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Accrued Expenses

Accrued expenses consisted of the following as of December 31 (in thousands):

	2011				2010
Employee benefits	$	297			$	420
Promotion and selling	683				725
Other accruals	343				447
	$	1,323			$	1,592

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Write-down of Excess GABA Inventory

Write-down of excess GABA inventory consisted of the following as of December 31 (in thousands):

	2011				2010
Write-down of excess GABA raw material inventory	$	—			$	241
Write-down of excess GABA finished goods inventory	—				265
	$	—			$	506

During 2010, and upon the decision to discontinue GABA in the fourth quarter in conjunction with difficulties we encountered with finding markets to sell the remaining inventory, we wrote-down the remaining excess GABA inventory.

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Capital Lease

In January 2011, we entered into capital lease agreements totaling $122,000 for the lease of two branded vehicles used for marketing. The leases are payable over a 60-month period at 6.99% interest. Our remaining scheduled lease payments, which include $16,000 in interest, are $29,000 for each of the years 2012 through 2015, and $5,000 for 2016.

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Commitments and Contingencies

Commitments

In August 2011, we announced that we agreed to terminate the Amended Sponsorship Agreement with the New Jersey Nets, dated October 29, 2007, ending the agreement five years early. In connection with the termination, we agreed to pay $500,000, which included 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. As of December 31, 2011, the unpaid portion of the termination fee totaled $100,000 and is recorded in accounts payable.

With the conclusion of our sponsorship with the Portland Trailblazers effective June 30, 2011, our remaining sponsorships are comprised of several individual athlete sponsorships and other sponsorships.

These obligations vary in terms. Purchase obligations (raw materials, primarily including sugar and glass) in future periods under these commitments are expected to occur as follows (in thousands):

	Total				2012				2013				2014 and Thereafter
Purchase obligations	$	2,127			$	2,127			$	—			$	—
Sponsorships	300				150				150				—
Total	$	2,427			$	2,277			$	150			$	—

Legal proceedings

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.

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Employee 401(k) Plan

We have a 401(k) plan whereby eligible employees who have completed one hour of service per month in three consecutive months of employment may enroll. Employees can elect to contribute up to 100% of their eligible compensation to the 401(k) plan subject to Internal Revenue Service's limitations. Beginning January 1, 2009, we instituted an employee match under our safe harbor 401(k) plan and match employee contributions up to 4% of the employee’s compensation at the rate of 100% for the first 3% contributed and at the rate of 50% for the next 2%. During the years ended December 31, 2011 and 2010, the total matching contributions were $78,000 and $58,000, respectively.

-7184000-60740001312000012978000

Line of Credit

In December 2011, we entered into a secured credit facility with Access Business Finance LLC (Access), pursuant to which we, through two of our wholly owned subsidiaries, Jones Soda (Canada) Inc. and Jones Soda Co. (USA) Inc., may borrow a maximum aggregate amount of up to $2.0 million, subject to satisfaction of certain conditions.

Under this facility, we may periodically request advances for up to 75% of our eligible accounts receivable. The interest rate on the facility is the prime rate plus 2%, but may not be less than 5.25% per annum, with a minimum facility payment of $5,000 per month. The facility has an initial one-year term, which will be automatically extended unless either party gives notice of non-renewal. The facility is guaranteed by us and is secured by a first priority security interest in all of our assets. The credit facility contains customary representations and warranties as well as affirmative and negative covenants. We were in compliance with all debt covenants as of December 31, 2011.

For the year ended December 31, 2011, we did not borrow on this credit facility.

In connection with the execution of the credit facility, we paid a $20,000 fee. Additionally, upon our initial borrowing on the facility, we will issue Access a warrant to purchase $50,000 in shares of our common stock with an exercise price equal to the 20 day trailing average closing price from the date of the initial borrowing.

