is as follows (in thousands, except share data):       Three months ended June 30,     Six months ended June 30,       2021     2020     2021     2020   Net income (loss)   $ 309     $ ( 738 )   $ ( 410 )   $ ( 1,629 ) Weighted average common shares outstanding:                                 Basic     64,550,554       61,667,668       63,857,185       61,666,552                                                                       Dilutive convertible notes     2,615,606       -       -       -   Dilutive stock options     1,246,958       -       -       -   Diluted     68,413,118       61,667,668       63,857,185       61,666,552   Net income (loss) per share:                                 Basic   $ 0.00     $ ( 0.01 )   $ ( 0.01 )   $ ( 0.03 ) Diluted   $ 0.00     $ ( 0.01 )   $ ( 0.01 )   $ ( 0.03 )   Basic net loss per share is computed using the weighted average number of common shares outstanding during the periods. Diluted earnings per share is computed by adjusting the weighted average number of common shares by the effective net exercise or conversion of all dilutive securities. Outstanding stock options amounting to 219,750 were anti-dilutive and excluded from inclusion in diluted weighted shares outstanding for the three months ended June 30, 2021. Due to the net loss in the three and six months ended June 30, 2020, outstanding stock options amounting to 3,592,913 shares, shares issuable upon the conversion of the Convertible Notes of 5,233,116, and stock warrants of 15,000,000 shares were anti-dilutive and excluded from inclusion in diluted weighted shares outstanding. Due to the net loss in the six months ended June 30, 2021, outstanding stock options amounting to 4,343,233 shares and shares issuable upon the conversion of the Convertible Notes of 2,615,606  were anti-dilutive and excluded from inclusion in diluted weighted shares outstanding.    12 Table of Contents   Deferred financing costs   We defer costs related to the issuance of debt which are included on the accompanying balance sheets as a deduction from the debt liability. Deferred financing costs are amortized over the term of the related loan using the effective interest method and are included as a component of interest expense on the accompanying condensed consolidated statements of operations.   Operating leases   At lease commencement, we record a lease liability based on the present value of lease payments over the expected lease term. We calculate the present value of lease payments using the discount rate implicit in the lease, unless that rate cannot be readily determined. In that case, we use our incremental borrowing rate, which is the rate of interest that we would have to pay to borrow on a collateralized basis an amount equal to the lease payments over the expected lease term. We record a corresponding right-of-use lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor prior to the lease commencement date.    Recent accounting pronouncements   In August  2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020 - 06, “Debt-Debt with Conversion and other options” (“ASU 2020 - 06” ), which simplifies the accounting for convertible debt instruments and convertible preferred stock. This ASU is effective for public companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact ASU 2020 - 06 could have on our consolidated financial statements.   In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments: Credit Losses (“ASU 2016 - 13” ), which changes the impairment model for most financial instruments, including trade receivables from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU is effective for us in the first quarter of 2023 and must be adopted using a modified retrospective transition approach. We are currently evaluating the potential impact that the adoption of ASU 2016 - 13 will have on our consolidated financial statements.     2. Inventory   Inventory consisted of the following (in thousands):       June 30, 2021     December 31, 2020   Finished goods   $ 1,290     $ 1,142   Raw materials     632       714       $ 1,922     $ 1,856     Finished goods primarily include product ready for shipment, as well as promotional merchandise held for sale. Raw materials primarily include ingredients, concentrate and packaging. For the three months ended June 30, 2021 and 2020, we recorded obsolete inventory expenses of $ 8,000 and $ 62,000 , respectively. For the six months ended June 30, 2021 and 2020, we recorded obsolete inventory expenses of $ 16,000 and $ 71,000 , respectively.     3.      Lease Obligations   We currently lease approximately 6,500 square feet of retail/office space in Seattle, Washington for our principal executive and administrative offices. The initial term of the lease was five years; in February 2020, we amended the lease to extend the term through February 28, 2025. As a result of the lease amendment, we recognized a lease liability and right-of-use asset of $ 556,000 which represents the remaining lease payments discounted at a rate of 4 %. As of June 30, 2021, this lease had a remaining lease term of 3.67 years.   During the quarters ended June 30, 2021 and 2020, we incurred rental expenses of $ 38,000 and $ 42,000 , respectively and during the six months ended June 30, 2021 and 2020, we incurred rental expenses of $ 80,000 and $ 79,000 , respectively. During the quarters ended June 30, 2021 and 2020, we made cash payments of $ 38,000 and $ 39,000 , respectively and during the six months ended June 30, 2021 and 2020, we made cash payments of $ 78,000 and $ 77,000 , respectively.   13 Table of Contents   Management fees and other operational expenses were immaterial. Cash payments on our operating lease are presented as operating cash outflows in the condensed consolidated statements of cash flows. As of June 30, 2021, our scheduled lease payments excluding management fees and other operational expenses for the remainder of the lease term for the years ending December 31 will be as follows (in thousands):   2021 (remaining)   $ 60   2022     122   2023     126   2024     130   2025     22   Total lease payments     460   Less: imputed interest     ( 33 ) Total remaining lease liability   $ 427       4. Convertible Subordinated Notes Payable   On March 23, 2018, and April 18, 2018, we issued and sold an aggregate principal amount of $ 2,920,000 of convertible subordinated promissory notes (the “Convertible Notes”) to institutional investors, our management team, and other individual investors.   