JONES SODA CO. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion of our financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. As described at the beginning of this Annual Report on Form 10-K, our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could contribute to such differences include those discussed at the beginning of this Report, below in this section and in the section above entitled “ Risk Factors. ” You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect new information, events or circumstances after the date of this Report, or to reflect the occurrence of unanticipated events. You should read the following discussion and analysis in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this Report. Overview We develop, produce, market and distribute premium beverages that we sell and distribute primarily in North America through our network of independent distributors and directly to our national and regional retail accounts. We also sell premium soda beverage products in select international markets and license cannabis and hemp infused beverages and syrups in several states. Our premium soda beverage products are sold primarily 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 any of our premium soda beverage products, but instead outsource the manufacturing process to third-party contract manufacturers. We also sell various premium beverage soda 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. In addition, we currently market hemp infused beverages in several states through third party manufacturers and distributors. Our Focus: Sales Growth Our focus is sales growth through execution of the following key initiatives: ● Expand the Jones Soda glass bottle business in existing and new sales channels; ● Expand our sales in the health conscious modern soda market; and ● Expand our sales in the Alternative Adult market with our Spiked Jones brands Results of Operations Years Ended December 31, 2025 and 2024 2025 2024 % Change (Dollars in thousands) (Dollars in thousands) Revenue $ 25,303 $ 17,793 42.2 % Cost of Goods Sold (18,539 ) (14,132 ) (31.2 )% Gross Profit 6,764 3,661 84.8 % % of Revenue 26.7 % 20.6 % Net Revenue For the year ended December 31, 2025, our net revenue was approximately $25.3 million, representing an increase of $7.5 million, or 42.2%, compared to approximately $17.8 million in revenue for the year ended December 31, 2024. This growth in net sales revenue was driven by new core soda sales through the club channel, incremental Direct to Consumer (DTC) sales, increased Food Service sales, increases in Modern Soda sales and increased HD9 sales. The percentage of our revenues generated in Canada for 2025 and 2024 was 11.2% and 17.3%, respectively. For the year ended December 31, 2025, trade spending and promotional allowances, which reduced our gross revenue from product sales, totaled approximately $2.8 million. This represents a decrease of approximately $1.6 million, or 36.3%, compared to approximately $4.4 million for the year ended December 31, 2024. The primary reason for the decrease was driven by a higher mix of sales with lower trade spend (club and DTC channels). These two channels accounted for 35% of 2025 gross sales compared to 5.6% in 2024. Gross Profit For the year ended December 31, 2025, gross profit increased by $3.1 million, or 84.8%, to approximately $6.8 million compared to approximately $3.7 million for the year ended December 31, 2024 driven by the increase in net sales, and lower trade spend driven by product mix in the current year compared to the prior year. The Company made improvements in inventory management in 2025; however, it still had material inventory impairment charges related to the HD9 business driven by legislative changes made by the Federal Government in November 2025. - 37 - Table of Contents Selling and Marketing Expenses Selling and marketing expenses for the year ended December 31, 2025, were approximately $5.3 million, a decrease of $0.3 million, or 5.4%, from approximately $5.6 million for the year ended December 31, 2024. There were large increases to license fees paid ($0.6 million) on Fallout licensed products and increases to brokerage fees ($0.1 million) that were offset by decreases in advertising and promotions ($0.4 million), trade shows and sponsorships ($0.3 million), decreases to consulting ($0.1 million), and decreases to travel ($0.2 million). As a result, selling and marketing expenses as a percentage of revenue decreased to 21.0% in the year ended December 31, 2025, from 31.4% in the year ended December 31, 2024. We intend to continue to manage selling and marketing expenses with our working capital resources and it is a major management focus to continue to reduce this % of revenue in the coming quarters. General and Administrative Expenses General and administrative expenses for the year ended December 31, 2025 were approximately $6.3 million, a decrease of $1.5 million, or 19.2%, compared to approximately $7.8 million for the year ended December 31, 2024. This decrease was a result of decreased legal and regulatory expenditures related to our Mary Jones business and the Litigation Matters ($0.9 million), travel decreases ($0.3 million), rent decreases ($0.1 million), insurance decreases ($0.3 million), professional services decreases ($0.1 million) and other ($0.2 million) which was offset by increases in salaries and wages ($0.4 million). We intend to carefully manage general and administrative expenses in line with our working capital resources and it is a major management focus to reduce this % of revenue in the coming quarters. Other income (expense) Other income (expense) was $3.1 million for the years ended December 31, 2025 compared to other income (expense) of $12,000 for the years ended December 31, 2024. The increase of $3.1 million was due to the gain on the sale of the Company’s Cannabis business of $3.9 million which was offset by other expenses of $0.8 million. Income Tax Expense We had income tax expense of approximately $8,000 and $25,000 for the years ended December 31, 2025 and 2024, 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 overall consolidated pretax loss, state and foreign income taxes, forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a full valuation allowance on our U.S. net deferred tax assets. Net Loss Net loss for the year ended December 31, 2025 decreased to approximately $1.8 million from a net loss of $9.9 million for the year ended December 31, 2024 or a decrease of $8.1 million. The majority of the decrease in net loss in 2025 compared to 2024 was primarily driven by the gain on the sale of the Company’s Cannabis business ($3.9 million) and a decrease in the loss from operations ($5.0 million). - 38 - Table of Contents Liquidity and Capital Resources As of December 31, 2025 and 2024, we had cash and cash-equivalents of approximately $3.6 million and $1.3 million, respectively, and working capital of approximately ($0.5) million and $2.0 million, respectively. Net cash used in continuing operations during fiscal years 2025 and 2024 totaled approximately $1.3 million and $6.2 million, respectively which is an improvement of $4.9 million for the year ended December 31, 2025. For the year ended December 31, 2025, cash used in operating activities decreased by approximately $4.9 million compared to the prior year. This change was primarily driven by an improvement in net loss after adjusting for non-cash items, which decreased by approximately $4.7 million relative to 2024. Cash generated from changes in non-cash working capital compared to the prior year was improved by $0.2 million. We incurred a net loss of approximately $1.7 million