Jones Soda Annual Report

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Annual Report 2004

Jones Soda * Annual Report 2004

Peter van Stolk, President and C.E.O. stated, “We were pleased with our ability to drive strong top line gains, despite the comparison from a year ago due to the launch of Starbucks. During the quarter we continued to make investments in sell-ing, general and administration expenses, as well as the creation of new products, to better position the company for the future. As we head into our key selling season, we are extremely optimistic about our prospects and remain committed to fully capitaliz-ing on our growing position as a lifestyle brand.”

“With the summer selling period upon us, we are excited with our Target business and the addition of the new flavors that are currently being launched. Sugar-Free Green Apple, Sugar-Free Cola, Berry Lemonade, as well as Twisted Lime and Watermelon are ideally suited towards the taste profile of the Target consumer, with the addition of more sugar frees as well as unique, fun Jones flavors.” Mr. van Stolk further commented, “our relationship is flourishing and each day the opportunities continue to broaden. We are confident about Target’s com-

mitment to maximizing this unique partnership and we expect to see the real potential begin to surface over the next few quarters.”

Mr. van Stolk continued, “During the quarter, we announced a licensing agreement with The Kroger Co., the second largest grocery chain with over 2,500 stores across the United States. The introduc-tion of Jones Frozen Soda Pops helps us further expand our product mix and underscores our ability to leverage our brands into new non-beverage categories. Most importantly, it strengthens our relationship with Kroger which should allow us to increase our overall penetration within this power-ful retailer. We are also very excited about the upcoming launch of our Jones Organics. This new initiative gives us an entrée into the large, rapidly growing, high margin organic tea market seg-ment. It also helps us further diversify our business and provides us with another meaningful growth vehicle into the future.” Mr. van Stolk concluded,

“Over the past several years we have successfully expanded our brands, products and distribution

channels to become a more well-balanced company, both operationally and financially. At the same time, we have upgraded our infrastructure and improved our platform to support future growth. Looking ahead, we are confident that the Jones brand is a lifestyle brand, with consumer appeal that will al-low us to continue to grow in all key areas that will provide positive momentum and long-term value to our shareholders.” Headquartered in Seattle, Washington, Jones Soda Co. manufactures its Jones Soda, Jones Naturals, Jones Energy and Whoopass brands and sells through its distribution network in select markets across North America. A leader in the premium soda category, Jones is known for its inno-vative labeling technique that incorporates always-changing photos sent in from its consumers. Jones Soda is sold through traditional beverage retailers and everywhere you’d never expect to find a soda. This press release contains forward-looking state-ments and projections concerning the Company’s plans, strategies, expectations, predictions and financial projections concerning the Company’s future activities and results of operations and other

Jones Soda * Annual Report 2004 1

future events or conditions, and are ”forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Words such as “expect,” “believe,” “anticipate,” “may,” “will,”

“plan,” “intend,” “estimate,” “could,” and other similar expressions are intended to identify these forward-looking statements. In particular, state-ments in this release regarding potential growth opportunities, working capital and cash flow man-agement, operational and expense controls, future profitability and results of operations are forward looking. Statements in this press release, and else-where, that look forward in time or include any-thing other than historical information involve risks and uncertainties that may affect the Company’s actual results of operations. These statements by the Company are subject to certain risks, including, among others, future demand for its products and brand, competition from other businesses providing similar products, the ability to maintain profitability and control expenses and the Company’s ability to successfully execute its business strategy. These and other risks and uncertainties are discussed in more

detail in the Company’s periodic reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, which are available at the SEC website at www.sec.gov.

Peter M. Van StolkChief Executive Officer and President

Letter To Shareholders


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Jones Soda Co. Sales(Annual Sales in Millions ($US)

Youth Market GrowthPopulation of 12-24 yr olds in millions, North America

New Age Beverage MarketAnnual Sales in Billions (US$)

Source: U.S. Census Bureau Source: Beverage Marketing Corporation*estimated sales

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There’s a lot more to the beverage industry than simply creating a product. At Jones Soda Co. we cover the categories with a full line of unique beverages, and the manufacturing, distribution and marketing knowledge to deliver the alternative to the mainstream.

