You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report and the 2008 audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (SEC) on March 16, 2009.
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "believe," "expect," "intend," "anticipate," "estimate," "may," "will," "can," "plan," "predict," "could," "future," variations of such words, and similar expressions. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined at the beginning of this report under "Cautionary Notice Regarding Forward-Looking Statements" and in Item 1A of our most recent Annual Report on Form 10-K filed with the SEC. These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview
We develop, produce, market and distribute a range of premium beverages. With the addition of Jones GABA® in the first quarter of 2009, our premium beverages include the following six brands:
• Jones Pure Cane Soda™, a premium carbonated soft drink;

• Jones 24C™, an enhanced water beverage;

• Jones GABA®, a functional tea juice blend;

• Jones Organics™, a ready-to-drink organic tea;

• Jones Naturals®, a non-carbonated juice & tea; and

• WhoopAss Energy Drink® a citrus energy drink.

We sell and distribute our products primarily throughout the United States (U.S.) and Canada through our network of independent distributors, which we refer to as our direct store delivery (DSD) channel, national retail accounts, which we refer to as our direct to retail (DTR) channel, as well as through licensing arrangements. We do not directly manufacture our products but instead outsource the manufacturing process to third party contract packers.
In September 2006, we entered into an exclusive manufacturing and distribution agreement with National Beverage Corp. (National Beverage) to manufacture and distribute Jones Soda 12-ounce cans to the more mainstream channels and in-store locations. This was an effort to expand our points of availability within all stores including the shelves that are normally restricted to national mainstream brands manufactured by companies such as The Coca-Cola Company and PepsiCo. Beginning in January 2007, National Beverage started selling Jones Pure Cane Soda to retailers in the grocery and mass merchant channels in the U.S. Through this arrangement, we identify and secure retailers across the U.S. for Jones Soda 12-ounce cans, and we are solely responsible for all sales efforts, marketing, advertising and promotion. Using concentrate supplied by Jones, National Beverage both manufactures and sells the products on an exclusive basis directly to retailers. However, beginning in 2009, we have changed our strategic direction, emphasizing our higher-margin, core products, including our Jones Pure Cane Soda glass bottle business, with less emphasis on our canned soda (or CSD) business, which is a lower margin business for us.

Our products are sold in 50 states in the U.S. and nine provinces in Canada, primarily in convenience stores, delicatessens, sandwich shops and selected supermarkets, as well as through our national accounts with several large retailers. We also sell various products on-line, which we refer to as our interactive channel, including soda with customized labels, wearables, candy and other items. We have focused our sales and marketing resources on the expansion and penetration of our products through our independent distributor network and national retail accounts in our core markets consisting of the Northwest, Southwest and Midwest U.S. and Canada, as well as targeted expansion into our less penetrated markets consisting of the Northeast and Southeast U.S. In addition, we are expanding our international business outside of North America and have entered the markets of Ireland, the United Kingdom, Australia and the United Arab Emirates through independent distributors.
Beginning in 2004, we launched our licensing business strategy as a method to extend our brand into non-alternative beverage products and non-beverage products. We currently have licensing arrangements with four companies. With these licensing agreements, we believe that we are able to partner with companies that will manufacture Jones-related products and extend our Jones brand into select products that we feel enhance our brand image. We do not expect this business to be a material part of our operations in 2009.
Our business strategy is to increase sales by expanding distribution of our brands in new and existing markets (primarily within North America), stimulating consumer awareness and trial of our products, thus leading to increased relevance and purchase intent of our brands. Our business strategy focuses on:
• expanding points of distribution for our products;

• creating strong alignment with our key distributors;

• developing innovative beverage brands and products;

• stimulating strong consumer demand for our existing brands and products, with primary emphasis in the U.S. and Canada;

• inviting consumers to participate in our brand through submission of photographs to be placed on labels through our interactive application of myJones.com;

• licensing our brand equity for the creation of other beverage or non-beverage products; and

• exploring opportunities to license our patented custom-label process to non-competitive products.

