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iso4217:USD
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JONES SODA CO
0001083522
--12-31
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<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 1 - us-gaap:SignificantAccountingPoliciesTextBlock-->
<!-- xbrl,ns -->
<!-- xbrl,nx -->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="center" style="font-size: 10pt; margin-top: 0pt"><b></b>
</div>
<div align="left">
</div>
<div align="center" style="font-size: 10pt"><b></b></div>
<div align="center" style="font-size: 10pt"><b></b></div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>1. Nature of Operations and Summary of Significant Accounting Policies</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     Jones Soda Co. develops, produces, markets and distributes premium beverages, including the
following product lines and extensions:
</div>
<div style="margin-top: 6pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" style="background: transparent"> </td>
<td width="2%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td><i>Jones Soda</i><sup style="font-size: 85%; vertical-align: text-top">®</sup>, a premium carbonated soft drink;</td>
</tr>
</table>
</div>
<div style="margin-top: 6pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="6%" style="background: transparent"> </td>
<td width="2%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td><i>Jones Zilch™, </i>with zero calories (and an extension of the <i>Jones Soda</i><sup style="font-size: 85%; vertical-align: text-top">®</sup> product line);</td>
</tr>
</table>
</div>
<div style="margin-top: 6pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" style="background: transparent"> </td>
<td width="2%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td><i>WhoopAss Energy Drink</i><sup style="font-size: 85%; vertical-align: text-top">®</sup>, an energy supplement drink; and</td>
</tr>
</table>
</div>
<div style="margin-top: 6pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="6%" style="background: transparent"> </td>
<td width="2%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td><i>WhoopAss Zero Energy Drink</i><sup style="font-size: 85%; vertical-align: text-top"><i><sup style="font-size: 85%; vertical-align: text-top">®</sup></i></sup><i>, with zero sugar (and an extension of the WhoopAss Energy Drink</i><sup style="font-size: 85%; vertical-align: text-top"><i><sup style="font-size: 85%; vertical-align: text-top">®</sup></i></sup><i> product line).</i></td>
</tr>
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     We are a Washington corporation and have three operating subsidiaries, Jones Soda Co. (USA)
Inc., Jones Soda (Canada) Inc., and myJones.com, Inc., as well as one non-operating subsidiary,
Whoopass USA Inc.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Basis of presentation and consolidation</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The accompanying condensed consolidated balance sheet as of December 31, 2010, which has been
derived from audited consolidated financial statements and the unaudited interim condensed
consolidated financial statements as of June 30, 2011, have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) and the Securities
and Exchange Commission (SEC) rules and regulations applicable to interim financial reporting. The
condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany transactions between the Company and its subsidiaries
have been eliminated in consolidation.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all material adjustments, consisting only of those of a normal recurring nature,
considered necessary for a fair presentation of our financial position, results of operations and
cash flows at the dates and for the periods presented. The operating results for the interim
periods presented are not necessarily indicative of the results expected for the full year. These
financial statements should be read in conjunction with the audited financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2010.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Use of estimates</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The preparation of the condensed consolidated financial statements requires management to make
a number of estimates and assumptions relating to the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenue and expenses during the reporting period.
Significant items subject to such estimates and assumptions include, but are not limited to,
inventory valuation, depreciable lives and valuation of fixed assets, valuation allowances for
receivables, trade promotion liabilities, stock-based compensation expense, valuation allowance for
deferred income tax assets, contingencies, and forecasts supporting the going concern assumption
and related disclosures. Actual results could differ from those estimates.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Seasonality</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     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. Timing of customer
purchases will vary each year and sales can be expected to shift from one quarter to another.