We are pioneers in the youth oriented, New Age Beverage industry -- an industry that generates almost $10 billion dollars in annual sales–with the proven ability to develop and market products that resonate with today’s image conscious consumer.

All of our unique products focus on the fast-growing 12 to 24 year-old market segment. With a current population of over 50 million people, this decidedly individualistic group spends more than $300 billion annually, and influences the spending of an even greater amount.

At Jones Soda Co. we understand our customer. We share common beliefs, attitudes and vision with our target audience. Our products create an immediate connection with our consumer and allow them to play a part in everything Jones.

Financial Highlights


“ I was watching my favorite show and they were drinking Jones Soda. Ever since then, Jones Soda has been my favorite. Jones Soda rocks!” – Emiko, 21


Jones Soda, our first product, is one of the most innovative beverages to ever hit retail shelves. Jones Soda provides freedom of choice. Consumers can pick from a wide variety of unique flavors, including Strawberry-Lime, Orange, Cherry, Green Apple, Crushed Melon, Fufu Berry, Blue Bubblegum, and Happy. And they can also choose a look that matches the moment. With hundreds of different label images, Jones Soda reflects our ever-changing moods, providing a little something for the indi-vidualist in everyone.

WhoopAss Energy Drink follows the successful Jones Soda Co. product development formula — com-bine great looks with great taste. The premiere American-style energy drink, WhoopAss dares you to “Run with the little guy” and consumers every-where are taking up the challenge. With ingredients like Taurine, Inositol and Royal Jelly, WhoopAss de-livers energy with attitude, and gives Jones Soda Co. a strong presence in this rapidly growing category.

Jones Juice brings a twisted bit of nature to the fastest growing segment of the New Age Beverage industry. A premium product that could only come from the minds of Jones Soda Co., Jones Juice is set to take the company to the next level. Packaging that reflects the look and feel of the highly rec-ognizable Jones brand is only the beginning for a great tasting product that shows kids it can be hip to be healthy. With flavors like Fu Cran Fu, Limes With Orange, Purple Carrot, and even one named Dave, you can be sure that this is definitely not juice the way Mother Nature intended.

For today’s youth market, every brand is an accessory and every purchase makes a statement.


“ A Jones haiku: Yummyness hits my taste buds Monotonousness is gone I revel in my glory.” – Chandler, 15


The youth market is a moving target, and one that is hard to reach through traditional marketing meth-ods. While an independent and idealistic nature creates a highly diverse audience, we have the know-how to speak directly to the most important segment of this highly sought-after market segment.

We understand the importance of trendsetters and role models and know how and where to reach these most influential members of our target audience. The Jones RV Team is our finely tuned mobile mar-keting machine crisscrossing the country taking the product to the people, turning any event into a Jones event. From sports events to concerts to county fairs and festivals, these brightly colored, flame-covered vehicles are impossible to ignore as they sample product directly to our core consumer community.

And on boards, bikes and blades, the Jones Soda Co. logo has come to define excellence in alternative sports marketing. Jones was one of the first bever-age companies to enter into support and sponsor-ship agreements with alternative sports athletes, and today the company sponsors a team of profes-

sional and amateur athletes that includes some of the leading snowboarders, skateboarders and BMX riders in the world.

Alternative marketing is a natural fit for a line of products that has urban credibility and authentic grassroots appeal, and Jones Soda Co. is proof that attitude attracts attention.

Alternative marketing supports our urban appeal and street credibility.


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“Jones is the only soda in my fridge!!!” – Joshua, 28


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Today’s online generation has grown up with the Internet, and the World Wide Web has allowed our products to evolve into a virtual consumer commu-nity—with unequaled brand loyalty.