In order to compete effectively in the beverage industry, we believe that we must convince independent distributors that Jones Pure Cane Soda is a leading brand in the premium soda segment of the alternative or New Age beverage industry. Additionally, as a means of maintaining and expanding our distribution network, we introduce new products and product extensions, and when warranted, new brands. During the year we have launched two new product extensions and one new brand.
During the second quarter of 2009, we launched two extensions of our Jones Pure Cane Sodaincluding Jones Refresco De Caña Pura, launched in our west coast markets, and Jones Jumble, our summer seasonal soda launched in targeted markets. Both of these product extensions added incremental Jones Soda glass bottle business for our DSD channel.
In February 2009, we launched a new brand, Jones GABA, our first line of beverage products containing Pharma GABA, offered in a 12-ounce can and part of a new emerging category of functional beverages. We are marketing this tea and juice blended beverage by focusing on the benefits of enhanced focus and clarity that studies have shown GABA provides. Our results with respect to Jones GABA depend in part on our ability to market the product's benefits. We believe our launch has been hampered by the continued economic slowdown, and as such, we are continuing to explore the best channels and price points in which to sell Jones GABA as well as assessing other potential opportunities for GABA. Jones GABA is our first entry into beverage products containing GABA and much of our success will depend on our ability to gain new points of distribution through our DSD channel. We must also be successful in developing DTR distribution for Jones GABA through existing DTR customers and obtain new listings with customers that currently do not have points of distribution.
The beverage industry, and particularly those companies selling premium beverages like us, can be affected by macroeconomic factors including changes in national, regional, and local economic conditions, unemployment levels and consumer spending patterns, which together may impact the willingness of consumers to purchase our products as they adjust their discretionary spending. The recent disruptions in the overall economy and financial markets as a result of the global economic downturn have adversely impacted our two primary markets:
the U.S. and Canada. This has reduced consumer confidence in the economy and we believe has negatively affected consumers' willingness to purchase our products as they reduce their discretionary spending. Moreover, current economic

conditions may adversely affect the ability of our distributors to obtain the credit necessary to fund their working capital needs, which could negatively impact their ability or desire to continue to purchase products from us in the same frequencies and volumes as they have done in the past. There can be no assurances that the financial markets will stabilize or recover in the months ahead, that consumer confidence will be restored, or that access to the credit markets will become available. If the current economic conditions persist or deteriorate, sales of our products could be adversely affected, collectability of accounts receivable may be compromised and we may face obsolescence issues with our inventory, any of which could have a material adverse impact on our operating results and financial condition.
As we have moved through the historically seasonally-stronger shipping months of April to September, we have gained insight into developing economic conditions and the severity of the impact of those conditions on our business. As a result, as of the date of our quarterly report for the first quarter of 2009, we had refined our operating plan to contemplate lower case sales through the remainder of 2009 than we had anticipated at the beginning of the year. However, case sales in the second quarter of 2009, and again in the third quarter of 2009, have been even lower than our revised expectations. Therefore, as of the date of this report, we have further refined our operating plan from last quarter to contemplate slightly lower case sales through the remainder of 2009. With these further adjustments, and the additional cost containment measures including an additional reduction in workforce implemented during the third quarter, we believe that our revised 12-month operating plan, with its foundation built upon the broader macroeconomic factors, allows us to meet our anticipated cash needs for the next 12 months and beyond. However, we believe our revised operating plan already includes the majority of attainable cost cutting measures, which places greater emphasis on the need to meet our case sales projections in order to effectively operate our business. The economic conditions so far in 2009 have made forecasting demand for our products much more difficult, so there is significant uncertainty regarding our ability to meet our revised case sales projections. This uncertainty, together with our inability to implement further meaningful cost containment measures beyond those we undertook in the third quarter, and the extremely difficult environment in which to obtain additional equity or debt financing, raise substantial doubt about our ability to continue as a going concern. Refer to "Liquidity and Capital Resources" included below in this report. Results of Operations
The following selected unaudited financial and operating data are derived from our condensed consolidated financial statements and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our condensed consolidated financial statements.