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.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Liquidity</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     As of June 30, 2011, we had cash and cash equivalents of approximately $4.6 million and
working capital of $7.0 million. Cash used in operations during the six months ended June 30, 2011
totaled $2.8 million. Our cash flows vary throughout the year based on seasonality. We
traditionally use more cash in the first half of the year as we build inventory to support our
historically seasonally-stronger shipping months of April through September, and expect cash used
by operating activities to decrease in the second half of the year as we collect receivables
generated during our stronger shipping months. We incurred a net loss of $1.8 million during the
three months ended June 30, 2011.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     We believe that our current cash and cash equivalents, which includes net proceeds of
approximately $2.2 million received from our final draw down under the equity line of credit
facility on February 1, 2011 (see Note 2), will be sufficient to meet our anticipated cash needs at
least into the first half of 2012. This will depend, however, on our ability to successfully
execute our 2011 operating plan, which is based on our realigned higher-margin product portfolio,
including <i>Jones Soda </i> and our newly re-launched <i>WhoopAss Energy Drink</i>. The
introduction of new and re-launched products involves a number of risks, and there can be no
assurance that we will achieve the sales levels we expect or that justify the additional costs
associated with such product introductions. We also plan to continue our efforts to reinforce and
expand our distributor network by partnering with new distributors and replacing underperforming
distributors. It is critical that we meet our volume projections and continue to increase volume
going forward, as our operating plan already reflects prior significant general and administrative
cost containment measures, leaving us little room for further reductions in such costs that do not
jeopardize our growth plans.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     Our operating plan factors in the use of cash to meet our contractual obligations. A
substantial portion of these contractual obligations consists of obligations to purchase raw
materials, including sugar and glass under our supply agreements. We enter into these supply
agreements in order to fix the cost of these key raw materials, which we expect will be used in the
ordinary course of our business. Our contractual obligations also relate to payments for
sponsorships, and have been reduced by approximately $7.0 million
through 2017 as the result of our termination of the
sponsorship arrangement with the New Jersey Nets (see Note 7).
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     We intend to continually monitor and adjust our business plan as necessary to respond to
developments in our business, our markets and the broader economy. Our current 2011 operating plan
does not require us to obtain additional financing; however, this will depend on our ability to
meet our sales volume goals and otherwise execute on our operating plan. We believe it is
imperative to meet these objectives and continue to expand our distribution network and increase
sales volume in order to lessen our reliance on external financing in the future. In order to
execute on our growth strategy beyond our 2011 operating plan, we will require additional financing to support our working capital
needs. The amount of additional capital we will require, and the timing of our capital needs, will depend on a number of factors, including the performance of our business for the remainder of 2011 and beyond and the market conditions for debt or equity financing. Although we believe we may have various debt and equity financing alternatives available to us, these alternatives may require significant cash payments for interest and other costs or
could be highly dilutive to our existing shareholders. We continue to monitor whether credit
facilities may be available to us on acceptable terms. There can be no assurance that any new debt
or equity financing arrangement will be available to us when needed on acceptable terms, if at all.
In addition, there can be no assurance that these financing alternatives would provide us with
sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic
transactions in the best interest of the Company and our shareholders, which may include, without
limitation, public or private offerings of debt or equity securities, joint ventures with one or
more strategic partners, strategic acquisitions and other strategic alternatives, but there can be
no assurance that we will enter into any agreements or transactions.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The uncertainties relating to our ability to successfully execute our 2011 operating plan,
combined with our inability to implement further meaningful cost containment measures that do not
jeopardize our growth plans and the difficult financing environment, continue to raise substantial
doubt about our ability to continue as a going concern. Our financial statements for the quarters
ended June 30, 2011 and 2010 were prepared assuming we would continue as a going concern, which
contemplates that we will continue in operation for the foreseeable future and will be able to
realize assets and settle liabilities and commitments in the normal course of business. These
financial statements do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications of liabilities that
could result should we be unable to continue as a going concern.
</div>
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</div>
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<div style="font-family: 'Times New Roman',Times,serif">
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>2. Equity Financing</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In June 2010, we entered into an equity line of credit arrangement (Equity Line) with
Glengrove Small Cap Value, Ltd (Glengrove), pursuant to which Glengrove committed to purchase, upon
the terms and subject to the conditions of the purchase agreement establishing the facility, up to
$10 million worth of shares of our common stock, subject to a maximum aggregate limit of 5,228,893
common shares. The facility provided that we may, from time to time, over the 24-month term of the
facility and at our sole discretion, present Glengrove with draw down notices to purchase our
common stock at a price equal to the daily volume weighted average price of our common stock on
each date during the draw down period on which shares are purchased, less a discount of 6.0%.
During 2010, we completed draw downs and sales under the facility of an aggregate of 3,632,120
shares for net proceeds of approximately $4.0 million. On February 1, 2011, we completed our final
draw down and sale of 1,596,773 shares for net proceeds of approximately $2.2 million. We sold to
Glengrove a total of 5,228,893 shares, which is the maximum number of shares issuable under the
terms of the Equity Line and the Equity Line by its terms automatically has terminated.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 3 - us-gaap:InventoryDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>3. Inventory</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     Inventory consists of the following (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Finished goods
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">2,438</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,695</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Raw materials
</div></td>
<td> </td>
<td> </td>
<td align="right">587</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">584</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">3,025</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2,279</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     Finished goods primarily include product ready for shipment, as well as promotional
merchandise held for sale. Raw materials primarily include ingredients, concentrate and packaging.
