Item 1. Business
ITEM
1. BUSINESS.
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. In addition, during 2022, we developed and began to license THC infused cannabis products
under the “Mary Jones” brand name in various U.S. states that permitted the sale of THC infused products. We also have a
royalty-free license in perpetuity to intellectual property related to Mary Jones for us to license Mary Jones products for use only
in Canada.
Our
company is a Washington corporation formed in 2000 as a successor to Urban Juice and Soda Company Ltd., a Canadian company formed in
1986. Our principal place of business is located at 4786 1st Avenue South, Suite 103, Seattle, WA 98134. Our telephone number is (206)
624-3357.
Products
Our
strategy is to evolve from a craft soda company (Jones Soda) to a diverse beverage company covering additional growing market segments
including modern soda (Pop Jones and Fiesta Jones) and the alternative adult beverages (Mary Jones). Our product line-up currently consists
of the following:
Jones
Soda
Jones
Soda is our premium carbonated soft drink. We sell Jones Soda in premium glass bottles and cans, with labels featuring photos sent to
us by our consumers. Over one million photos have been submitted to us. We believe this unique interaction with our consumers distinguishes
our brand and offers a strong competitive advantage for Jones Soda. Additionally, we release various label campaigns that celebrate our
consumers and the positive impact such consumers have on the world. Our products are made from high quality ingredients, including cane
sugar and natural colors and flavors when possible. We also sell Jones Soda in more traditional flavors such as Cream Soda, Cola, Root
Beer and Orange & Cream.
Pop
Jones and Fiesta Jones (Modern Soda market segment)
We
continue to see a growing market in in our health focused soda brands, which we consider to be the “modern soda” market.
Recent growth by industry competitors such as Poppi and Olipop have proven out the growing consumer demand for this market segment. In
2024, Jones launched its Pop Jones and Fiesta Jones product lines to capitalize on this growing market opportunity.
Mary
Jones (Alternative Adult Beverages market segment)
In
February 2024 we received approval to operate in Ontario, Canada, and have launched, in that province, 10mg Tetrahydrocannabinol
(“THC”) infused sodas in a variety of flavors as well gummies and vapes. We also launched in British Columbia in 2024
where we launched 10mg Tetrahydrocannabinol (“THC”) infused sodas. We also recently received approval in the province of
Alberta to launch in June 2025 10mg Tetrahydrocannabinol (“THC”) infused sodas in a variety of flavors as well as
gummies and vapes. Manufacturing and distribution of Mary Jones products in Canada is intended to be done through Tilray Brands,
Inc. The new Mary Jones products will continue Jones Soda’s tradition of using photographs submitted by consumers on their
bottle labels and printing quotes from fans under the bottle caps.
We
currently intend to expand both the products offered under the Mary Jones brand as well as the number of states and Canadian provinces
we offer such cannabis infused products in.
Fountain
(food services market segment)
Drawing
inspiration from our traditional bottles, our fountain equipment and cups are branded with an engaging collage of consumer-submitted
photos that are inspired by the business themes of our retail partners and the regions in which they are located. Our fountain offerings
include traditional flavors such as Cane Sugar Cola, Sugar Free Cola, as well as cane sugar sweetened Ginger Ale, Orange & Cream,
Root Beer and Lemon Lime. Rounding out the lineup are two of our most popular cane sugar flavors, Berry Lemonade and Green Apple. We
have developed other products in select markets that include teas, lemonade, vitamin enhanced waters, hydration beverages, as well as
naturally flavored sparkling waters.
We
continue to see growing interest from larger quick service restaurants, corporate accounts, retailers, celebrity chefs and a variety
of other outlets looking for differentiated offerings in their fountain soda. We feel that Jones on fountain enhances the consumer experience,
while appealing to a broad demographic. We believe our national brand awareness and customer-centric approach make us unique compared
to other craft soda competitors within this category.
- 5 -
Table of Contents
Co-Brand
and Private Label Products
From
time to time, when opportunities meet our required financial and operational metrics, we utilize our industry expertise to provide private
label products for customers. No material examples of this opportunity occurred in 2024.
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 business in the modern soda category through our Pop Jones and Fiesta Jones brands;
●
Expand our fountain program in the United States and Canada; and,
●
Grow the new Mary Jones brand of Tetrahydrocannabinol (THC) and cannabidiol (CBD)-infused beverages, edibles, and other related products through our Mary Jones brand as well as the number of states and Canadian provinces where such products are sold.
Product
Distribution and Sales Strategy
Premium
Soda Beverages
Our
core products are distributed and sold throughout the United States and Canada and in select international markets. Our primary distribution
channels are DSD channel (sales and distribution through our network of independent distributors) and our DTR channel (sales directly
to national and regional retail accounts). We also have our online channel for internet sales of various products. We strategically build
our national and regional retailer network by focusing on distribution systems that we believe will provide top-line drivers for our
products and increased availability and visibility of our products in our core markets. In building and expanding our DSD channel, we
also consider international markets and look for regions that data suggests have a high affinity for the Jones brand and can be pursued
within our financial resources.
Part
of our strategy in building our distribution system is to blend our DSD and DTR distribution channels, delivering different offerings
through alternate channels. In addition to determining the most advantageous distribution channel, we work to ensure that our products
are placed on shelves that are normally restricted to national mainstream brands and in the cold-aisle of stores, thus providing us access
to the important “take home market.” We have also introduced the JONES Cane Sugar Fountain program through a network of fountain
distributors in select regions across the United States and Canada to provide our premium products and uniquely customized fountain equipment.
For
the year ended December 31, 2024, DOT Foods Inc. (“DOT”), one of our independent distributors and our top account by revenue
represented approximately 13% of revenue during 2024. We intend to continue to expand our distributor network and DTR accounts, which
we hope will result in a decreased dependence on any one or more of our independent distributors (including DOT) or national retail accounts.