Jonessoda.com helps ensure that our products truly mirror our market. The site allows our following of dedicated customers to interact directly with the company, playing a pivotal role in shaping our prod-ucts and defining everything Jones. Our customer community supplies us with the photographic im-ages for our labels, they follow the activities of the Jones RV Team, watch videos, listen to music, enter contests and purchase merchandise from the Jones Soda Store. But while customers can buy Jones products or order their own custom labels, the site is a lot more about community than it is about commerce. Jonessoda.com takes advantage of the true strength of the Internet, a place where people from all walks of life can find common ground to connect and communicate.

Our myjones.com site takes a unique approach to internet marketing and customer interaction. Through this specialized site consumers are able to submit photos for their own unique Jones labels. From birthday parties and special events to corpo-rate gifts, we are creating a dynamic connection between company and consumer, as myjones.com turns Jones Soda Co. into the first audience-partici-pation beverage company.

Our Internet presence provides a valuable service to both our customers and our company as it takes guerilla marketing to the web, increasing brand awareness and extending the reach of our commu-nications efforts to a worldwide audience.

A strong connection to our consumer community creates unequaled brand loyalty.


Whoopass Cortex

Flavor Association Cortex

Fufu Berry Cortex

Jones Juice Cortex

Jones NaturalsCortex

“ Jones Soda ROCKS!! The Cream Soda is like God in a bottle!!” – Megan, 19


We have a proven ability to reach our core con-sumer. Our unique distribution and promotion strategies set our products apart from the main-stream, resulting in unbeatable brand loyalty. And our grassroots marketing expertise has enabled us to consistently create an interesting, relevant story centered on our products.

From the alternative press to mainstream media, we know how to attract attention. Major publications and television networks have been drawn to both our products and our people.

The company and its culture have received unprec-edented attention in all major media. The New York Times, People Magazine, Entrepreneurial Edge, and Inc. Magazine and all of the major television networks have profiled Jones Soda Co. And the unique look of our products has made them a favor-ite in Hollywood —Jones products have appeared in countless top-rated television shows and major feature films.

In a world where it often takes multimillion-dollar ad campaigns to gain product recognition, you have to think a little differently if you’re going to suc-ceed. At Jones Soda Co. we have our own ways of getting noticed.

Jones is a state of mind. If we think like our competitors we’re dead.


“ I love Jones Soda. I love Jones Soda.

I love the people who make Jones Soda. I love Jones Soda.” – Russell, 12


Product development, bottling, distribution and merchandising— They’re all part of Jones Soda Co.

One of the original members of the alternative bev-erage movement, Jones Soda Co. brings a wealth of knowledge and experience to the beverage industry. The company spent almost a decade build-ing successful brands for others before deciding to capitalize on its reputation for picking winners by creating its own unique beverages.

Since the launch of Jones Soda in 1996, the compa-ny has created and maintained an unequaled level of customer loyalty. All of Jones Soda Co.’s brands have a personality that is impossible to ignore, and difficult to duplicate.

Complete in-house product design and develop-ment coupled with our use of a national network of independent bottlers and distributors provides a cost-effective, flexible solution for getting prod-ucts to retail. And our full line of beverages allows manufacturers, distributors and retailers to get maximum advantage from our unique products.

At Jones Soda Co., a thorough understanding of marketing to today’s youth has allowed the compa-ny to successfully maintain its alternative appeal as it has moved from being an underground phenom-enon to mainstream consumer acceptance.

Established in Vancouver, Canada in 1987, the com-pany was originally known as Urban Juice and Soda, a bottler and distributor of mainstream beverages. In order to better focus on the U.S. market, Urban Juice and Soda moved from Vancouver, B.C. to Seattle in 2000, and in recognition of the strength of its flagship brand officially changed its name to Jones Soda Co.


JONES SODA CO. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Expressed in United States dollars)Years ended December 31, 2004 and 2003

2004 2003

Revenue $ 27,449,674 $ 20,100,864Cost of goods sold 17,885,811 12,957,165Gross profit 9,563,863 7,143,699Licensing revenue 109,234 —Operating expenses: Promotion and selling 5,955,645 4,603,219 General and administrative [note 10(a)] 2,440,185 2,173,695 8,395,830 6,776,914Income from operations 1,277,267 366,785Other income (expense): Interest income (expense), net (3,705) 25,066 Other income (expense) 56,798 (68,336) 53,093 (43,270)

Earnings for the year $ 1,330,360 $ 323,515Earnings per share: Basic $ 0.06 $ 0.02 Diluted 0.06 0.02

Weighted average number of common stock: Basic 20,639,402 19,871,180 Diluted 21,949,001 20,592,917 See accompanying notes to consolidated financial statements.