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>4. Capital Lease</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In January 2011, we entered into capital lease agreements totaling $122,000 for the lease of
two branded vehicles used for marketing. The debt is payable over a 60-month period at 6.99%
interest. Our remaining scheduled lease payments, which include $20,000 in interest, are $15,000
for 2011, $29,000 for each of the years 2012 through 2015, and $5,000 for 2016.
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>5. Lease Obligations</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In June 2011, we entered into an office building sublease for use as our principal
headquarters, as our previous lease expires in August 2011 and does not include an option to renew.
The term of the sublease is five years with an option to extend for up to three additional five
year terms. Under the terms of the sublease, we were required to deliver a Letter of Credit (LOC)
issued by KeyBank National Association in an amount equivalent to 50% of the total Subtenant
Improvement Allowance (as defined in the sublease agreement), or $183,000, which will be released
after year three of the sublease term, provided we have not been late in the payment of rent more
than five times during such period. As a condition of and to secure the LOC, KeyBank National
Association required us to place $183,000 in an interest bearing restricted reserve account,
invested in a certificate of deposit which is recorded in other assets.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     Our scheduled sublease payments as of June 30, 2011 are as follows (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="88%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Operating Lease</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">2011
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">2012
</div></td>
<td> </td>
<td> </td>
<td align="right">201</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">2013
</div></td>
<td> </td>
<td> </td>
<td align="right">206</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">2014
</div></td>
<td> </td>
<td> </td>
<td align="right">211</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">2015
</div></td>
<td> </td>
<td> </td>
<td align="right">216</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Thereafter
</div></td>
<td> </td>
<td> </td>
<td align="right">127</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">961</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>6. Stock-Based Compensation</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     At our Annual Meeting held on May 25, 2011, our shareholders approved the Jones Soda Co. 2011
Incentive Plan (2011 Plan). As a result, the 2002 Stock Option and Restricted Stock Plan (2002
Plan) was terminated, and equity awards granted after the 2011 Annual Meeting will be made under
the 2011 Plan. Awards outstanding under the 2002 Plan will remain outstanding in accordance with
their existing terms.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The 2011 Plan initially authorizes the issuance of 3,000,000 shares of the Company’s common
stock. Starting in 2012, the number of shares authorized under the 2011 Plan also may be increased
each January 1<sup style="font-size: 85%; vertical-align: text-top">st</sup> by an amount equal to the least of (a) 1,300,000 shares, (b) 4.0% of
our outstanding common stock as of the end of our immediately preceding fiscal year, and (c) a
lesser amount determined by the Board of Directors (the Board), provided that the number of shares
that may be granted pursuant to awards in a single year may not exceed 10% of the Company’s
outstanding shares of common stock on a fully diluted basis as of the end of the immediately
preceding fiscal year.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     Under the terms of the 2011 Plan, the Board may grant awards to employees, officers,
directors, consultants, agents, advisors and independent contractors. Awards may consist of stock
options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards
or other stock or cash-based awards. As
of June 30, 2011, there were 3,000,000 shares available for issuance under the 2011 Plan.