The Convertible Notes have a four -year term from the date of issuance and bear interest at 6 % per annum until maturity on March 23, 2022 and April 18, 2022, as applicable. The holders can convert the Convertible Notes at any time into the number of shares of our common stock equal to the quotient obtained by dividing (i) the amount of the unpaid principal and interest on such Convertible Note by (ii) $ 0.32 (the “Conversion Price”). The Conversion Price is subject to anti-dilution adjustment on a broad-based, weighted average basis if we issue shares or equity-linked instruments at a conversion price below $0.32 per share. No payments of principal or interest are due until the maturity.   The Convertible Notes are subordinated in right of payment to the prior payment in full of all of our senior indebtedness, which is defined as amounts due in connection with our indebtedness for borrowed money to banks, commercial finance lenders, or other lending institutions regularly engaged in the business of lending money, with certain restrictions.   During the quarter ended June 30, 2021, Convertible Notes in the aggregate principal amount of $ 124,000 and related accrued interest were converted into an aggregate of 462,600 shares of common stock in accordance with the original terms of the Convertible Notes. As a result, the carrying amount of the converted principal amount of such Convertible Notes, along with the converted accrued interest, in an aggregate amount of $ 148,000 , was credited to common stock and unamortized discounts in an amount equal to $ 3,000 were recognized as interest expense for the three months ended June 30, 2021. During the period from January 1, 2021 through June 30, 2021, Convertible Notes in the aggregate principal amount of $ 774,000 and related accrued interest were converted into an aggregate of 2,847,658 shares of common stock in accordance with the original terms of the Convertible Notes. As a result, the carrying amount of the converted principal amount of such Convertible Notes, along with the converted accrued interest, in an aggregate amount of $ 911,000 , was credited to common stock and unamortized discounts in an amount equal to $ 25,000 were recognized as interest expense for the six months ended June 30, 2021. There were no Convertible Notes converted during the three or six months ended June 30, 2020.   The fair value of our common stock on March 23, 2018, the initial closing date for the issuance of the Convertible Notes, was $ 0.36 per share; therefore, the Convertible Notes contained a beneficial conversion feature with an aggregate intrinsic value of $ 350,000 . The fair value of our common stock on April 18, 2018, the second closing date for the issuance of the Convertible Notes, was $ 0.30 per share, which did not result in an additional beneficial conversion feature. The resulting debt discount for the Convertible Notes issued on March 23, 2018 is presented as a direct deduction from the carrying value of the Convertible Notes and was recorded with an increase to additional paid-in capital. This discount, along with the related closing costs amounting to $ 137,000 , are amortized through interest expense over the term of the Convertible Notes. The balance of notes payable is presented net of unamortized discounts amounting to $ 36,000 and $ 88,000 at June 30, 2021 and December 31, 2020, respectively. The principal balance of notes payable to related parties amounted to $ 120,000 at June 30, 2021 and December 31, 2020.   14 Table of Contents   Principal payment obligations on the Convertible Notes are as follows for the following years ending December 31 ( in thousands):   2021 (remaining)   $ -   2022     700       $ 700       5. Shareholders ’ Equity   Under the terms of our 2011 Incentive Plan (the “Plan”), the number of shares authorized under the Plan may be increased each January 1st by an amount equal to the lesser of (a) 1,300,000 shares, (b) 4.0 % of our outstanding common stock as of the end of our immediately preceding fiscal year, and (c) a lesser amount determined by the Board of Directors (the “Board”), provided that the number of shares that may be granted pursuant to awards in a single year may not exceed 10 % of our outstanding shares of common stock on a fully diluted basis as of the end of the immediately preceding fiscal year. As of June 30, 2021, the total number of shares of common stock authorized under the Plan was 12,084,032 shares.   Under the terms of the Plan, the Board may grant awards to employees, officers, directors, consultants, agents, advisors and independent contractors. Awards may consist of stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards or other stock or cash-based awards. Stock options are granted with an exercise price equal to the closing price of our stock on the date of grant, and generally have a ten -year term and vest over a period of 48 months with the first 25 % of the shares subject to the option vesting one year from the grant date and the remaining 75 % of the shares subject to the option vesting in equal monthly increments over the subsequent 36 months. Restricted stock awards generally vest over one year. As of June 30, 2021, there were 6,587,921 shares of unissued common stock authorized and available for future awards under the Plan.   In March 2021, the Board approved the readoption of the Plan to extend the expiration date thereof from April 1, 2021 to April 1, 2023 and obtained shareholder approval of such readoption at the annual meeting of shareholders held on May 13, 2021.   (a) Stock options:   A summary of our stock option activity is as follows:       Outstanding Options       Number of Shares     Weighted Average Exercise Price   Balance at January 1, 2021     3,589,783     $ 0.36   Options granted     998,450       0.36   Options exercised     ( 154,271 )     0.43   Options forfeited/expired     ( 90,729 )     0.78   Balance at June 30, 2021     4,343,233     $ 0.35   Exercisable, June 30, 2021     2,707,124     $ 0.38   Vested and expected to vest     3,861,412     $ 0.35       (b) Restricted stock awards:   Prior to December 31, 2019, equity compensation for non-employee director service consisted of an annual restricted stock unit award that vested over one year, with the number of shares underlying such award being determined by dividing $ 15,000 by the closing stock price on the date of grant (which was the first business day in January in each calendar year); when joining the Board each non-employee director received an initial restricted stock unit award that vested over one year, the number of shares underlying such award being determined by dividing $15,000 by our closing stock price on the date of grant (which was the first trading day following the date on which such director was appointed), prorated based on the date on which such director was appointed.   