                               Three Months Ended September 30,                         Nine Months Ended September 30,
                                      % of                        % of                         % of                         % of
                        2009        Revenue         2008        Revenue         2009         Revenue         2008         Revenue
                                                     (Dollars in thousands, except per share data)
Consolidated
statements of
operation data:
Revenue               $  7,156         100.0      $  8,684         100.0      $  21,710         100.0      $  29,787         100.0
Cost of goods sold      (5,643 )       (78.9 )      (7,718 )       (88.9 )      (16,696 )       (76.9 )      (23,918 )       (80.3 )

Gross profit             1,513          21.1           966          11.1          5,014          23.1          5,869          19.7
Licensing revenue           19           0.3            43           0.5             70           0.3            152           0.5
Promotion and
selling expenses        (1,590 )       (22.2 )      (3,481 )       (40.0 )       (6,151 )       (28.3 )       (9,967 )       (33.5 )
General and
administrative
expenses                (1,446 )       (20.2 )      (2,724 )       (31.4 )       (5,006 )       (23.1 )       (7,809 )       (26.2 )

Operating loss          (1,504 )       (21.0 )      (5,196 )       (59.8 )       (6,073 )       (28.0 )      (11,755 )       (39.5 )
Other
(expense) income,
net                        (65 )        (0.9 )          66           0.7            (65 )        (0.3 )          301           1.0

Loss before income
taxes                   (1,569 )       (21.9 )      (5,130 )       (59.1 )       (6,138 )       (28.3 )      (11,454 )       (38.5 )
Income tax benefit
(expense)                   87           1.2          (130 )        (1.5 )           88           0.4           (392 )        (1.3 )

Net loss              $ (1,482 )       (20.7 )    $ (5,260 )       (60.6 )    $  (6,050 )       (27.9 )    $ (11,846 )       (39.8 )

Basic and diluted
net loss per share    $  (0.06 )                  $  (0.20 )                  $   (0.23 )                  $   (0.45 )

                                                                                       As of
                                                                   September 30, 2009         December 31, 2008
                                                                              (Dollars in thousands)
Balance sheet data:
Cash and cash equivalents, short term investments and
accounts receivable                                                 $          9,703           $        15,054
Fixed assets, net                                                              1,443                     2,099
Total assets                                                                  18,170                    24,315
Long-term liabilities                                                            294                       396
Working capital                                                               11,329                    17,674



                                       Three Months Ended              Nine Months Ended
                                          September 30,                  September 30,
                                      2009           2008            2009            2008
 288-ounce equivalent case sales:
 Finished products case sales         538,500         712,300       1,691,800       2,416,200
 Concentrate case sales               317,600         314,700         685,800       1,365,800

 Total case sales                     856,100       1,027,000       2,377,600       3,782,000

Quarter Ended September 30, 2009 Compared to Quarter Ended September 30, 2008 Revenue
For the quarter ended September 30, 2009, revenue was approximately $7.2 million, a decrease of $1.5 million, or 17.6% from $8.7 million in revenue for the three months ended September 30, 2008. The decrease in revenue was primarily attributable to a decrease in total case sales of 16.6% to 856,100 cases. Case sales through our DTR and DSD channels decreased 24.4% to 538,500 cases. A decline in case sales of our core product, Jones Soda glass bottles, of approximately 64,000 cases contributed to the reduced case sales, and we believe was caused primarily by reduced demand resulting from the impact of the economic downturn on consumer spending levels. We expect economic conditions to continue to have a negative impact on our business for at least the remainder of 2009. In addition, the discontinuance of Jones Soda glass bottles at some of our major retailers in our DTR channel, which occurred in 2008 as part of our realigned channel focus, contributed to a lesser extent to the decline in case sales. Also contributing to the decline was a reduction in 24C shipments of 83,000 cases; 24C had stronger pull-through a year ago subsequent to its launch in 2007. These declines were partially offset by an increase in case sales of concentrate to National Beverage to 317,600 cases, or 0.9%, compared to the same period of 2008. As part of management's strategic refocus, we will continue to emphasize our higher-margin core products, including our Jones Pure Cane Soda glass bottle business, with less emphasis on our CSD business, which is a lower margin business for us, and we expect this strategy will have a negative impact on case sales of concentrate compared to prior periods.
For the quarter ended September 30, 2009, promotion allowances and slotting fees, which are a reduction to revenue, totaled $486,000, a decrease of $559,000, or 53.5%, from $1.0 million a year ago. The promotion allowances and slotting fees for the third quarter of 2009 were primarily attributable to promoting some new distribution points in our DSD business. The promotion allowances and slotting fees a year ago related primarily to price promotion programs implemented in the quarter for our DTR and CSD business and for the continued introduction of 24C across North America. We believe using promotional allowances as a way to promote our core products, while judiciously using slotting fees to gain access on new products, is a more balanced strategy in this economy. As a result, we anticipate for the remainder of 2009 an overall reduction in our promotional allowance and slotting fee costs with an emphasis on our higher margin business, including our core glass bottle business, and only modest slotting fees for the product rollout of Jones GABA in comparison to previous product launches.
Gross Profit
For the quarter ended September 30, 2009, gross profit increased by approximately $547,000, or 56.6%, to $1.5 million as compared to $966,000 in gross profit for the quarter ended September 30, 2008. This was primarily a result of a reduction in promotion allowances and slotting fees due to cost containment measures and a significant reduction in freight and storage costs per case due to reduced fuel surcharges and inventory management. For the quarter ended September 30, 2009, gross profit as a percentage of revenue increased to 21.1% from 11.1% compared to the third quarter of 2008.