We
contract with independent trucking companies to have our product shipped from our contract manufacturers to independent warehouses and
then on to our distributors and national retail accounts. Distributors then sell and deliver our products either to sub-distributors
or directly to retail accounts. We recognize revenue upon receipt by our distributors and national account customers of our products,
net of discounts and promotional allowances, and all sales are final; however, in limited instances, due to credit issues, quality
or damage issues, or distributor changes, we may accept returned product, which to date has not been material.
- 6 -
Table of Contents
DSD
(direct store delivery)
We
maintain a network of independent distributors across the United States and Canada that sell our portfolio of branded products. We have
also secured distribution in select international markets and are evaluating other international opportunities for our products. We choose
our distributors based on our perception of their ability to build our brand franchise in convenience stores, grocery stores, on fountain
in restaurants and “up and down the street” in independent accounts such as delicatessens and sandwich shops.
Typically,
we grant our independent distributors exclusive distribution rights in defined territories, which may include invasion fees in the event
we provide any of our products directly to one of our national retailers located in the distributor’s region. We are also obligated
to pay termination fees for cancellations of most of these written distributor agreements, unless the termination is for “cause.
We
intend to continue our efforts to reinforce and expand our distribution network by partnering with new distributors and replacing underperforming
distributors. In addition to the efforts of our independent distributors in obtaining distribution of our products, we actively seek
to obtain listings for our products with key retail grocery, convenience and mass merchandiser accounts, which are serviced through our
independent distributor network.
Product
availability at a specific store location for any of our retailers is subject to the retailer preference, consumer demand, and localized
store variances. To find a retailer that carries our products, our product locator is available on our website.
DTR
(direct to retail)
Our
direct to retail channel of distribution is an important part of our strategy to target large national or regional restaurant chains
and retail accounts, including convenience store chains, mass merchandisers and premier food-service businesses. Through these programs,
we negotiate directly with the retailer to carry our products, and the account is serviced through the retailer’s appointed distribution
system (rather than through our DSD network). These arrangements are terminable at any time by these retailers or us and contain no minimum
purchase commitments or termination fees.
Co-Brand
and Private Label Distribution
We
offer private label products directly to retailers. Our expertise in innovation and managing the manufacturing process allow for efficiencies
for both us and the customer. We are able to produce these products with minimal sell through risk and ship them through our network
of independent trucking companies or a preferred partner of the customer.
Fountain
Distribution
We
sell direct to certain retailers in addition to working with a network of fountain distributors in select focus regions within the United
States and Canada to provide our premium products, including our fountain and slush products, and uniquely customized fountain equipment.
Sales
Our
premium beverage products are sold throughout the United States and Canada, primarily in grocery stores, convenience and gas stores,
on fountain in restaurants and “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. In 2024, sales in the United States represented
approximately 83% of total sales, while sales in Canada represented approximately 17% (primarily through our distributor relationship
with Lassonde).
Mary
Jones (THC) Branded Products
Our
Mary Jones Brand cannabis-infused line (THC) is currently marketed and licensed through indirect
subsidiaries in California, Michigan, Missouri and Washington in the US and through Mary Jones Beverage (Canada) Inc. We partner with
different state-licensed co-manufacturing and distribution partners in each respective state,
region, or province in which we license these products.
- 7 -
Table of Contents
Our
Premium Soda Brands
Building
Our Brand
We
have established our brand primarily through our fun and independent image, as well as by offering what we believe to be unique and exciting
flavors that appeal to consumers seeking alternatives to mainstream “corporate” carbonated soft drinks. This market is largely
driven by young, trendy consumers who are looking for distinctive products with better ingredients. While we are known for our innovative
flavors, we also offer traditional ones, which broadens our appeal and positions us as a leader in the growing premium craft beverage
segment.
Through
the labels on our bottles, we also focus on building brand loyalty and customer engagement by inviting consumers to submit photographs
to be featured on Jones Soda labels. Throughout the year, we select photos to place on our bottles and cans for distribution. Additionally,
consumers can create personalized labels to celebrate special occasions and memories through myJones.com, where they can upload a photo
and caption using our proprietary patented process.
We
aim to “bring our labels to life” with augmented reality (AR) labels, showcasing athletes and artists in action. This effort
builds on our long-time connection with action sports and creators. Using the Jones Soda app, consumers can scan the “Reel Label”
icon on our bottles to view short videos that bring these creators’ worlds to life—whether it’s a time-lapse of a mural
being painted or an athlete performing a hardflip at the skatepark.
Beyond
creative labeling, we provide distributors with point-of-sale materials and branded apparel to increase consumer appeal and awareness.
These marketing efforts, combined with our innovative labeling, have helped establish strong connections and loyalty to the Jones Soda
brand.
Brand
Marketing
Our
marketing team has developed a strong brand positioning and identity, which we believe is an essential asset that keeps our brand widely
recognized and positively viewed by a large demographic. We’ve positioned ourselves as an alternative to mainstream soda brands,
often targeting locations where these brands are not sold. We’ve also sponsored alternative sports athletes to promote our products
in youth-oriented sports, including UFC, auto racing, skateboarding, BMX biking, snowboarding, and skiing. Additionally, we’ve
sponsored emerging musicians and artists. This strategy helps us connect with a younger audience that values independence from larger
soft drink brands.
Social
Media
A
key marketing pillar for us is the open access our consumers have to define the brand via social media and our website, Jonessoda.com .
We engage with our consumers through social media campaigns to better understand their preferences and trends. Social media has shifted
modern business away from traditional advertising, and we’ve had success creating social hubs on platforms like Facebook, X,
and Instagram. Our consumers have welcomed us into their social media lives, creating a personal connection that we believe strengthens
their engagement with our brand and products.
Consumer-Submitted
Photos
We
are known for featuring consumer-submitted photos on our labels and cans. We encourage consumers to send in photos of their lives, which
we select to feature on our labels. These photos can be submitted through our “Jones Soda Photo Gallery” on our website.
Customized
Photo Labels
We
offer Jones Soda customers—whether businesses or individuals—the chance to create personalized 12-packs with custom labels
featuring their own photos. This program not only provides a unique product offering but also serves as an innovative marketing opportunity
for our brand. Consumers can upload their photos through our website to create their own myJones labels, which are printed and delivered
to them.