There was no restricted stock activity during the three and six months ended June 30, 2021 and no unvested restricted stock awards at June 30, 2021. During the six months ended June 30, 2020, 119,520 restricted stock awards vested, less 17,928 shares withheld as payment for taxes due in connection with the vesting of restricted stock awards.   Commencing as of January 1, 2020, equity compensation for non-employee director service consists of the grant of an annual non-qualified stock option award that vests on the first anniversary of the date of grant (subject to the director’s continuing service as of such anniversary date), with the number of shares underlying such award determined by dividing $ 25,000 by the closing stock price on the date of grant (which shall be the first trading day in January in each calendar year), and such stock option award shall have an exercise price equal to our closing stock price on the date of grant. When joining our board of directors, each non-employee director shall be granted a non-qualified stock option award that vests on the first anniversary of the date of grant (subject to the director’s continuing service as of such anniversary date), with the number of shares underlying such award determined by dividing $25,000 by our closing stock price on the first trading day following the date on which such director is appointed), prorated based on the date on which such director is appointed, and which stock option shall be granted as of the first trading day following the date on which such director was appointed, and shall have an exercise price equal to our closing stock price on the date of grant.   15 Table of Contents   (c) Stock-based compensation expense:   Stock-based compensation expense is recognized using the straight-line attribution method over the employees’ requisite service period, or the non-employee's service period based on the term of the contract. We recognize compensation expense for only the portion of stock options or restricted stock expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee attrition. If the actual number of forfeitures differs from those estimated by management, additional adjustments to stock-based compensation expense may be required in future periods.   At June 30, 2021, we had unrecognized compensation expense related to stock options of $ 179,000 to be recognized over a weighted-average period of 2.9 years.   The following table summarizes the stock-based compensation expense (in thousands):       Three months ended June 30,     Six months ended June 30,       2021     2020     2021     2020   Type of awards:                                 Stock options   $ 28     $ 27     $ 81     $ 63   Restricted stock     -       5       -       10       $ 28     $ 32     $ 81     $ 73                                     Income statement account:                                 Selling and marketing   $ 6       7     $ 25     $ 16   General and administrative     22       25       56       57       $ 28     $ 32     $ 81     $ 73     We employ the following key weighted-average assumptions in determining the fair value of stock options, using the Black-Scholes option pricing model and the simplified method to estimate the expected term of “plain vanilla” options:       Six months ended June 30,       2021     2020   Expected dividend yield     —       —   Expected stock price volatility     74.8 %     73.4 % Risk-free interest rate     0.7 %     1.4 % Expected term (in years)     5.8       5.6   Weighted-average grant date fair-value   $ 0.23     $ 0.18     The aggregate intrinsic value of stock options outstanding at June 30, 2021 was approximately $ 702,000 and for options exercisable was $ 371,000 . The intrinsic value of outstanding and exercisable stock options is calculated as the quoted market price of the stock at the balance sheet date less the exercise price of the option. There were 154,271 options exercised with an aggregate intrinsic value of $ 21,000 during the six months ended June 30, 2021. There were no options exercised during the six months ended June 30, 2020.     6. Segment Information   We have one operating segment with operations primarily in the United States and Canada. Sales are assigned to geographic locations based on the location of customers. Sales by geographic location are as follows (in thousands):       Three months ended June 30,     Year Ended June 30,       2021     2020     2021     2020   Revenue:                                 United States   $ 3,221     $ 2,278     $ 5,481     $ 4,429   Canada     1,195       819       1,775       1,443   Other countries     42       1       59       18   Total revenue   $ 4,458     $ 3,098     $ 7,315     $ 5,890     16 Table of Contents   During the three  months ended June 30, 2021 and 2020, one of our customers (Lassonde) represented an aggregate of approximately 24 % and 22 % of our revenue, respectively. During the six months ended June 30, 2021 and 2020, one of our customers (Lassonde) represented an aggregate of approximately 24 % and 22 % of our revenue, respectively.     7 . Paycheck Protection Program   On April 24, 2020, we received loan proceeds of $ 334,500 (the “PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of the CARES Act, provided for loans to qualifying companies in amounts up to 2.5 times their average monthly payroll expenses. Our PPP Loan was evidenced by a promissory note, dated as of April 24, 2020 ( the “Note”), between us and HomeStreet Bank (the “Lender”). The Note had a two -year term and accrued interest at the rate of 1.0% per annum. No payments of principal or interest were due during the 10 -month period beginning on the date of the Note (the “Deferral Period”). Furthermore, we received an extension of the first principal and interest payment date to 10 months after the last day of the Deferral Period.   