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Income Taxes

The provision (benefit) for income taxes consisted of the following for the years ended December 31 (in thousands):

	2011				2010
Current
Federal	$	—			$	(68	)
State	12				11
Foreign	(25		)		(281		)
Total	(13		)		(338		)
Deferred
Federal	—				—
State	—				—
Foreign	45				—
Total	45				—
Provision (benefit) for income taxes	$	32			$	(338	)

Loss before provision (benefit) for income taxes was as follows for the years ended December 31 (in thousands):

	2011				2010
United States	$	(7,354	)		$	(6,636	)
Foreign	232				192
Total	$	(7,122	)		$	(6,444	)

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes are as follows:

	2011			2010
Federal statutory rate	34.00	%		34.00	%
Effect of:
Permanent differences	(0.68	)		(2.66	)
State income taxes, net of federal benefit	1.54			(0.10	)
Change in valuation allowance	(37.49	)		(37.63	)
Non-recurring credit	1.95			10.53
Other, net	0.24			1.11
Benefit (provision) for income taxes	(0.44	)%		5.25	%

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred income taxes were as follows (in thousands):

	2011				2010
Deferred tax assets
Net operating loss carry forwards	$	17,311			$	13,899
Capital assets	(5		)		15
Intangible assets	144				189
Inventory adjustment and reserve	90				833
Stock-based compensation	1,257				1,147
Other	106				151
Total deferred tax asset	18,903				16,234
Valuation allowance	(18,903		)		(16,234		)
Net deferred tax asset	$	—			$	—
Deferred tax liabilities	(2		)		(2		)
Total deferred tax asset (liability)	(2		)		(2		)
Classified as current	—				—
Long-term asset (liability)	$	(2	)		$	(2	)

We continue to experience significant losses in our U.S. operations that are material to our decision to maintain a full valuation allowance against our net U.S. deferred tax assets. This is due to the fact that the relevant accounting guidance puts more weight on the negative objective evidence of cumulative losses in recent years than the positive subjective evidence of future projections of pretax income. As of December 31, 2010, the valuation allowance increased by $2.4 million. The amount of the excess tax deductions from stock based compensation arrangements that is allocated to contributed capital if the future tax benefits are subsequently recognized is $3.5 million. As of December 31, 2011, the valuation allowance increased by $2.7 million.

We continually analyze the realizability of our deferred tax assets, but we reasonably expect to continue to record a full valuation allowance on future U.S. tax benefits until we sustain an appropriate level of taxable income through improved U.S. operations and tax planning strategies.

No valuation allowance was recorded for deferred tax assets recorded in the Canadian subsidiary, as this subsidiary remains profitable.

At December 31, 2011, we had net operating loss carry-forwards for income tax purposes in the United States of $51.5 million which expire at various times commencing in 2019. Net operating loss carry-forwards may be subject to certain limitations under Section 382 of the Internal Revenue Code.

There are no uncertain tax positions to recognize as of December 31, 2011 and 2010.

The tax years that remain open to examination by the taxing authorities are 2007 — 2011, generally. The net operating losses from prior years are subject to adjustment under examination to the extent they remain unutilized in an open year.

A provision had not been made at December 31, 2011 and 2010, for the U.S. or additional foreign withholding taxes on undistributed earnings from the Canadian subsidiary. It is the present intention of management to reinvest the undistributed earnings indefinitely in foreign operations. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. If we were to declare a dividend for the cumulative earnings of the Canadian subsidiary as of December 31, 2011, the resulting withholding tax provision would not be material to our financial condition or results of operations.

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Inventory    

Inventory consisted of the following as of December 31 (in thousands):

	2011				2010
Finished goods	$	1,819			$	1,695
Raw materials	567				584
	$	2,386			$	2,279

Finished goods primarily include product ready for shipment, as well as promotional merchandise held for sale. Raw materials primarily include ingredients, concentrate and packaging.

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Fixed Assets

Fixed assets consisted of the following as of December 31 (in thousands):

	2011				2010
Vehicles	$	527			$	390
Leasehold improvements and equipment	933				1,430
Office and computer equipment	1,032				1,449
	2,492				3,269
Accumulated depreciation	(1,648		)		(2,973		)
	$	844			$	296

29600084400079000-64000

Selected Quarterly Financial Information (unaudited)

Summarized quarterly financial information for fiscal years 2011 and 2010 is as follows (dollars in thousands, except per share data):