We
believe this personalized approach has increased awareness and consumer interaction with the Jones Soda brand.
Point
of Sale and Consumer Awareness
To
increase consumer awareness of our products, we use point-of-sale materials such as posters, stickers, hats, and T-shirts. In response
to consumer demand, we also sell our products and branded apparel on our website. We participate in grassroots-level community and sporting
events in selected cities to build brand awareness and loyalty. Our vehicles—painted in Jones colors and logos—help create
excitement and support distributors as they open new retail accounts.
Occasionally,
we partner with companies to manufacture Jones-related products, like the Jones Soda Flavor Booster hard candy, which extends and enhances
our brand. We also engage in cross-promotional campaigns with other companies to further our reach.
Events
We
invest in events that align with our brand and core demographic, including skateboarding events and partnerships with like-minded companies.
These events allow us to display our logo, offer product samples, and encourage purchases at retail locations. We plan to continue investing
in these events to strengthen the Jones Soda brand.
- 8 -
Table of Contents
Brand
and Product Development – Premium Soda Beverages
We
recognize the importance of continually creating new beverages and enhancing existing products to meet evolving consumer tastes. Our
Jones Cane Sugar Fountain program, which offers our sodas “on tap” at restaurants and grocery stores, is a key part of this
strategy. We work with select fountain distributors to provide these innovative products to retail customers.
Our
focus is on developing innovative products that resonate with consumers, retailers, and distributors. We maintain open communication
with our consumers via our website, blogs, and social media, as well as with our retail and distributor partners to stay current with
industry trends.
The
majority of our brand and product development occurs in-house, using the same process that launched the Jones Soda brand. This process
includes:
1. Market
Evaluation : We assess industry segments to identify potential opportunities.
2. Financial
Evaluation : We consider price sensitivity and the ability to meet margin requirements.
3. Distributor
Evaluation : We analyze existing and potential distribution channels.
4. Production
Evaluation : We assess contract packing capacity, strategic production locations, and
quality control.
5. Image
and Design : Based on our evaluations, we develop brand concepts and work with flavor
houses to test and choose flavors.
Brand
and Product Development – Mary Jones
The
Mary Jones brand is inspired by the original Jones Soda flavors. We believe the popularity of Jones Soda has paved the way for growth
in the Mary Jones line. Although we differentiate the two brands for safety and compliance reasons, we leverage the equity of the Jones
Soda brand to support and market Mary Jones products. As the Mary Jones brand grows, we will continue to innovate and develop new products
and flavors.
Competition
Premium
Beverage Market Segment
The
beverage industry is highly competitive. Our primary competitors include large soft drink manufacturers, regional premium beverage companies,
and private label suppliers. Competition factors include brand image, distribution, price, product quality, and innovation.
We
compete not only for consumer acceptance but also for shelf space and marketing focus with our distributors. While our products are premium
offerings priced similarly or higher than competitors, we believe our quality sets us apart.
Although
we believe that we will be able to continue to create competitive and relevant brands and products to satisfy consumers’ changing
preferences, there can be no assurance that we will be able to do so or that other companies will not be more successful in this regard
over the long term.
Pricing
of the products is also important. We believe that our products are priced in the same price range or higher than competitive brands
and products, and compete on quality as they are premium product offerings.
Cannabis
Market Segment
We
face intense competition in the Cannabis industry from other companies, some of which have longer operating histories and more financial
resources and longer history of the production and marketing of cannabis products than we do. Competitors are primarily branded and private
label cannabis companies who are operating in multiple states. We are currently in direct competition with Keef Brands, Cann Social Tonics,
and Tonik Beverages, none of which are national consumer packaged goods brands in the United States. We are confident that our cannabis
products will be highly competitive. We seek a competitive advantage over our competitors by applying our Mary Jones brand name recognition
and by offering quality cannabis products to our loyal customer base. Because of the early stage of the cannabis industry in the United
States and Canada, we also face additional competition from new entrants. If the number of users of medical and recreational cannabis
increases, the demand for products will increase and we expect that competition will become more intense, as current and future competitors
begin to offer an increasing number of diversified products and pricing strategies. To remain competitive, we believe we will be required
to make a high level of investment in our planned licenses, partnerships, branding, products and technologies, distribution, research
and development, marketing, sales and client support. We may not have sufficient resources to maintain its marketing, sales and client
support efforts on a competitive basis which could materially and adversely affect our business, financial condition, and results of
operations of our planned cannabis business.
- 9 -
Table of Contents
Production
Contract
Packing Arrangements
We
do not directly manufacture our premium soda beverage products, but instead outsource the manufacturing process to third-party bottlers
and independent contract manufacturers (co-packers). We currently use primary co-packers located in Canada and the United States. Once
the product is manufactured, the finished products are stored either at the co-packer’s location or in nearby third-party warehouses.
Other than minimum case volume requirements per production batch or “run” for most co-packers, we do not have annual minimum
production commitments with our co-packers. Our co-packers may terminate their arrangements with us at any time, in which case we could
experience disruptions in our ability to deliver products to our customers. We continually review our contract packing needs in light
of regulatory compliance and logistical requirements and may add or change co-packers based on those needs.
Raw
Materials
The
raw materials used in the manufacturing of our premium soda beverage products consist primarily of concentrate, flavors, supplements,
sugar, bottles, cans, labels, trays, caps and packaging. Substantially all of the raw materials used in the preparation, bottling and
packaging of our bottle and can products are purchased by us or by our contract manufacturers in accordance with our specifications.
These raw materials are purchased from suppliers selected by us or by our contract manufacturers. We believe that we have adequate sources
of raw materials, which are available from multiple suppliers.