Under the terms of the CARES Act, the principal and accrued interest under the Note was forgivable after 24 weeks if we used the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise complied with PPP requirements. In May 2021, we received full forgiveness of our PPP Loan and recorded the gain on debt forgiveness in the amount of $ 334,500 in earnings, which was presented as “other income” on our condensed consolidated statements of operations for the three and six months ended of June 30, 2021.     8 . Subsequent Events   On July 14, 2021, we issued a $ 2,000,000 unsecured convertible debenture to SOL Verano Blocker 1 LLC (the “Convertible Debenture”) that is convertible into units of the company (each a “Jones Unit”) at a conversion price of $ 0.50 per Jones Unit (the “Conversion Price”), with each Jones Unit consisting of one share of our common stock (each a “Jones Share”) and one share purchase special warrant of Jones (each a “Jones Special Warrant”). Each Jones Special Warrant will be exercisable into one Jones Share at a price of $ 0.625 per Jones Share for a period of 24 months from the date of issuance, conditional upon us increasing our authorized capital to an amount to cover the Jones Shares issuable pursuant to all of the outstanding Jones Special Warrants as well as the other Jones Shares issuable pursuant to our then-outstanding convertible/exercisable securities. Pursuant to the terms of the Convertible Debenture, upon satisfaction or waiver of the conditions precedent to the closing of the Plan of Arrangement (defined below), the entire principal amount on the Convertible Debenture and all accrued interest thereon shall automatically convert into Jones Units at the Conversion Price.   The Convertible Debenture matures on the earlier of July 14, 2023 or 60 days after either any agreement between Pinestar Gold Inc. (“Pinestar”) and us respecting the planned statutory plan of arrangement under the Business Corporations Act (British Columbia) (the “Plan of Arrangement”) is terminated or the debentureholder receives notice from either Pinestar or us that the Plan of Arrangement is unlikely to occur within seven months of the date of the Convertible Debenture (the “Maturity Date”), and accrues interest a rate of 5.00 % (which will increase to 18 % if an Event of Default (as defined in the Convertible Debenture) occurs or in the event that the Plan of Arrangement does not occur within seven months of the date of Convertible Debenture) that is payable on the last day of December in each year commencing on December 31, 2021, as well as the Maturity Date, and the date on which all or any portion of the Convertible Debenture is converted or repaid.   The terms of the Convertible Debenture restrict, amongst other things, the amount of additional debt we can incur, as well as the number of Jones Shares we can issue, without the consent of the debentureholder. The terms of the Convertible Debenture also provide that we shall use the principal amount of the Convertible Debenture exclusively for the costs and expenses associated with pursuing and completing the Plan of Arrangement, and for the purpose of expanding our business to the production of cannabis-containing beverages and related products.   Subsequent to June 30, 2021, Convertible Notes in the aggregate principal amount of $ 329,000 and related accrued interest were converted into 1,236,968 shares of common stock in accordance with the original terms of the Convertible Notes (as discussed in Note 4, unrelated to the Convertible Debenture noted in this footnote).   17 Table of Contents       ITEM 2. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.   You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report and the 2020 audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission ( “ SEC ” ) on March   24, 2021.   This Report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “ believe, ” “ expect, ” “ intend, ” “ anticipate, ” “ estimate, ” “ may, ” “ will, ” “ can, ” “ plan, ” “ predict, ” “ could, ” “ future, ” “ continue, ” variations of such words, and similar expressions. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined at the beginning of this Report under “ Cautionary Notice Regarding Forward-Looking Statements ” and in Item 1A of our most recent Annual Report on Form 10-K filed with the SEC, and in our other reports we file with the SEC, including our periodic reports on Form 10-Q and current reports on Form 8-K. These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.   Overview   We develop, produce, market and distribute premium beverages that we sell and distribute primarily in the United States and Canada through our network of independent distributors and directly to our national and regional retail accounts. We also sell products in select international markets. Our products are sold in grocery stores, convenience and gas stores, on fountain in restaurants, “up and down the street” in independent accounts such as delicatessens, sandwich shops and burger restaurants, as well as through our national accounts with several large retailers. We refer to our network of independent distributors as our direct store delivery (“DSD”) channel, and we refer to our national and regional accounts who receive shipments directly from us as our direct to retail (“DTR”) channel. We do not directly manufacture our products, but instead outsource the manufacturing process to third-party contract manufacturers. We also sell various products online, including soda with customized labels, wearables, candy and other items, and we license our trademarks for use on products sold by other manufacturers.   Our Focus: Sales Growth   Our focus is sales growth through the execution of the following key initiatives:     ● Expand the Jones Soda glass bottle business in existing and new sales channels;   ● Expand our fountain program in the United States and Canada; and   ● Increase distribution of Lemoncocco in the United States and Canada.   In addition, we intend to pursue the development of new extensions to Jones products, including the potential commercialization of cannabidiol (CBD)-infused beverages, and plan to use the proceeds of the Convertible Debenture and transactions outlined in the Term Sheet (each as described below) exclusively for transaction costs and the expansion our business to the production and sale of cannabis-containing beverages, edibles and related products.   18 Table of Contents   Results of Operations   The following selected financial and operating data are derived from our condensed consolidated financial statements and should be read in conjunction with our condensed consolidated financial statements.       