</div>
<div style="margin-top: 6pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="2%" nowrap="nowrap" align="left"><b><i>(a)</i></b></td>
<td width="1%"> </td>
<td><b><i>Stock options:</i></b></td>
</tr>
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     A summary of our stock option activity is as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Outstanding Options</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Number of</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Weighted Average</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Shares</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Exercise Price</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at January 1, 2011
</div></td>
<td> </td>
<td> </td>
<td align="right">1,789,784</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1.96</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Options granted
</div></td>
<td> </td>
<td> </td>
<td align="right">480,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1.35</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Options exercised
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(25,288</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">0.68</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Options cancelled/expired
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(176,243</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">1.20</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at June 30, 2011
</div></td>
<td> </td>
<td> </td>
<td align="right">2,068,253</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1.68</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Exercisable, June 30, 2011
</div></td>
<td> </td>
<td> </td>
<td align="right">1,096,879</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2.17</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Vested and expected to vest
</div></td>
<td> </td>
<td> </td>
<td align="right">2,024,156</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1.70</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div style="margin-top: 6pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="2%" nowrap="nowrap" align="left"><b><i>(b)</i></b></td>
<td width="1%"> </td>
<td><b><i>Restricted stock awards:</i></b></td>
</tr>
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     A summary of our restricted stock activity is as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="right" colspan="6" style="border-bottom: 0px solid #000000"><b>Weighted-Average</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Restricted</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Grant Date</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Shares</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Fair Value</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Non-vested restricted stock at January 1, 2011
</div></td>
<td> </td>
<td> </td>
<td align="right">158,581</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1.52</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Granted
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Vested
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(107,264</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">1.52</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Cancelled/expired
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(47,781</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">1.42</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Non-vested restricted stock at June 30, 2011
</div></td>
<td> </td>
<td> </td>
<td align="right">3,536</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2.80</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     A total of 47,352 shares were withheld by the Company as payment for withholding taxes due in
connection with the vesting of restricted stock awards issued under the 2002 Plan for the six
months ended June 30, 2011, and the average price paid per share of $1.32, reflects the average
market value per share of the shares withheld for tax purposes. There were no shares withheld by
the
Company for the three months ended June 30, 2011. A total of 808 and 1,715 shares were
withheld by the Company as payment for withholding taxes due in connection with the vesting of
restricted stock awards issued under the 2002 Plan for the three and six months ended June 30,
2010, respectively, and the average price paid per share of $2.03 and $1.82, respectively, reflects
the average market value per share of the shares withheld for tax purposes.
</div>
<div style="margin-top: 6pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="2%" nowrap="nowrap" align="left"><b><i>(c)</i></b></td>
<td width="1%"> </td>
<td><b><i>Stock-based compensation expense:</i></b></td>
</tr>
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     Stock-based compensation expense is recognized using the straight-line attribution method over
the employees’ requisite service period. We recognize compensation expense for only the portion of
stock options or restricted stock expected to vest. Therefore, we apply estimated forfeiture rates
that are derived from historical employee termination behavior. If the actual number of forfeitures
differs from those estimated by management, additional adjustments to stock-based compensation
expense may be required in future periods.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     At June 30, 2011, the unrecognized compensation expense related to stock options and
non-vested restricted stock awards was $683,000 and $4,300, respectively, which is to be recognized
over weighted-average periods of 2.2 years and 0.4 years, respectively.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The following table summarizes the stock-based compensation expense (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="top">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Three Months Ended June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 0px solid #000000"> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td nowrap="nowrap" align="left" style="border-bottom: 0px solid #000000"><b>Type of awards:</b></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Stock options
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">115</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">213</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">200</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">348</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Restricted stock
</div></td>
<td> </td>
<td> </td>
<td align="right">5</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">21</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">95</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">53</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">120</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">234</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">295</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">401</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="top"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Income statement account:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Promotion and selling
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">28</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">25</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">86</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">58</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">General and administrative
</div></td>
<td> </td>
<td> </td>
<td align="right">92</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">209</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">209</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">343</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">120</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">234</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">295</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">401</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     We employ the following key weighted-average assumptions in determining the fair value of
stock options, using the Black-Scholes option pricing model:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="top">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Expected dividend yield
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Expected stock price volatility
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">99.4</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">91.9</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Risk-free interest rate
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">2.5</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">2.8</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Expected term (in years)
</div></td>
<td> </td>
<td colspan="3" nowrap="nowrap" align="center">5.9 years</td>
<td> </td>
<td colspan="3" nowrap="nowrap" align="center">5.6 years</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Weighted-average grant date fair-value
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">1.06</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0.60</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The aggregate intrinsic value of stock options outstanding at June 30, 2011 and 2010 was
$135,000 and $311,000 and for options exercisable was $257,000 and $188,000, respectively. The
intrinsic value of outstanding and exercisable stock options is calculated as the quoted market
price of the stock at the balance sheet date less the exercise price of the option. The total
intrinsic value of options exercised during the three and six months ended June 30, 2011 and 2010
was $700 and $57,000 and $14,000 and $58,000, respectively.