We
purchase flavor concentrate from our suppliers. Generally, flavor concentrate suppliers own the proprietary rights to the flavors. Although
we do not have the list of ingredients or formulas for our flavors, we have exclusive rights to the use of the flavor concentrates developed
with our suppliers. In connection with the development of new soda products and flavors, independent suppliers bear a large portion of
the expense for product development, thereby enabling us to develop new products and flavors at relatively low cost. If we have to replace
a flavor supplier, we could experience disruptions in our ability to deliver products to our customers, which could have a material adverse
effect on our results of operations.
The
costs of raw materials fluctuate and in certain instances we enter into supply agreements to address these risks. We have a fixed price
supply agreement with our primary glass supplier which expires at the end of 2025. The price of glass continues to increase each year
due to the shortage of available glass in the industry; however, our supply agreement with our glass supplier provides us with some
price protection through 2025.
Quality
Control
Our
premium soda beverage products are made from high-quality ingredients and natural and artificial flavors. We seek to ensure that all
of our products satisfy our high-quality standards. Contract manufacturers are selected and monitored by our quality control representatives
in an effort to ensure adherence to our production procedures and quality standards.
For
every batch or “run” of product, our contract manufacturer undertakes extensive testing of product quality and packaging.
This includes testing levels of sweetness, carbonation, taste, product integrity, packaging and various regulatory cross checks. BME
(Beginning, Middle, End) samples from each production run are analyzed and categorized in a reference library. For each product, the
contract manufacturer must transmit all quality control test results to us for reference following each production run.
Testing
also includes microbiological checks and other tests to ensure the production facilities meet the standards and specifications of our
quality assurance program. Water quality is monitored during production and at scheduled testing times to ensure compliance with beverage
industry standards. The water used to produce our products is filtered and is also treated to reduce alkalinity. Flavors are pre-tested
by the flavor concentrate supplier before shipment to contract manufacturers. We are committed to ongoing product improvement with a
view towards ensuring the high quality of our product through a stringent co-packer selection, training and communication program.
Cannabis
Operations
Cannabis
Operations
During
2022, we began to develop, market and license our cannabis-infused beverage brand under the “Mary Jones” brand name in California
to complement our existing soda beverage business. Similar to the manufacturing process with our premium soda products we outsource the
manufacturing and distribution of our products to state licensed third parties with whom we enter licensing agreements with concerning
our cannabis products being manufactured and sold. We operate our cannabis operations in California, Michigan, Missouri and Washington
under wholly-owned subsidiaries that are separate from our current soda beverage business. We currently plan to expand our cannabis operations
into other states that have legalized the recreational use of cannabis using a similar structure to our operations in California.
- 10 -
Table of Contents
Regulation
Premium
Beverage Business
The
production and marketing of our proprietary beverages are subject to the rules and regulations of various federal, provincial, state
and local health agencies, including in particular Health Canada, Agriculture and Agri-Food Canada (the “AAFC”) and the United
States Food and Drug Administration (the “FDA”). The FDA and AAFC also regulate labeling of our products. From time to time,
we may receive notifications of various technical labeling or ingredient reviews with respect to our products. We believe that we have
a compliance program in place to ensure compliance with production, marketing and labeling regulations.
Legal
requirements have been enacted in several jurisdictions in the United States and Canada requiring that deposits or certain eco-taxes
or fees be charged for the sale, marketing and use of certain non-refillable beverage containers. The precise requirements imposed by
these measures vary. Other beverage container-related deposit, recycling, eco-tax and/or product stewardship proposals have been introduced
in various jurisdictions in the United States and Canada. We anticipate that similar legislation or regulations may be proposed in the
future at local, state and federal levels, both in the United States and Canada.
Cannabis
Business
Application
of Federal Law
Although
certain states have legalized either medical marijuana or medical and adult use cannabis, at the federal level, cannabis currently remains
a Schedule I drug under the Controlled Substances Act of 1970 (21 U.S.C. §§ 811 et seq.). Under United States federal law,
a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety
for the use of the drug under medical supervision. As such, cannabis related practices or activities, including without limitation, the
cultivation, manufacture, importation, possession, use, or distribution of cannabis, remain illegal under United States federal law.
Although
federally illegal, the U.S. Department of Justice (the “DOJ”) has historically exercised enforcement discretion. This means
that while federal law technically prohibits cannabis, the DOJ has generally not prioritized prosecuting individuals or businesses that
comply with state cannabis regulations, especially in states with robust medical or recreational cannabis programs. This approach stems
from guidance like the 2013 memorandum issued by the DOJ to all U.S. Attorney’s Offices to generally direct all U.S. Attorneys
not to prioritize the enforcement of federal marijuana laws against individuals and businesses that rigorously comply with state regulatory
provisions in states with strictly regulated medical or recreational cannabis programs (the “2013 Cole Memorandum”), which
was later rescinded in 2018 under Attorney General Jeff Sessions. Despite the rescission, enforcement discretion remains, with U.S. Attorneys
having the authority to decide whether to prosecute cannabis-related offenses based on factors like the seriousness of the offense and
available resources.
In
2022, former President Joe Biden announced a three-step approach to reforming federal cannabis policy. This included pardoning federal
offenders convicted of simple cannabis possession, urging state Governors to take similar actions, and directing the Department of Health
and Human Services (“HHS”) and the Attorney General to review cannabis’s status as a Schedule I substance. In early
2024, HHS and the FDA recommended rescheduling cannabis, marking a significant step toward potential federal policy change. These efforts
reflect broader momentum for reform, though cannabis remains a Schedule I drug until official changes are made to federal law. As of
now, given the change in administration, these actions do not alter the legal status of cannabis but represent steps toward reconsidering
its classification.
Under
Attorney General Pam Bondi, who assumed office in 2025, the DOJ has indicated its focus is refining federal cannabis policy, with an
emphasis on prosecutorial discretion and greater alignment with state-level regulatory frameworks. Attorney General Bondi has signaled
that her approach will be more tailored to individual jurisdictions, respecting state decisions to regulate cannabis while maintaining
federal oversight over interstate issues and illicit activity. While the DOJ continues to prioritize resource allocation, it has stated
that state-compliant cannabis businesses operating under rigorous regulatory schemes will generally not be a target for federal prosecution.