Three months ended June 30,     Six months ended June 30,       2021     % of Revenue     2020     % of Revenue     2021     % of Revenue     2020     % of Revenue   Consolidated statements of operations data:   (Dollars in thousands, except per share data)     (Dollars in thousands, except per share data)                 Revenue   $ 4,458       100.0 %   $ 3,098       100.0 %   $ 7,315       100.0 %   $ 5,890       100.0 % Cost of goods sold     (3,064 )     (68.7 )%     (2,512 )     (81.1 )%     (5,153 )     (70.4 )%     (4,722 )     (80.2 )% Gross profit     1,394       31.3 %     586       18.9 %     2,162       29.6 %     1,168       19.8 % Selling and marketing expenses     (710 )     (15.9 )%     (529 )     (17.1 )%     (1,371 )     (18.7 )%     (1,282 )     (21.8 )% General and administrative expenses     (675 )     (15.1 )%     (754 )     (24.3 )%     (1,431 )     (19.6 )%     (1,462 )     (24.8 )% Income (loss) from operations     9       0.2 %     (697 )     (22.5 )%     (640 )     (8.7 )%     (1,576 )     (26.8 )% Interest income     1       0.0 %     4       0.1 %     2       0.0 %     21       0.4 % Interest expense     (24 )     (0.5 )%     (38 )     (1.2 )%     (84 )     (1.1 )%     (76 )     (1.3 )% Other income (expense), net     335       7.5 %     1       0.0 %     328       4.5 %     14       0.2 % Loss before income taxes     321       7.2 %     (730 )     (23.6 )%     (394 )     (5.4 )%     (1,617 )     (27.5 )% Income tax expense, net     (12 )     (0.3 )%     (8 )     (0.3 )%     (16 )     (0.2 )%     (12 )     (0.2 )% Net income (loss)   $ 309       6.9 %   $ (738 )     (23.8 )%   $ (410 )     (5.6 )%   $ (1,629 )     (27.7 )% Basic and diluted net loss per share   $ 0.00             $ (0.01 )           $ (0.01 )           $ (0.03 )               As of       June 30, 2021     December 31, 2020   Balance sheet data:   (Dollars in thousands)   Cash and cash equivalents and accounts receivable, net   $ 6,098     $ 6,195   Fixed assets, net     287       305   Total assets     8,988       9,053   Long-term liabilities     321       2,188   Working capital     4,657       5,758     Seasonality and Other Fluctuations   Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. We historically have generated a greater percentage of our revenues during the warm weather months of April through September. Sales may fluctuate materially on a quarter to quarter basis or an annual basis when we launch a new product or fill the “pipeline” of a new distribution partner or a large retail partner. Sales results may also fluctuate based on the number of SKUs selected or removed by our distributors and retail partners through the normal course of serving consumers in the dynamic, trend-oriented beverage industry. As a result, management believes that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the fiscal year.   Quarter Ended June 30, 2021 Compared to Quarter Ended June 30, 2020   Revenue   For the quarter ended June 30, 2021, revenue increased by approximately $1.4 million, or 44%, to approximately $4.5 million compared to approximately $3.1 million for the quarter ended June 30, 2020. This increase was primarily a result of increased DSD and DTR core bottled soda sales in the United States and Canada. Additionally, our fountain business returned to growth through increased sales in the food service channel.   For the quarter ended June 30, 2021, trade spend and promotion allowances, which offset revenue, totaled approximately $454,000, an increase of approximately $47,000, or 11.5%, compared to approximately $407,000 for the quarter ended June 30, 2020, due to the timing of incentive and retailer programs.   19 Table of Contents   Gross Profit   For the quarter ended June 30, 2021, gross profit increased by approximately $808,000, or 138%, to approximately $1.4 million compared to approximately $586,000 for the quarter ended June 30, 2020 due to higher revenues in the quarter ended June 30, 2021, the continued shift to a more profitable product mix and our ongoing efforts to optimize supply chain costs. For the quarter ended June 30, 2021, gross margin increased to 31.3% from 18.9% for the quarter ended June 30, 2020. This increase in gross margin was for the same reasons as noted above.    Selling and Marketing Expenses   Selling and marketing expenses for the quarter ended June 30, 2021 were approximately $710,000, an increase of approximately $181,000, or 34.2%, from approximately $529,000 for the quarter ended June 30, 2020. Selling and marketing expenses as a percentage of revenue decreased to 15.9% in the quarter ended June 30, 2021 from 17.1% in the same period in 2020 due to the increase in revenue during the 2021 period.  This increase in total selling and marketing expenses was primarily a result of the launch of multiple marketing programs, including our new augmented reality “Reel Label” series, multiple special release flavors, and additional digital marketing efforts such as the new Jones Soda phone application and an increase in paid social media, search engine optimization, influencer and email marketing efforts. We will continue to balance selling and marketing expenses with our working capital resources. For the three months ended June 30, 2021 and 2020, non-cash expenses included in selling and marketing expenses (stock compensation and depreciation) were approximately $23,000 and $17,000, respectively.   General and Administrative Expenses   General and administrative expenses for the quarter ended June 30, 2021 were approximately $675,000, a decrease of approximately $79,000, or 10.5%, compared to approximately $754,000 for the quarter ended June 30, 2020. General and administrative expenses as a percentage of revenue decreased to 15.1% in the quarter ended June 30, 2021 from 24.3% in the same period in 2020. This decrease in general and administrative expenses was due to a decrease in consulting expenses. We will continue to carefully manage general and administrative expenses with our working capital resources. For the three months ended June 30, 2021 and 2020, non-cash expenses included in general and administrative expenses (stock compensation and depreciation) were approximately $27,000 and $26,000, respectively.   