JONES SODA CO. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (Expressed in United States dollars) December 31, 2004 and 2003 2004 2003 ASSETS Current assets: Cash and cash equivalents (note 8) $ 333,533 $ 315,988Accounts receivable (note 3) 2,834,882 1,507,374 Inventory (note 5) 3,550,595 2,000,924 Prepaid expenses and deposits 399,779 275,623 7,118,789 4,099,909 Capital assets (note 6) 682,439 490,273 Intangible assets (note 7) 49,444 75,856 $ 7,850,672 $ 4,666,038 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Bank indebtedness (note 8) $ 480,285 $ — Accounts payable and accrued liabilities 2,745,602 2,059,587 Current portion of capital lease obligations 63,549 41,630 Current portion of deferred revenue 50,000 50,000 3,339,436 2,151,217

Capital lease obligations (note 9) 113,509 19,712 Deferred revenue (note 4) 50,000 100,000 Shareholders’ equity (note 10): Common stock: Authorized: 100,000,000 common stock, no par value Issued and outstanding: 20,956,346 common stock (2003—20,089,096) 11,780,996 11,178,475 Deficit (8,299,898) (9,630,258) See accompanying notes to consolidated financial statements.


For the year ended December 31, 2004, revenues were approximately $27,450,000, an increase of $7,349,000, or 36.6% over the $20,101,000 in revenues for the year ended December 30, 2003. Consolidated case sales with a translation to 288-ounce equivalent cases for the year ended December 31, 2004 were 2,258,000, an increase of 33.5% from 288-ounce equivalent case sales for the 2003 year of 1,690,000. The increase in revenues in fiscal 2004 over fiscal 2003 was primarily attribut-able to higher case sales of Jones Soda and Jones Energy, partially offset by small decrease in both Jones Naturals and Whoopass. The overall increase in revenues for the comparable years was due primarily to the fact that we experienced increased case sales of Jones Soda through our distributor

network in our core markets of the Southwest, Midwest and Western Canada, as well as in our non-core markets of the Northeast, Southeast and Eastern Canada. The increase in revenues was also due to our strategy of adding certain national ac-counts. In particular, in March 2004 we added the Starbucks account (Jones Soda) in the U.S., which provided revenue to us in all quarters of fiscal 2004. In addition, we had increased revenues over the comparable periods of fiscal 2004 and 2003 from certain of our existing national accounts such as Panera Bread Company (Jones Soda and Jones Naturals) which has continued to grow in num-ber of bakery-cafes year over year. In addition in the fourth quarter of 2004, we added the Target Corporation account (Jones Soda

Results of Operations for the Year Ended December 31, 2004(Dollars in Thousands) 2004 2003 ChangeRevenue $ 27,450 $ 20,101 36.6%Gross profit 9,564 7,144 33.9%Licensing revenue 109 0 n/aPromotion and selling 5,956 4,603 29.4%General and administrative 2,440 2,174 12.2%Total operating expenses 8,396 6,777 23.9%Promotion and selling 5,956 4,603 29.4%General and administrative 2,440 2,174 12.2%


JONES SODA CO. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME(Expressed in United States dollars)Years ended December 31, 2004 and 2003Common stock

Number Amount Additional Paid-In Captial

Accumulated Other Comprehensive

Income

Deficit Comprehensive Income

Total Shareholders’ Equity

Balance Dedember 31, 2002 19,800,596 $11,021,231 $625,560 $107,752 ($9,953,773) — $1,800,770

Options Exercised 288,500 157,244 — — — — 157,244

Stock-basedcompensation expense

— — 113,580 — — — 113,580

Comprehensive loss: Income for the year

— — — — 323,515 323,515 323,515

Balance, December 31, 2003

20,089,096 11,178,475 739,140 107,752 (9,630,258) — —

Option exercised 867,250 602,521 — — — — 2,395,109

Stock-based expenses — — — 19,737 — — 19,737

Repurchase escrow sharesComprehensive loss: Increase for the year

— — — — 1,330,360 1,330,360 1,330,360

See accompanying notes to consolidated financial statements.