However, federal law enforcement remains vigilant in addressing significant concerns such as money laundering, illegal trafficking, and
other criminal activities connected to cannabis.
Additionally,
under U.S. federal law it may potentially be a violation of federal money laundering statutes for financial institutions to take any
proceeds from marijuana sales or any other Schedule I substance. Banks and other financial institutions could be prosecuted and possibly
convicted of money laundering for providing services to cannabis businesses. Under U.S. federal law, banks or other financial institutions
that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found
guilty of money laundering or conspiracy. Despite these laws, the U.S. Department of the Treasury issued a memorandum in February of
2014 (the “FinCEN Memorandum”) outlining the pathways for financial institutions to bank state-sanctioned marijuana businesses.
Under these guidelines, financial institutions must submit a “suspicious activity report” (“SAR”) as required
by federal money laundering laws. These marijuana related SARs are divided into three categories: marijuana limited, marijuana priority,
and marijuana terminated, based on the financial institution’s belief that the marijuana business follows state law, is operating
out of compliance with state law, or where the banking relationship has been terminated.
On
the same day the FinCEN Memorandum was published, the DOJ issued a memorandum (the “2014 Cole Memo”) directing prosecutors
to apply the enforcement priorities of the 2013 Cole Memorandum in determining whether to charge individuals or institutions with crimes
related to financial transactions involving the proceeds of marijuana-related conduct. The 2014 Cole Memo has been rescinded as of January
4, 2018, along with the 2013 Cole Memorandum, removing guidance that enforcement of applicable
financial crimes was not a DOJ priority.
However,
Attorney General Sessions’ revocation of the 2013 Cole Memorandum and the 2014 Cole
Memo has not affected the status of the FinCEN Memorandum, nor has the Department of the Treasury given any indication that it intends
to rescind the FinCEN Memorandum itself. Though it was originally intended for the 2014 Cole Memo and the FinCEN Memorandum to work in
tandem, the FinCEN Memorandum can act as a standalone document which explicitly lists the eight enforcement priorities originally cited
in the 2013 Cole Memorandum. As such, the FinCEN Memorandum remains intact.
Despite
this guidance, many financial institutions remain hesitant to engage with the cannabis industry due to the risks of federal prosecution
and regulatory uncertainty. Additionally, in 2021, some proposals were made to clarify or modify FinCEN’s stance to ease access
to banking services for cannabis businesses, but comprehensive reform has not yet been enacted. Thus, while FinCEN provides a framework
for financial institutions, the cannabis industry’s access to banking remains limited and subject to ongoing regulatory and legal
challenges.
Enforcement
Proceedings under Federal Law
Although
the Cole Memorandum and 2014 Cole Memo have been rescinded, the United States Congress has repeatedly enacted legislation to protect
the medical marijuana industry from prosecution. The United States Congress has passed appropriations bills each of the last three
years that included the Rohrabacher Amendment Title: H.R.2578 — Commerce, Justice, Science, and Related Agencies
Appropriations Act, 2016, which by its terms does not appropriate any federal funds to the U.S. DOJ for the prosecution of medical
cannabis offenses of individuals who are in compliance with State medical cannabis laws. Subsequent to the issuance of the Sessions
Memorandum on January 4, 2018, the United States Congress passed its omnibus appropriations bill, SJ 1662, which for the fourth
consecutive year contained the Rohrabacher-Blumenauer Amendment language (the “Leahy Amendment”) and continued the
protections for the medical cannabis marketplace and its lawful participants from interference by the DOJ up and through the 2018
appropriations deadline of September 30, 2018. The deadline has passed, but the Leahy Amendment has remained in effect by virtue of
a series of short-term spending bills signed on September 28, 2018, December 7, 2018, January 25, 2019 and February 8, 2019. On
February 15 the amendment was renewed through the signing of the fiscal year 2019 omnibus spending bill, effective through September
30, 2019. On May 16, 2019, a House subcommittee released a base appropriations bill with the amendment included. On September 26,
2019 the Senate Appropriations Committee approved a base appropriations bill with the amendment included. On September 27, 2019 the
amendment was renewed through a stopgap spending bill, and again on November 21, 2019. On December 20, 2019 the amendment was
renewed through the signing of the fiscal year 2020 omnibus spending bill, effective through September 30, 2020. In July 2020, a
House subcommittee introduced a base appropriations bill with the amendment included. The amendment was then renewed through a
series of stopgap spending bills on October 1, 2020 December 11, 2020, December 18, 2020,
December 20, 2020, and December 22, 2020. On December 27, 2020, the amendment was renewed through the signing of the fiscal
year 2021 omnibus spending bill, effective through September 30, 2021. In 2021, former President
Joe Biden became the first president to propose a budget with the Leahy Amendment included. The amendment was then renewed through a
series of stopgap spending bills on September 30, December 3, February 18, and March 11. On March 15 the amendment was renewed
through the signing of the FY 2022 omnibus spending bill, effective through September 30, 2022. The amendment remains
effective in March 2025.
- 11 -
Table of Contents
State
Regulatory Environment
The
following sections describe the legal and regulatory landscape in California and Washington where we have commenced our cannabis operations.
While we will work to ensure that our operations comply with applicable state laws, regulations, and licensing requirements, for the
reasons described above and the risks further described under the heading “Risk Factors”, there are significant risks associated
with our planned cannabis business. Readers are strongly encouraged to carefully read and consider all of the risk factors contained
under the heading “Risk Factors” below.
California
Regulatory Landscape
In
1996, California was the first state to legalize medical marijuana through Proposition 215, the Compassionate Use Act of 1996. This legalized
the use, possession and cultivation of medical marijuana by patients with a physician recommendation for treatment of cancer, anorexia,
AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine, or any other illness for which marijuana provides relief.
In
2003, Senate Bill 420 was signed into law establishing an optional identification card system for medical marijuana patients.
In
September 2015, the California legislature passed three bills collectively known as the Medical Cannabis Regulation and Safety Act (“MCRSA”).