Interest Income   We earned approximately $1,000 of interest income for the quarter ended June 30, 2021, compared to $4,000 for the quarter ended June 30, 2020. This decrease was related to a decrease in interest rates for interest-bearing money market accounts.   Interest Expense   We incurred approximately $24,000 of interest expense for the quarter ended June 30, 2021, compared to approximately $38,000 for the quarter ended June 30, 2020. This decrease was primarily related to the lower Convertible Notes balance outstanding as of June 30, 2021 in comparison to the balance outstanding as of June 30, 2020, which resulted in a decrease in accrued interest. The interest expense incurred during the quarters ended June 30, 2021 and 2020 was non-cash and primarily related to the amortization of the discount associated with the beneficial conversion feature on the Convertible Notes, along with the amortization of associated closing costs and interest related to the Convertible Notes.   Income Tax Expense   We incurred approximately $12,000 and $8,000 of income tax expense for the quarters ended June 30, 2021 and 2020, respectively, primarily related to the tax provision on income from our Canadian operations. We have not recorded any tax benefit for the loss in our U.S. operations as we have recorded a full valuation allowance on our U.S. net deferred tax assets. We expect to continue to record a full valuation allowance on our U.S. net deferred tax assets until we sustain an appropriate level of taxable income through improved U.S. operations. Our effective tax rate is based on recurring factors, including the forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a full valuation allowance on our U.S. net deferred tax assets.   Other income (expense)   We incurred approximately $335,000 and $1,000 of other income for the quarters ended June 30, 2021 and 2020, respectively. This increase in other income is due to our recognition of gain on debt forgiveness related to the full forgiveness of our PPP Loan in the principal amount of $334,500 during the quarter ended June 30, 2021.   Net income (loss)   Net income for the quarter ended June 30, 2021 was approximately $309,000 compared to net loss of approximately $738,000 for the quarter ended June 30, 2020. This increase was primarily due to the increase in gross profit, decrease in operating expenses, and forgiveness of our PPP loan that occurred during the quarter ended June 30, 2021 compared to the quarter ended June 30, 2020.   20 Table of Contents   Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020   Revenue   For the six months ended June 30, 2021, revenue increased by approximately $1.4 million, or 24.2%, to approximately $7.3 million compared to approximately $5.9 million for the six months ended June 30, 2020. This increase was primarily a result of increased DSD and DTR core bottled soda sales in the United States and Canada. Additionally, our fountain business returned to growth through increased sales in the food service channel.   For the six months ended June 30, 2021, trade spend and promotion allowances, which offset revenue, totaled approximately $804,000, an increase of approximately $100,000, or 14.2%, compared to approximately $704,000 for the six months ended June 30, 2020, due to the timing of incentive and retailer programs.   Gross Profit   For the six months ended June 30, 2021, gross profit increased by approximately $994,000, or 85.1%, to approximately $2.2 million compared to approximately $1.2 million for the six months ended June 30, 2020 due to higher revenues in the quarter ended June 30, 2021, the continued shift to a more profitable product mix and ongoing efforts to optimize supply chain costs. For the six months ended June 30, 2021, gross margin increased to 29.6% from 19.8% for the six months ended June 30, 2020. This increase in gross margin was for the same reasons as noted above.   Selling and Marketing Expenses   Selling and marketing expenses for the six months ended June 30, 2021 were approximately $1.4 million, an increase of approximately $89,000, or 6.9%, from approximately $1.3 million for the six months ended June 30, 2020. Selling and marketing expenses as a percentage of revenue decreased to 18.7% for the six months ended June 30, 2021 from 21.8% in the same period in 2020 due to the increase in revenue during the 2021 period. This increase in total selling and marketing expenses was primarily a result of the launch of multiple marketing programs, including our new augmented reality “Reel Label” series, multiple special release flavors, and additional digital marketing efforts such as the new Jones Soda phone application and an increase in paid social media, search engine optimization, influencer and email marketing efforts. We will continue to balance selling and marketing expenses with our working capital resources. For the six months ended June 30, 2021 and 2020, non-cash expenses included in selling and marketing expenses (stock compensation and depreciation) were approximately $58,000 and $35,000, respectively.   General and Administrative Expenses   General and administrative expenses for the six months ended June 30, 2021 were approximately $1.4 million, an increase of approximately $31,000, or 2.1%, compared to approximately $1.5 million for the six months ended June 30, 2020. General and administrative expenses as a percentage of revenue decreased to 19.6% in the six months ended June 30, 2021 from 24.8% in the same period in 2020. This decrease in general and administrative expenses was due to a decrease in consulting expenses. We will continue to carefully manage general and administrative expenses with our working capital resources. For the six months ended June 30, 2021 and 2020, non-cash expenses included in general and administrative expenses (stock compensation and depreciation) were approximately $70,000 and $58,000, respectively.   Interest Income   We earned approximately $2,000 of interest income for the six months ended June 30, 2021, compared to $21,000 for the six months ended June 30, 2020. This decrease was related to a significant decrease in interest rates for interest-bearing money market accounts.   