JONES SODA CO. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in United States dollars)Years ended December 31, 2004 and 2003

2004 2003Cash flows from (used in) operating activities: Earnings for the year $ 1,330,360 $ 323,515 Items not involving cash: Depreciation and amortization 193,223 173,605 Non-cash Stock-based compensation 19,737 113,580 Changes in assets and liabilities: Accounts receivable (1,327,508) (574,720) Inventory (1,549,671) (240,736) Prepaid expenses (124,156) 211,423 Accounts payable and accrued liabilities 686,015 294,290

Net cash from (used in) operating activities (772,000) 300,957Cash flows used in investing activities: Purchase of capital assets (167,019) (82,386) Purchase of intangible assets (12,176) (11,156) Net cash used in investing activities (179,195) (93,542)Cash flows from financing activities: Net Borrowing under line of credit 480,285 (114,833) Repayment of capital lease obligations (64,066) (9,141) Note receivable — 75,238 Deferred revenue (50,000) (50,000) Proceeds from exercise of options 602,521 157,244Cash flows from financing activities 968,740 58,508


Net increase in cash and cash equivalents 17,545 265,923Cash and cash equivalents, beginning of year 315,988 50,065

Cash and cash equivalents, end of year $ 333,533 $ 315,988

Supplemental disclosure of non-cash financing and investing activities: Stock-based compensation $ 19,737 $ 113,580 Bad debt recovery 15,000 71,493 Increase in capital lease obligations 179,782 40,740 Write off of note receivable — 151,979 Write off of deferred revenue — (151,979)

Cash paid during year for: Interest received $ — $ (45,295) Interest payments 7,288 —

See accompanying notes to consolidated financial statements.


Accounts receivable: 2004 2003

Trade $ 2,851,922 $ 2,118,752 Other 158,084 53,949 Allowance for doubtful accounts (175,124) (665,327) $2,834,882 $ 1,507,374

Supplementary information on the allowance for doubtful accounts: 2004 2003 Allowance for doubtful accounts: Beginning of year $ 665,327 $ 763,319 Bad debt expense 4,000 — Net recoveries and write-offs (494,203) (97,992) End of year $ 175,124 $ 665,327

Net recoveries and write-offs of $494,203 relate to bad debts expensed during 2001. $475,203 was written off during 2004 and $19,000 was collected during 2004.

Deferred revenue: 2004 2003 Deferred revenue $ 100,000 $ 150,000 Current portion of deferred revenue (50,000) (50,000) $ 50,000 $ 100,000

In 2001, the Company secured a new distributor to replace a previous distributor that went bankrupt. As part of the distribution agreement, the Company received a $250,000 non-refundable cash pay-ment from its new distributor which was recorded as deferred revenue and is being amortized on a straight-line basis over the five years, representing

management’s current best estimate of the period of imputed benefit from the initial distribution agreement. During 2004, $50,000 has been recog-nized in revenue.


JONES SODA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars) Years Ended December 31, 2004 and 2003

Under APB 25, compensation expense is measured as the excess, if any, of the market price of the underlying stock over the exercise price on the measurement date of the grant. Had stock com-pensation expense for grants to employees under

the Company’s stock option plan been determined based on the fair value methodology under SFAS 123, the Company’s net earnings for years ended December 31, 2004 and 2003 would have been presented as follows:

Twelve Months Ended December 31 2004 2003

Earnings as reported $ 1,330,360 $ 323,515 Add: Stock-based employee compensation Expenses included in reported earnings 19,737 113,580

Deduct: Total stock-based employee compensation expenses determined under fair value method for all awards (318,458) (149,270)