The MCRSA established a licensing and regulatory framework for medical marijuana businesses in California. The system created multiple
license types for dispensaries, infused products manufacturers, cultivation facilities, testing laboratories, transportation companies,
and distributors. Edible infused product manufacturers would require either volatile solvent or non-volatile solvent manufacturing licenses
depending on their specific extraction methodology. Multiple agencies would oversee different aspects of the program and businesses would
require a state license and local approval to operate. However, in November 2016, voters in California overwhelmingly passed Proposition
64, the Adult Use of Marijuana Act (“AUMA”) creating an adult-use marijuana program for adults 21 years of age or older.
AUMA had some conflicting provisions with MCRSA, so in June 2017, the California State Legislature passed Senate Bill No. 94, known as
Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), which amalgamates MCRSA and AUMA to provide a set
of regulations to govern a medical and adult-use licensing regime for cannabis businesses in the State of California. The four agencies
that originally regulated marijuana at the state level were the Bureau of Cannabis Control (“BCC”), California Department
of Food and Agriculture (“DFA”), California Department of Public Health (“DPH”), and California Department of
Tax and Fee Administration. MAUCRSA went into effect on January 1, 2018.
On
July 1, 2019, California enacted A.B. 97. In relevant part, the bill authorizes licensing authorities to issue citations and fines to
a licensee or an unlicensed person who violates MAUCRSA. The maximum fine is $5,000 per violation for licensees and $30,000 per violation
for unlicensed persons. Each day of a violation constitutes a separate violation.
A.B.
97 also repeals a prior requirement that an applicant for a provisional license first hold a temporary license. The bill also requires
applicants for provisional licenses to submit evidence of compliance with the California Environmental Quality Act, limits the validity
of a provisional license to 12 months with subsequent renewals as approved by the relevant licensing authority, and allows licensing
authorities to revoke provisional licenses for failing to diligently pursue final licensure. Finally, the bill requires the DPH to establish
a certification program for manufactured cannabis products comparable to the National Organic Program and the California Organic Food
and Farming Act.
On
October 12, 2019, California enacted A.B. 1529. The bill mandates that all cannabis vaping cartridges and cannabis vaporizers must include
a universal symbol identifying the product as a vaping product.
On
July 12, 2021, California Governor Gavin Newsom signed into law Assembly Bill 141 (AB-141), which creates the Department of Cannabis
Control (“DCC”). The DCC is in the process of consolidating the state’s cannabis program oversight from three of the
existing agencies – the BCC, the DFA, and the DPH – under a single department in an effort to centralize and simplify regulatory
and licensing oversight in California. DCC similarly announced its intention to create a single Licensing Division that would be responsible
for licensing of all cannabis businesses. On or about September 15, 2021, the DCC filed emergency regulations to consolidate, clarify,
and make consistent cannabis regulations to the California Office of Administrative Law. After a limited comment period, these consolidated
emergency regulations were approved and became effective on or about September 27, 2021. These regulations created consistent standards
for cannabis licensees across all license types, by aligning application requirements, unifying terminology, and clarifying ownership
and financial interest requirements. Further consolidated regulations and modifications of existing regulations were issued in March
2024.
At
present, to legally operate a medical or adult-use cannabis business in California, the operator must have both a local and state license.
This requires license holders to operate in cities with marijuana licensing programs. Therefore, cities in California are allowed to
determine the number of licenses they will issue to marijuana operators or can choose to outright ban marijuana.
- 12 -
Table of Contents
California
Licensing Requirements
A
medicinal retailer license permits the sale of medicinal cannabis and cannabis products to a medicinal cannabis patient in California
who possesses a physician’s recommendation. Only certified physicians may provide medicinal marijuana recommendations. An adult-use
retailer license permits the sale of cannabis and cannabis products to any individual age 21 years of age or older who presents a valid
government-issued photo identification.
An
adult-use or medicinal cultivation license permits cannabis cultivation activity which means any activity involving the planting, growing,
harvesting, drying, curing, grading or trimming of cannabis. Such licenses further permit the production of a limited number of non-manufactured
cannabis products and the sales of cannabis to certain licensed entities within the state of California for resale or manufacturing purposes.
An
adult-use or medical manufacturing license permits the manufacturing of cannabis products. Manufacturing includes the compounding, blending,
extracting, infusion, packaging or repackaging, labeling or relabeling, or other preparation of a cannabis product.
In
the state of California, only cannabis that is grown in the state can be sold in the state. Although California is not a vertically-integrated
system, the state allows licensees to make wholesale purchase of cannabis from, or a distribution of cannabis and cannabis product to,
another licensed entity within the state.
Holders
of marijuana licenses in California are subject to a detailed regulatory scheme encompassing: security, staffing, sales, manufacturing
standards, inspections, inventory, advertising and marketing, product packaging and labeling, records and reporting, and more. As with
all jurisdictions, the full regulations, as promulgated by each applicable state agency, should be consulted for further information
about any particular operational area.
Licensed
cannabis businesses may partner with non-licensed business entities pursuant to intellectual property licensing agreements subject to
certain disclosure requirements and approvals by the DCC.
California
Dispensary Requirements
Cannabis
retailers may only sell cannabis products that were received by the retail licensee from a licensed distributor or licensed microbusiness
authorized to engage in distribution, and the licensed retailer must verify that the cannabis goods have not exceeded their best-by,
sell-by, or expiration date if one is provided. The goods must have undergone appropriate laboratory testing, and the batch number labeled
on the package of cannabis goods must match the batch number on the corresponding certificate of analysis for regulatory compliance testing.
The packaging and goods must comply with all applicable laws in order for the goods to be sold at the retail location. In addition to
cannabis goods, a licensed retailer may sell only cannabis accessories and licensee’s branded merchandise. A licensed retailer
may not provide free cannabis goods except for in certain limited circumstances.