Interest Expense   We incurred approximately $84,000 of interest expense for the six months ended June 30, 2021, compared to approximately $76,000 for the six months ended June 30, 2020. This increase was primarily related to the conversion of Convertible Notes that occurred during the six months ended June 30, 2021 that resulted in a higher amortization of the discount associated with the beneficial conversion feature on the Convertible Notes. The interest expense incurred during the six months ended June 30, 2021 and 2020 was non-cash and primarily related to the amortization of the discount associated with the beneficial conversion feature on the Convertible Notes, along with the amortization of associated closing costs and interest related to the Convertible Notes.   Income Tax Expense   We incurred approximately $16,000 and $12,000 of income tax expense for the six months ended June 30, 2021 and 2020, respectively, primarily related to the tax provision on income from our Canadian operations. We have not recorded any tax benefit for the loss in our U.S. operations as we have recorded a full valuation allowance on our U.S. net deferred tax assets. We expect to continue to record a full valuation allowance on our U.S. net deferred tax assets until we sustain an appropriate level of taxable income through improved U.S. operations. Our effective tax rate is based on recurring factors, including the forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a full valuation allowance on our U.S. net deferred tax assets.   21 Table of Contents   Other income (expense)   We incurred approximately $328,000 and $14,000 of other income during the six months ended June 30, 2021 and 2020, respectively. This increase in other income is due to our recognition of gain on debt forgiveness related to the full forgiveness of our PPP Loan in the principal amount of $334,500 during the six months ended June 30, 2021.   Net loss   Net loss for the six months ended June 30, 2021 was approximately $410,000 compared to net loss of approximately $1.6 million for the six months ended June 30, 2020. This decrease in loss was primarily due to the increase in gross profit, decrease in operating expenses, and forgiveness of our PPP loan that occurred during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.   Liquidity and Capital Resources   As of June 30, 2021, we had cash and cash-equivalents of approximately $3.1 million and working capital of approximately $4.7 million. Net cash used in operations during the six months ended June 30, 2021 and 2020 totaled approximately $1.6 million and $1.8 million, respectively.   During the six months ended June 30, 2021 and 2020, we received $67,000 and $0, respectively, from the cash exercise of stock options. From time to time, we may receive additional cash through the exercise of stock options. However, we cannot predict the timing or amount of cash proceeds we may receive from the exercise, if at all, of any of the outstanding stock options or warrants.   We have experienced recurring losses from operations and negative cash flows from operating activities.  This situation creates uncertainties about our ability to execute our business plan, finance operations, and indicates substantial doubt about the Company’s ability to continue as a going concern. On July 14, 2021, we received proceeds of $2 million in connection with the Convertible Debenture described below under “Recent Developments”. We believe that this recent financing will help alleviate the conditions which we believed initially indicated substantial doubt about our ability to continue as a going concern. However, we have experienced and continue to experience negative cash flows from operations, as well as an ongoing requirement for additional capital to support working capital needs. Therefore, even with the proceeds of this financing, we may require additional financing to support our working capital needs in the future. The amount of additional capital we may require, the timing of our capital needs and the availability of additional financing to fund those needs will depend on a number of factors, including our strategic initiatives and operating plans, the performance of our business and the market conditions for available debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our sales goals and otherwise successfully execute our operating plan. We believe it is imperative that we meet these sales objectives in order to lessen our reliance on external financing in the future. We intend to continually monitor and adjust our operating plan as necessary to respond to developments in our business, our markets and the broader economy. In addition, the continuation of the COVID-19 pandemic and uncertain market conditions may limit our ability to access capital, may reduce demand for certain products, and may negatively impact our supply chain.   Although we believe various debt and equity financing alternatives will be available to us to support our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. In addition, the terms of the Convertible Debenture restrict, among other things, the amount of additional debt we can incur, as well as the number of shares of common stock we may issue, without the consent of the debentureholder.  Moreover, any debt or equity financing alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic transactions that we consider to be in the best interest of our company and our shareholders, which may include, without limitation, public or private offerings of debt or equity securities, a rights offering, and other strategic alternatives; however, these options may not ultimately be available or feasible when needed.   As of the date of this Quarterly Report, as a result of our cash on hand as well as the issuance of the Convertible Debenture, we believe that our current cash and cash equivalents will be sufficient to meet the Company’s funding requirements for one year after these consolidated financial statements are issued.   Off-Balance Sheet Arrangements   We have no off-balance sheet arrangements.   Critical Accounting Policies   See the information concerning our critical accounting policies included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 24, 2021. There have been no material changes in our critical accounting policies during the six months ended June 30, 2021.     