Licensing Revenue
Licensing revenue decreased 55.3%, or $24,000, to $19,000 for the quarter ended September 30, 2009 from $43,000 for the quarter ended September 30, 2008, and consisted primarily of our exclusive licensing arrangements with Big Sky Brands for Jones Soda Flavor Booster Hard Candy. We believe licensing revenue was down due to the negative impact on sales resulting from the economic downturn. We do not expect licensing revenue to represent a material portion of our overall revenues in 2009.
Promotion and Selling Expenses
Promotion and selling expenses for the quarter ended September 30, 2009 were approximately $1.6 million, a decrease of $1.9 million, or 54.3%, from $3.5 million for the quarter ended September 30, 2008. Promotion and selling expenses as a percentage of revenue decreased to 22.2% for the quarter ended September 30, 2009, from 40.1% in the same period in 2008. The decrease in promotion and selling expenses was primarily due to a decrease in selling expenses year over year of $1.2 million, to $832,000, or 11.6% of revenue. This decrease resulted primarily from decreases in sales personnel in conjunction with the strategic refocus in the fourth quarter of 2008 and continued cost containment efforts during 2009, which included reductions in workforce and our realigned channel focus which contributed to a decrease in promotional expenses. The effects of the workforce reductions including the most recent reduction in the third quarter of 2009 are expected to reduce ongoing promotion and selling expenses for the remainder of 2009 compared to prior year periods. Also contributing to the decrease in promotion and selling expenses was a decrease in marketing expenses of $651,000, to $759,000, or 10.6% of revenue for the quarter ended September 30, 2009, from $1.4 million in the same period in 2008 due in part to our cost containment efforts.
General and Administrative Expenses
General and administrative expenses for the quarter ended September 30, 2009 were $1.4 million, a decrease of $1.3 million, or 46.9%, compared to $2.7 million for the quarter ended September 30, 2008. General and administrative expenses as a percentage of revenue decreased to 20.2% for the three months ended September 30, 2009 from 31.4% in the same period of 2008. The decrease in general and administrative expenses was primarily due to a decrease of salaries and benefits including stock-based compensation, resulting from a decrease in headcount primarily as a result of the strategic refocus in the fourth quarter of 2008 and continued cost containment efforts during 2009, which also included reductions in workforce. Also contributing to the decrease was a reduction in professional fees including consulting and legal expenses as well as a reduction in bad debt expense. The effects of the workforce reductions including the most recent reduction in the third quarter of 2009 are expected to reduce ongoing general and administrative expenses for the remainder of 2009 compared to prior year periods.
Other (Expense) Income, Net
Other (expense) income, net decreased to an expense of $65,000 for the quarter ended September 30, 2009, from other income, net of $66,000 in the same period a year ago, primarily due to a decrease in interest income due to lower levels of cash and short-term investments.
Income Tax Benefit (Expense)
Provision for income taxes for the quarter ended September 30, 2009 and 2008 was a benefit of $87,000 and an expense of $130,000, respectively. The tax provision relates primarily to the tax provision on income from our Canadian operations and reflects a credit for the quarter ended September 30, 2009 due to a tax refund received resulting from our Canadian operations. No tax benefit is recorded for the loss in our U.S. operations as we have recorded a full valuation allowance on our U.S. net deferred tax assets. We expect to continue to record a full valuation allowance on our U.S. net deferred tax assets until we sustain an appropriate level of taxable income through improved U.S. operations. Our effective tax rate is based on recurring factors, including the forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a full valuation allowance on our U.S. net deferred tax assets.
Net Loss
Net loss for the quarter ended September 30, 2009 decreased to $1.5 million from a net loss of $5.3 million for the quarter ended September 30, 2008. This was due to improvements to our gross profit of $547,000 through reductions in promotion allowances and slotting fees due to cost containment measures and a significant reduction in freight and storage costs per case due to reduced fuel surcharges and inventory management. Additionally the reduction in net loss was attributable to decreases in promotion and selling expense of $1.9 million and general and administrative expenses of $1.3 million as a result of our cost containment efforts.