Pro forma earnings $ 1,031,639 $ 287,825 Earnings per share Basic—as reported 0.06 0.02 Basic—pro forma 0.05 0.01 Diluted—as reported 0.06 0.02 Diluted—pro forma 0.05 0.01


JONES SODA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars) Years Ended December 31, 2004 and 2003

1. Nature and continuance of operations: Jones Soda Co. (the “Company” or “Jones Soda”) develops, produces, markets, and distributes “alter-native” or “new age” beverages. The Company’s main product lines include the brands: Jones Soda Co. ®, Jones NaturalsTM, a non-carbonated juice & tea drink, Jones Energy, a high energy drink, and WhoopAssTM, a high energy drink. Urban Juice and Soda Company Limited, the Company’s predecessor, was incorporated in 1986 under the Company Act (British Columbia). The Company has three operat-ing subsidiaries, Jones Soda Co. (USA) Inc., Jones Soda (Canada) Inc., and myJones.com Inc., as well as one non-operating subsidiary, Whoopass USA Inc.

2. Significant accounting policies: (a) Basis of presentation: These consolidated financial statements have been prepared using generally accepted accounting prin-ciples in the United States of America.

The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation.

(b) Use of estimates: The preparation of financial statements in ac-cordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Areas of significant estimate include the assessment of collectibility of accounts receivable, net realizable value of inventory, and valuation allowance against deferred income tax assets. Accordingly, actual results may differ from these estimates.

(c) Foreign currency translation: All foreign exchange gains or losses, including those arising from translating the net monetary assets of the Company’s Canadian operations to the Company’s func-tional currency of US dollars, have been included in income. For the twelve month period ended December 31, 2004, the Company incurred a foreign exchange gain of $56,798 (2003 loss—$68,336). (d) Cash and cash equivalents: The Company considers all short-term investments with a maturity date at purchase of three months or less to be cash equivalents.

(e) Inventory: Inventory has been stated at the lower of cost and estimated net realizable value and includes adjust-ments for estimated obsolescence. Cost includes laid-down cost and is determined principally using actual cost on a first-in first-out basis. Inventory that is older than 12 months is considered as obsoles-cence and is expensed as part of cost of goods sold.


5. Inventory: 2004 2003 Finished goods $ 1,964,875 $ 1,460,550 Raw materials 1,585,720 540,374 $ 3,550,595 $ 2,000,924

6. Capital assets: 2004 2003

Automotive $ 265,630 $ 85,848 Equipment 1,025,410 922,273 Office and computer equipment 616,029 552,147

1,907,069 1,560,268

Accumulated depreciation (1,224,630) (1,069,995) $ 682,439 $ 490,273 Included in fixed assets are assets under capital leases with a net book value of $301,982 (2003—$138,238).

7. Intangible assets: 2004 2003 Trademarks and patents $ 328,125 $ 314,949 Accumulated amortization (278,681) (240,093) $ 49,444 $ 75,856


(f) Capital assets: Capital assets are recorded at cost and are depreciated on the declining balance basis over the estimated useful lives of the assets as follows: 2004 2003

Automotive $ 265,630 $ 85,848 Equipment 1,025,410 922,273 Office and computer equipment 616,029 552,147

1,907,069 1,560,268

Accumulated depreciation (1,224,630) (1,069,995) $ 682,439 $ 490,273 Included in fixed assets are assets under capital leases with a net book value of $301,982 (2003—$138,238).


A summary of the Company’s stock option activity is as follows: Outstanding options Average exercise price Number of shares US CDN Balance at December 31, 2002 2,543,500 $ 0.59 $ 0.92 Option granted 651,000 0.36 0.46 Options exercised (288,500) (0.55) (0.74) Options cancelled (501,500) (0.81) (1.06) Balance at December 31, 2003 2,404,500 $ 0.58 $ 0.76 Option granted 560,500 2.39 2.88 Options exercised (867,250) (0.69) (0.90) Options cancelled (65,500) (0.44) (0.54) Balance at December 31, 2004 2,032,250 $ 1.06 $ 1.27

Jones Soda Annual Report

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