Cannabis
retailers may only display cannabis goods for inspection and sale in the retail area. Such goods may be removed from their packaging
and placed in containers to allow for customer inspection, so long as the containers are not readily accessible to customers without
assistance of retailer personnel. A container must be provided to the customer by the licensed retailer or its employees, who must remain
with the customer at all times that the container is being inspected by the customer. Cannabis goods removed from their packaging in
this way may not be sold or consumed. They must be destroyed appropriately when they are no longer being used for display.
California
Reporting Requirements
The
state of California uses METRC as the state’s track-and-trace (“T&T”) system used to track commercial cannabis
activity and movement across the distribution chain for all state-issued annual licensees. The system allows for other third-party system
integration via application programming interface. Only licensees have access to METRC.
- 13 -
Table of Contents
California
Storage, Transportation, and Security Requirements
To
ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss
of cannabis or cannabis products, California’s marijuana businesses are required to do the following:
● maintain
a fully operational security alarm system;
● contract
for security guard services;
● maintain
a video surveillance system that records continuously 24 hours a day;
● ensure
that the facility’s outdoor premises have sufficient lighting;
● not
dispense from its premises outside of permissible hours of operation;
● store
cannabis and cannabis product only in areas per the premises diagram submitted to the state
of California during the licensing process;
● store
all cannabis and cannabis products in a secured, locked room or a vault;
● report
to local law enforcement within 24 hours after being notified or becoming aware of the theft,
diversion, or loss of cannabis; and
● ensure
the safe transport of cannabis and cannabis products between licensed facilities, maintain
a delivery manifest in any vehicle transporting cannabis and cannabis products. Only vehicles
registered with the DCC that meet DCC distribution requirements are to be used to transport
cannabis and cannabis products.
DCC
Inspections
The
DCC, and its authorized representatives, shall have full and immediate access to inspect and enter onto any premises licensed by the
DCC. Prior notice of an inspection, investigation, review, or audit is not required. The DCC may also test any vehicle or equipment possessed
by, in control of, or used by a licensee or their agents and employees for the purpose of conducting commercial cannabis activity. Moreover,
it may test any cannabis goods or cannabis-related materials, or products possessed by, in control of, or used by a licensee or their
agents and employees for the purpose of conducting commercial cannabis activity. The DCC may also copy any materials, books, or records
of any licensee or their agents and employees. Failure to cooperate with and participate in any DCC investigation pending against the
licensee may result in a licensing violation subject to discipline.
Washington
Regulatory Landscape
Washington
State’s cannabis regulatory regime has evolved significantly since the state first legalized cannabis. In 2012, Washington voters
passed Initiative 502 (I-502), legalizing both medical and recreational cannabis for adults over the age of 21. This marked a significant
shift in state policy, as Washington became one of the first states in the U.S. to legalize recreational cannabis. I-502 established
a framework for regulating the production, distribution, and sale of cannabis, creating a state-controlled system for licensing producers,
processors, and retailers. The initiative also set strict limits on possession and consumption, ensuring cannabis was treated similarly
to alcohol in terms of regulation and enforcement.
Following
the passage of I-502, the Washington State Liquor and Cannabis Board (the “WSLCB”) was tasked with developing detailed regulations
and implementing the cannabis market. By 2014, the first legal cannabis stores opened, and the state began to collect significant tax
revenue from cannabis sales. The WSLCB established rules regarding the licensing process, product testing, packaging, and labeling to
ensure consumer safety and prevent cannabis from being sold to minors. Additionally, the state implemented robust tracking systems to
monitor cannabis products from cultivation through retail to prevent diversion to the black market. Washington’s regulatory framework
was designed to maintain strict oversight while promoting a legal market for cannabis.
In
addition to recreational cannabis, Washington’s medical cannabis system has also undergone considerable changes. Although medical
cannabis was legal in Washington before I-502, it lacked a clear regulatory structure. After I-502’s passage, the state worked
to integrate medical cannabis into the new recreational system, ensuring that medical patients had access to regulated, quality products.
In 2015, the Washington State Legislature passed ESHB 2136, which unified the medical and recreational cannabis systems and created a
framework for medical cannabis patients to access cannabis through licensed dispensaries. Under the new system, medical cannabis patients
benefit from certain tax exemptions and higher purchase limits, while the overall goal was to ensure both the recreational and medical
cannabis markets were properly regulated to protect public health and safety. Today, Washington State’s cannabis laws continue
to evolve, focusing on further refinement and adjustments to the market as the state navigates challenges related to enforcement, taxation,
and equity in the cannabis industry.
Washington
Licensing Requirements
In
Washington State, cannabis manufacturing is regulated by the Washington State Liquor and Cannabis Board (the “WSLCB”), which
issues licenses for producers and processors involved in the production and manufacture of cannabis products. The relevant regulatory
framework for cannabis manufacturing is governed primarily by Initiative 502 (I-502) and the rules set forth in Title 314 of the Washington
Administrative Code (the “WAC”). Under I-502, the WSLCB is responsible for issuing licenses, enforcing compliance with regulations,
and overseeing the legal cannabis market in Washington.
To
obtain a cannabis manufacturing or retail license, applicants must meet several criteria, including demonstrating that they are 21 years
of age or older, are U.S. citizens or legal residents, and have no felony convictions within the past 10 years, particularly those related
to controlled substances. The licensing process involves submitting an application through the WSLCB’s online portal, paying application
fees, and passing a background check. Manufacturers must also ensure that their operations meet local zoning requirements, as local municipalities
may have additional restrictions or bans on cannabis businesses. Licenses are available for different types of manufacturing, such as
cannabis processing, which involves the creation of cannabis-infused products, and cannabis extraction, which includes methods of concentrating
cannabinoids like THC and CBD.
Once
a license is granted, cannabis manufacturers and retailers must comply with ongoing regulatory requirements under the WSLCB’s rules.