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>7. Commitments and contingencies</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b><i>Commitments</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In
August 2011, we announced that we agreed to terminate the Amended Sponsorship Agreement with the New Jersey
Nets, dated October 29, 2007, effectively ending the agreement five years early. In connection
with the termination, we agreed to pay $500,000, which is recorded in accrued liabilities as of
June 30, 2011. The payment includes a $150,000 payment owed under the Amended Sponsorship
Agreement in connection with annual sponsorship fees for the year ended December 31, 2010 and
the first half of 2011 and a termination fee of $350,000 payable in three installments ending March
1, 2012.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     With the conclusion of our sponsorship with the Portland Trailblazers effective June 30, 2011,
our remaining sponsorships are comprised of several athlete and other sponsorships; these
obligations vary in terms. Sponsorship obligations in future periods
under these commitments, after giving effect to the termination of the New
Jersey Nets Sponsorship, are
expected to occur as follows (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Total</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2012</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2013</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Sponsorships
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">425</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">125</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">150</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">150</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Legal proceedings</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     On September 4, 2007, a putative class action complaint was filed against us, our then serving
chief executive officer, and our then serving chief financial officer in the U.S. District Court
for the Western District of Washington, alleging claims under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The case was
entitled <i>Saltzman v. Jones Soda Company, et al.</i>, Case No. 07-cv-1366-RSL, and purported to be
brought on behalf of a class of purchasers of our common stock during the period March 9, 2007 to
August 2, 2007. Six substantially similar complaints subsequently were filed in the same court,
some of which alleged claims on behalf of a class of purchasers of our common stock during the
period November 1, 2006 to August 2, 2007. Some of the subsequently filed complaints added as
defendants certain current and former directors and another former officer of the Company. The
complaints generally alleged violations of federal securities laws based on, among other things,
false and misleading statements and omissions about our financial results and business prospects.
The complaints sought unspecified damages, interest, attorneys’ fees, costs, and expenses. On
October 26, 2007, these seven lawsuits were consolidated as a single action entitled <i>In re Jones
Soda Company Securities Litigation</i>, Case No. 07-cv-1366-RSL. On March 5, 2008, the Court appointed
Robert Burrell lead plaintiff in the consolidated securities case. On May 5, 2008, the lead
plaintiff filed a First Amended Consolidated Complaint, which purports to allege claims on behalf
of a class of purchasers of our common stock during the period of January 10, 2007, to May 1, 2008,
against the Company and Peter van Stolk, our former Chief Executive Officer, former Chairman of the
Board, and former director. The First Amended Consolidated Complaint generally alleges violations
of federal securities laws based on, among other things, false and misleading statements and
omissions about our agreements with retailers, allocation of resources, and business prospects.
Defendants filed a motion to dismiss the amended complaint on July 7, 2008. After hearing oral
argument on February 3, 2009, the Court granted the motion to dismiss in its entirety on February
9, 2009. Plaintiffs filed their motion for leave to amend their complaint on March 25, 2009. On
June 22, 2009, the Court issued an order denying plaintiffs’ motion for leave to amend and
dismissed the case with prejudice. On July 7, 2009, the Court entered judgment in favor of the
Company and Mr. van Stolk. On August 5, 2009, plaintiffs filed a notice of appeal of the Court’s
order dismissing the complaint and denying plaintiffs’ motion for leave to amend, and the resulting
July 7, 2009 judgment. On August 30, 2010, the Ninth Circuit panel affirmed the denial of
plaintiffs’ motion for leave to amend. On September 20, 2010, plaintiffs filed a petition for
rehearing of their appeal by the full Ninth Circuit. On October 20, 2010, the Ninth Circuit denied
plaintiffs’ petition for rehearing. Plaintiffs did not file a petition for review by the U.S.