Nine Month Period Ended September 30, 2009 and 2008 Revenue
For the nine months ended September 30, 2009, revenue was approximately $21.7 million, a decrease of $8.1 million, or 27.1%, from $29.8 million in revenue for the nine months ended September 30, 2008. The decrease in revenue was primarily attributable to a 30.0% decrease in case sales through our DTR and DSD channels to 1,691,800 cases. A decline in case sales of our core product, Jones Soda glass bottles, of approximately 421,500 cases contributed to the reduced case sales, and we believe was caused primarily by the discontinuance of Jones Soda glass bottles at some of our major retailers in our DTR and DSD channels which occurred in 2008 as part of our realigned channel focus. In addition, we believe reduced demand resulting from the impact of the economic downturn on consumer spending levels negatively affected our case sales, and we expect economic conditions to continue to have a negative impact on our business for at least the remainder of 2009. Also contributing to the decline was a reduction in 24C shipments of 238,900 cases; 24C had stronger pull-through a year ago subsequent to its launch in 2007. Additionally, case sales of concentrate to National Beverage decreased to 685,800 cases, or 49.8%, compared to the same period of 2008. As part of management's strategic refocus, we will continue to emphasize our higher-margin core products, including our Jones Pure Cane Soda glass bottle business, with less emphasis on our CSD business, which is a lower margin business for us, and we expect this strategy will continue to have a negative impact on case sales of concentrate compared to prior periods.
For the nine months ended September 30, 2009, promotion allowances and slotting fees, which are a reduction to revenue, totaled $2.4 million, a decrease of $1.9 million or 43.7% from $4.3 million a year ago. The promotion allowances and slotting fees for the nine months ended September 30, 2009 were primarily attributable to promoting some new distribution points in our DSD business. The promotion allowances and slotting fees a year ago related primarily to price promotion programs implemented for our DTR and CSD business and for the continued introduction of 24C across North America. We believe using promotional allowances as a way to promote our core products, while judiciously using slotting fees to gain access on new products, is a more balanced strategy in this economy. As a result, we anticipate for the remainder of 2009 an overall reduction in our promotional allowance and slotting fee costs with an emphasis on our higher margin business, including our core glass bottle business, and only modest slotting fees for the product rollout of Jones GABA in comparison to previous product launches.
Gross Profit
For the nine months ended September 30, 2009, gross profit decreased by approximately $855,000, or 14.6% to $5.0 million as compared to $5.9 million in gross profit for the nine months ended September 30, 2008. This was primarily a result of lower sales volumes in our DTR channel due to the discontinuance of the Jones Soda glass bottles at some of our major retailers and lower DSD volumes in the majority of U.S. regions due, we believe, to softer consumer demand as a result of the economic downturn. These decreases to gross profit were offset by a reduction in promotion allowances and slotting fees and by a significant reduction in freight and storage costs per case due to reduced fuel . . .