These include maintaining a secure facility with proper surveillance and alarm systems, conducting regular product testing through state-approved
labs, and adhering to packaging and labeling standards outlined in WAC 314-55. All participants in the Washington cannabis industry are
also required to use the state’s seed-to-sale tracking system, called the Marijuana Tracking System (the “MTS”), to
monitor the movement of cannabis products from cultivation to sale. Compliance with these regulations is essential for ensuring the safety,
security, and legality of cannabis manufacturing in Washington State. Failure to comply with the licensing requirements and regulations
can result in fines, suspension, or revocation of the manufacturer’s license.
- 14 -
Table of Contents
Washington
Dispensary Requirements
Cannabis
dispensaries in Washington State are permitted to sell a variety of cannabis products, including flower (dried cannabis), pre-rolls,
concentrates, extracts, edibles, tinctures, and topicals. These products must be sourced from licensed producers and processors who comply
with state regulations regarding testing, labeling, and quality control. According to WAC 314-55, all cannabis products sold in dispensaries
must undergo testing for potency and contaminants (e.g., pesticides, mold, and residual solvents) at state-certified laboratories to
ensure they meet health and safety standards before they reach consumers. Additionally, dispensaries can only sell cannabis products
that are appropriately packaged and labeled, following WSLCB rules. Labels must include information such as product potency (THC/CBD
content), ingredients, serving size, and health warnings.
The
display of cannabis products within dispensaries is tightly regulated. Under WAC 314-55-155, cannabis products must be kept behind a
counter or in a secure area that is not accessible to customers without the assistance of a licensed employee. Retailers are prohibited
from displaying cannabis products in an open manner or allowing customers to handle the products without first engaging with a staff
member. Edibles and concentrates, in particular, must be stored in child-resistant, tamper-evident packaging, and products must not be
displayed in a way that is attractive to minors. Additionally, the law prohibits retailers from using advertising or packaging that could
appeal to children, such as cartoon characters or candy-like packaging.
Dispensaries
are required to maintain robust security measures to prevent theft and ensure public safety. According to WAC 314-55-083, dispensaries
must have a security system in place that includes 24/7 surveillance with video cameras covering key areas such as entrances, exits,
cash handling areas, and storage areas. All video footage must be retained for a minimum of 45 days and be available to law enforcement
upon request. Dispensaries must also maintain a secure inventory system to track cannabis products from producers and processors to the
final sale, using the state’s MTS. Furthermore, physical security measures, such as locked storage for cannabis products, safes
for cash, and alarm systems, are required to safeguard both the products and the dispensary’s premises. Employees must be trained
in security protocols, including how to handle potential theft, customer disputes, and other emergency situations.
These
rules aim to maintain a controlled, secure, and compliant cannabis retail environment in Washington State, ensuring the legal market
operates safely while protecting public health and preventing unauthorized access to cannabis products. Non-compliance with these regulations
can result in fines, suspension, or revocation of a dispensary’s license.
Washington
Reporting Requirements
All
participants in the Washington cannabis industry are also required to use the MTS to monitor the movement of cannabis products from cultivation
to sale.
Trademarks,
Flavor Concentrate Trade Secrets and Patent Rights
In
the United States, we own a number of trademark registrations (designated by the ® symbol) and pending trademark applications (designated
by the ™ symbol) for use in connection with our products, including “JONES®,” “JONES SODA CO.® “LEMONCOCCO
®” and “MARY JONES®,”.
In
general, trademark registrations expire 10 years from the filing date or registration date, with the exception in Canada, where trademark
registrations expire 15 years from the registration date. All trademark registrations may be renewed for a nominal fee.
Although
our flavor concentrate suppliers generally own the proprietary rights to the flavors, we have the exclusive rights to our flavor concentrates
developed with our current flavor concentrate suppliers, which we protect as trade secrets. We will continue to take appropriate measures
to maintain the secrecy and proprietary nature of our flavor concentrates.
We
consider our trademarks and trade secrets to be of considerable value and importance to our business.
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 or “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.
- 15 -
Table of Contents
Human
Capital
We
believe the strength of our workforce is one of the significant contributors to our success. Attracting, developing and retaining talent
with the right skills to drive our business is central to our purpose, mission and long-term growth strategy. Our human capital resources
objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees,
advisors and consultants. The principal purposes of our equity incentive plan is to attract, retain and reward personnel through the
granting of stock-based compensation awards, in order to increase shareholder value and the success of our Company by motivating such
individuals to perform to the best of their abilities and achieve our objectives.
As
of the date of this Report, we have 27 employees, all of which are full-time, and with the exception of two employees located in Canada
are all located in the United States. Of our 27 employees, 15 are employed in sales and marketing capacities, 4 are employed in finance
and accounting capacities and 8 are employed in customer service, manufacturing and quality control capacities. None of our employees
are represented by labor unions.
Securities
Exchange Act Reports and other Available Information
As
a public company, we are required to file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
proxy statements on Schedule 14A and other information (including any amendments) with the Securities and Exchange Commission (the “SEC”).
You can find our SEC filings at the SEC’s website at www.sec.gov.
Our
Internet address is www.jonessoda.com. Certain information contained on our website is not part of this annual report on Form
10- K.
We
make available on or through our website at www.jonessoda.com our SEC filings free of charge as soon as reasonably practicable after
we electronically file the information with, or furnish it to, the SEC. In addition, the following corporate governance materials are
also available on our website under “Investor Relations — Corporate Governance:”
● Audit
Committee Charter
● Compensation
and Governance Committee Charter
● Code
of Conduct applicable to all directors, officers and employees of Jones Soda Co.
● Code
of Ethics for our CEO and senior financial officers.
A
copy of any of the materials filed with or furnished to the SEC or copies of the corporate governance materials described above are available
free of charge and can be mailed to you upon request to Jones Soda Co., 4786 1st Avenue South, Suite 103, Seattle, Washington 98134.
Executive
Officers
Scott
Harvey, President and Chief Executive Officer
Brian
Meadows, Chief Financial Officer
Gabe
Carimi, Chief Operating Officer
Jerry
Goldner, Chief Growth Officer
Directors
Paul
Norman, Chairman
Clive
Sirkin
Gregg
Reichman
Mark
Murray
Ronald
Dissinger
- 16 -
Table of Contents