Supreme Court, and the time for doing so has passed.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In addition, on September 5, 2007, a shareholder derivative action was filed in the Superior
Court for King County, Washington, allegedly on behalf of and for the benefit of the Company,
against certain of our former officers and current and former directors. The case was entitled
<i>Cramer v. van Stolk, et al.</i>, Case No. 07-2-29187-3 SEA (Cramer Action). The Company also was named
as a nominal defendant. Four other shareholders filed substantially similar derivative cases. Two
of these actions were filed in Superior Court for King County, Washington. One of these two
Superior Court actions was voluntarily dismissed and the other was consolidated with the Cramer
Action under the caption In re Jones Soda Co. Derivative Litigation, Lead Case No. 07-2-31254-4
SEA. On April 28, 2008, plaintiffs in the consolidated action filed an amended complaint based on
the same basic allegations of fact as in the federal securities class actions and alleging, among
other things, that certain of our current and former officers and directors breached their
fiduciary duties to the Company and were unjustly enriched in connection with the public
disclosures that are the subject of the federal securities class actions. On May 2, 2008, the Court
signed a stipulation and order staying the proceedings in the consolidated Cramer Action until all
motions to dismiss in the consolidated federal securities class action have been adjudicated. On
July 9, 2010, the Court dismissed the consolidated action without prejudice.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The two other shareholder derivative actions were filed in the U.S. District Court for the
Western District of Washington. On April 10, 2008, the Court presiding over the federal derivative
cases consolidated them under the caption Sexton v. van Stolk, et al., Case
No. 07-1782RSL (Sexton Action), and appointed Bryan P. Sexton lead plaintiff. The actions
comprising the consolidated Sexton Action are based on the same basic allegations of fact as in the
securities class actions filed in the U.S. District Court for the Western District of Washington
and the Cramer Action, filed in the Superior Court for King County. The actions comprising the
Sexton Action alleged, among other things, that certain of our current and former directors and
former officers breached their fiduciary duties to the Company and were unjustly enriched in
connection with the public disclosures that are the subject of the federal securities class
actions. The complaints sought unspecified damages, restitution, disgorgement of profits, equitable
and injunctive relief, attorneys’ fees, costs, and expenses. The Court granted an agreed motion by
the parties to stay the Sexton Action until the resolution of the appeal in the securities class
action described above. By order dated February 14, 2011, the Court lifted the stay and the
plaintiffs filed a notice of designation of operative complaint by the deadline of April 18, 2011.
On June 2, 2011, the plaintiffs in the actions comprising the Sexton Action filed a notice of
voluntary dismissal without prejudice.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In addition to the matters above, we are or may be involved from time to time in various
claims and legal actions arising in the ordinary course of business, including proceedings
involving product liability claims and other employee claims, and tort and other general liability
claims, for which we carry insurance, as well as trademark, copyright, and related claims and legal
actions. In the opinion of our management, the ultimate disposition of these matters will not have
a material adverse effect on our consolidated financial position, results of operations or
liquidity.
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>8. Comprehensive Loss</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     Comprehensive loss is comprised of net loss and other adjustments, including items such as
non-U.S. currency translation adjustments. We do not provide income taxes on currency translation
adjustments, as the historical earnings from our Canadian subsidiary are considered to be
indefinitely reinvested.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The following table summarizes our comprehensive loss for the periods presented (in
thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Three Months Ended June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Net loss
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(1,820</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(1,554</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(3,490</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(3,686</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Currency translations
</div></td>
<td> </td>
<td> </td>
<td align="right">21</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(78</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">60</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(45</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Comprehensive loss
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(1,799</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(1,632</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(3,430</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(3,731</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>9. Segment Information</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     We have one operating segment with operations primarily in the United States and Canada.
Revenues are assigned to geographic locations based on the location of customers. Geographic
information is as follows (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Three Months Ended June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">United States
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">3,678</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">3,784</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">6,842</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">6,484</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Canada
</div></td>
<td> </td>
<td> </td>
<td align="right">1,227</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,322</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,106</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,335</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Other Countries
</div></td>
<td> </td>
<td> </td>
<td align="right">9</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">259</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">53</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">439</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total revenue
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">4,914</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">5,365</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">9,001</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">9,258</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     During the three months ended June 30, 2011 and 2010, three of our customers represented
approximately 43% and 35%, respectively, of revenue, one of which, A. Lassonde Inc., a Canadian
direct store delivery distributor, represented approximately 33% and 24%, respectively, of revenue.
During the six months ended June 30, 2011 and 2010, three of our customers represented
approximately 40% and 32%, respectively, of revenue, one of which, A. Lassonde Inc., a Canadian
direct store delivery distributor, represented approximately 28% and 21%, respectively, of revenue.
</div>
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</div>
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<div style="font-family: 'Times New Roman',Times,serif">
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>10. Subsequent Events</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In
August 2011, we announced that we agreed to terminate the Amended Sponsorship Agreement with the New Jersey
Nets, dated October 29, 2007, effectively ending the agreement five years early. In connection
with the termination, we agreed to pay $500,000 which is recorded in accrued liabilities as of June
30, 2011. The payment includes a $150,000 payment owed under the Amended Sponsorship Agreement in
connection with annual sponsorship fees for the year ended December 31, 2010 and the first half of
2011 and a termination fee of $350,000 payable in three installments ending March 1, 2012.
</div>
</div>