22 Table of Contents     Recent Developments   As previously disclosed in a Current Report on Form 8-K filed on July 20, 2021, on July 14, 2021, we issued a $2,000,000 unsecured convertible debenture to SOL Verano Blocker 1 LLC (the “Convertible Debenture”) that is convertible into units of the Company (each a “Jones Unit”) at a conversion price of $0.50 per Jones Unit (the “Conversion Price”), with each Jones Unit consisting of one share of our common stock (each a “Jones Share”) and one share purchase special warrant (each a “Jones Special Warrant”). Each Jones Special Warrant will be exercisable into one Jones Share at a price of $0.625 per Jones Share for a period of 24 months from the date of issuance, conditional upon us increasing our authorized capital to an amount to cover the Jones Shares issuable pursuant to all of the outstanding Jones Special Warrants as well as the other Jones Shares issuable pursuant to our then- outstanding convertible/exercisable securities. Pursuant to the terms of the Convertible Debenture, upon satisfaction or waiver of the conditions precedent to the closing of the Plan of Arrangement (defined below), the entire principal amount on the Convertible Debenture and all accrued interest thereon shall automatically convert into Jones Units at the Conversion Price.   The Convertible Debenture matures on the earlier of July 14, 2023 or 60 days after either any agreement between Pinestar Gold Inc. (“Pinestar”) and us respecting the Plan of Arrangement (defined below) is terminated or the debentureholder receives notice from either Pinestar or us that the Plan of Arrangement is unlikely to occur within seven months of the date of the Convertible Debenture (the “Maturity Date”), and accrues interest a rate of 5.00% (which will increase to 18% if an Event of Default (as defined in the Convertible Debenture) occurs or in the event that the Plan of Arrangement does not occur within seven months of the date of Convertible Debenture) that is payable on the last day of December in each year commencing on December 31, 2021, as well as the Maturity Date, and the date on which all or any portion of the Convertible Debenture is converted or repaid.   The terms of the Convertible Debenture restrict, among other things, the amount of additional debt we can incur, as well as the number of Jones Shares we can issue, without the consent of the debentureholder. The terms of the Convertible Debenture also provide that we shall use the principal amount of the Convertible Debenture exclusively for the costs and expenses associated with pursuing and completing the Plan of Arrangement, and for the purpose of expanding our business to the production of cannabis-containing beverages and related products.   The issuance of the Convertible Debenture was exempt from registration under the United States Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder.   In connection with the issuance of the Convertible Debenture, we also signed on July 14, 2021, a registration rights agreement with SOL Verano Blocker 1 LLC (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, we are required to file a registration statement with the United States Securities and Exchange Commission (the “SEC”) within 30 days from the conversion of the Convertible Debenture that registers for resale the Jones Shares issued upon the conversion of the Convertible Debenture as well as the Jones Shares issuable upon the exercise of the Jones Special Warrants issued in connection with the conversion of the Convertible Debenture. The failure on our part to file the registration statement with the SEC within this timeframe may subject us to payment of certain monetary penalties.   On July 14, 2021, in connection with the issuance of the Convertible Debenture, we entered into a non-binding term sheet (the “Term Sheet”) with Pinestar and SOL Global Investments Corp. (“SOL”). Under the terms of the Term Sheet, we intend to acquire all of the outstanding common shares of Pinestar (after a planned consolidation of such shares) and warrants exercisable into common shares of Pinestar in exchange for an aggregate of 4,000,000 Jones Shares and 1,674,808 warrants exercisable into Jones Shares as part of a statutory plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act (British Columbia) and in reliance on applicable exemptions from the prospectus and registration requirements under Canadian and United States securities laws.   The Term Sheet also provides that Pinestar intends to complete an offering of subscription receipts (“Subscription Receipts”) for minimum aggregate gross proceeds of $8,000,000, at a price per Subscription Receipt equal to $0.50. The Subscription Receipts are intended to automatically convert into units of Pinestar (the “Pinestar Units”) on a one-for-one basis if certain conditions relating to the Plan of Arrangement are met, with each Pinestar Unit expected to consist of one common share of Pinestar and one new share purchase warrant of Pinestar, which are then expected to be immediately exchanged for, or adjusted into, Jones Units as part of the Plan of Arrangement in accordance with a 1:1 exchange ratio.   The proposed transactions outlined in the Term Sheet are subject to, among other conditions, due diligence by the parties, the negotiation and execution of a definitive agreement, approval of any applicable regulators, including any applicable securities exchanges, and approval by both the shareholders of Pinestar and the Supreme Court of British Columbia.   The Term Sheet is intended to express only a mutual indication of interest in the Plan of Arrangement and corresponding offering of Subscription Receipts and does not represent a legally binding commitment or obligation on the part of the parties, and there can be no assurances that either the Plan of Arrangement or the offering of Subscription Receipts will be consummated. The terms of the Plan of Arrangement and corresponding offering of Subscription Receipts must be set forth in a definitive agreement. There are no assurances that we will be successful in negotiating an acceptable definitive agreement, when or whether a definitive agreement will be reached between the parties, or that the proposed Plan of Arrangement and/or corresponding offering of Subscription Receipts will be consummated. Even if a definitive agreement is executed, the terms of the proposed Plan of Arrangement and/or corresponding offering of Subscription Receipts may change materially from the terms set forth in the Term Sheet. There will be many conditions to closing, many of which are outside of the parties’ control and it cannot be predicted whether these conditions will be satisfied. There are no assurances when or if closing will occur, even if the parties successfully negotiate and sign a definitive agreement.   23 Table of Contents   ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   Not applicable.