from continuing operations in 2025, compared to a net loss of approximately $9.7 million in 2024, reflecting the lower operating loss as well as the impact of the gain on the disposition of subsidiaries. Our accumulated deficit increased to $94.7 million as of December 31, 2025, compared to $92.9 million as of December 31, 2024. Financing activities provided net cash inflows of approximately $2.5 million for the year ended December 31, 2025, compared to net cash inflows of $3.7 million in 2024. The 2025 inflows were primarily attributable to proceeds from new loan financing and the issuance of promissory notes, partially offset by repayments on existing debt and insurance financing arrangements. In contrast, the 2024 inflows were driven largely by the completion of a private placement offering, which generated net proceeds of $3.6 million, along with net borrowings under the revolving credit facility and proceeds from the exercise of warrants and stock options. These inflows were offset by repayments on the insurance financing agreement and withholding taxes related to restricted share units. Investing activities provided net cash of approximately $0.4 million in 2025, compared to cash used of $27 thousand in 2024. The increase was primarily due to proceeds received from the disposal of a subsidiary, net of cash disposed, along with the proceeds from the sale of property, plant and equipment. We have experienced recurring losses from operations and negative cash flows from operating activities. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. To address this issue, in the first quarter of fiscal year 2025, the Company changed its senior leadership and is focusing on reducing its operating expenses while bringing products to market with higher margins and potentially higher customer demand. Additionally, on February 19, 2025, the Company, through a wholly-owned subsidiary (the “Subsidiary”), entered into loan agreement (the “Loan Agreement”) with Two Shores Capital Corp (“Two Shores”), pursuant to which the Subsidiary may borrow a maximum aggregate amount of up to $5 million, subject to satisfaction of certain conditions. All advances drawn under the Loan Agreement will bear interest at a rate of 13.75% per annum and all present and future obligations of the Subsidiary arising under the Loan Agreement are secured by a first priority security interest in all of the assets of the Company, the Subsidiary and the Company’s other United States subsidiaries. The Loan Agreement replaces the $2 million revolving credit facility entered into by the Company in March 2024 (the “2024 Credit Facility”). The borrowing base under the Loan Agreement expands the assets that can be financed against from only accounts receivable under the 2024 Credit Facility to accounts receivable, inventory and customer purchase orders. The Loan Agreement was amended on December 1, 2025 to increase the facility to $10 million. Based on management’s current operating plan, the Company believes its cash on hand, projected cash generated from product sales and funds received from under the Loan Agreement are sufficient to fund the Company’s operations for a period of at least 12 months subsequent to the issuance of the accompanying Consolidated Financial Statements. There is no assurance that management’s current operating plan will be successful. Seasonality 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 stock keeping units (“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. - 39 - Table of Contents Critical Accounting Policies and Estimates 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 based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, or if management made different judgments or utilized different estimates. Many of our estimates or judgments are based on anticipated future events or performance, and as such are forward-looking in nature, and are subject to many risks and uncertainties, including those discussed below and elsewhere in this Report. We do not undertake any obligation to update or revise this discussion to reflect any future events or circumstances. There are certain critical accounting estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We have identified below our accounting policies that we use in arriving at key estimates that we consider critical to our business operations and the understanding of our results of operations. This is not a complete list of all of our accounting policies, and there may be other accounting policies that are significant to us. For a detailed discussion on the application of these and our other accounting policies, see Note 1 to Consolidated Financial Statements of this Report. 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 the Company expects to be entitled in exchange for those goods or services. We only apply the five-step model (as described in Note 1 to the Consolidated Financial Statements of this Report) to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods and services transferred to the customer. Inventory We hold raw materials and finished goods inventories, which are manufactured and procured based on our sales forecasts. We value inventory at the lower of cost or net realizable value and include adjustments for estimated obsolete or excess inventory, on a first in-first out basis. These valuations are subject to customer acceptance, planned and actual product changes, demand for the particular products, and our estimates of future realizable values based on these forecasted demands. We regularly review inventory detail to determine whether a write-down is necessary. We consider various factors in making this determination, including recent sales history and predicted trends, industry market conditions and general economic conditions. The amount and timing of write-downs for any period could change if we make different judgments or use different estimates. We also determine whether a provision for obsolete or excess inventory is required on products that are over 12 months from production date or any changes related to market conditions, slow-moving inventory or obsolete products. Trade Spend and Promotion Expenses Throughout the year, we run trade spend and promotional programs with distributors and retailers to help promote on- shelf discounts to our consumers. Additionally, in more limited instances, we enter into customer marketing agreements or various other slotting arrangements. The provisions for discounts, slotting fees and promotion allowances are recorded as an offset to revenue and shown net on the consolidated statements of operations. Estimates are made to accrue for amounts that have not yet been invoiced in the month that the program occurs, or in the case of slotting, when the commitment is made. Income Taxes We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following: ● the tax position is not “more likely than not” to be sustained, ● the tax position is “more likely than not” to be sustained, but for a lesser amount, or ● the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. Our liability for uncertain tax positions contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various tax positions. Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. As these audits progress, events may occur that cause us to change our liability for uncertain tax positions. To the extent we prevail in matters for which a liability for uncertain tax positions has been established, or are required to pay amounts in excess of our established liability, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective tax rate in the period of resolution. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. - 40 - Table of Contents