	Q1				Q2				Q3				Q4
2011 quarter:
Revenue	$	4,087			$	4,914			$	4,973			$	3,427
Gross profit	1,000				1,417				1,171				693
Loss from operations	(1,755		)		(1,762		)		(1,661		)		(2,048		)
Net loss	(1,670		)		(1,820		)		(1,684		)		(1,980		)
Basic and diluted loss per share	(0.05		)		(0.06		)		(0.05		)		(0.06		)

	Q1				Q2				Q3				Q4
2010 quarter:
Revenue	$	3,893			$	5,365			$	5,125			$	3,143
Write-down of excess GABA inventory	—				(178		)		(166		)		(162		)
Gross profit	808				1,293				1,384				557
Loss from operations	(2,090		)		(1,522		)		(974		)		(2,000		)
Net loss	(2,132		)		(1,554		)		(578		)		(1,842		)
Basic and diluted loss per share	(0.08		)		(0.06		)		(0.02		)		(0.06		)

0170000345000-53221000-460670001752600017401000

Segment Information

We have one operating segment with operations primarily in the United States and Canada. Sales are assigned to geographic locations based on the location of customers. Geographic information for the years ended December 31 is as follows (in thousands):

	2011				2010
Revenue:
United States	$	13,115			$	12,428
Canada	4,031				4,336
Other countries	255				762
Total revenue	$	17,401			$	17,526

	2011				2010
Fixed assets:
United States	$	844			$	296
Canada	—				—
Total fixed assets	$	844			$	296

During the years ended December 31, 2011 and 2010, three of our customers represented approximately 32% and 31%, respectively of revenues, one of which, A. Lassonde Inc., a Canadian DSD distributor, represented approximately 21% and 21%, respectively of revenue.

46760006296000546000799000

Nature of Operations and Summary of Significant Accounting Policies

Jones Soda Co. develops, produces, markets and distributes premium beverages, which currently consist of the following product lines and extensions:

•	Jones® Soda, a premium carbonated soft drink;

◦	Jones Zilch®, with zero calories (and an extension of the Jones® Soda product line);

•	WhoopAss™ Energy Drink, an energy supplement drink; and

◦	WhoopAss Zero™ Energy Drink, with zero sugar (and an extension of the WhoopAss™ Energy Drink product line).

We sell and distribute our products primarily in North America through our network of independent distributors located throughout the U.S. and Canada.

We are a Washington corporation and have two operating subsidiaries, Jones Soda Co. (USA) Inc. and Jones Soda (Canada) Inc., and two non-operating subsidiaries, myJones.com, Inc. and Whoopass USA Inc.

Basis of presentation and consolidation

The accompanying consolidated financial statements 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 financial reporting. The consolidated financial statements include our accounts and accounts of our wholly owned subsidiaries. All intercompany transactions between us and our subsidiaries have been eliminated in consolidation.

Liquidity

As of December 31, 2011 and 2010, we had cash and cash-equivalents of approximately $1.7 million and $5.4 million, respectively, and working capital of $3.6 million and $8.1 million, respectively. Cash used in operations during fiscal years 2011 and 2010 totaled $5.1 million and $3.5 million, respectively. 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.

For the year ended December 31, 2011, net cash used in investing activities totaled approximately $956,000 due primarily to investments in conjunction with tenant improvements for our new office lease and a related certificate of deposit. For the year ended December 31, 2010, net cash provided by investing activities totaled approximately $344,000 due primarily to redemption of the restricted certificate of deposit and in conjunction with the repayment of the note payable we issued in 2009. Net cash provided by financing activities for the year ended December 31, 2011, totaled approximately $2.3 million due to the proceeds from our final draw down on our equity line, and to a lesser extent, proceeds from the capital lease obligation for the financing of the purchased branded vehicles. This compares to net cash used by financing activities for the year ended December 31, 2010, which totaled approximately $3.6 million, due to the proceeds from the draw downs on our equity line, offset by the repayment of the note payable. We incurred a net loss of $7.2 million for the year ended December 31, 2011. Our accumulated deficit increased to $53.2 million as of December 31, 2011 compared to the prior year’s deficit of $46.1 million.

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 shares. During 2010 and 2011, 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. No further amounts are available to us under this Equity Line (see Note 8).

On December 27, 2011, we entered into a secured credit facility (Credit Facility) with Access Business Finance LLC (Access), pursuant to which we, through two of our wholly owned subsidiaries, Jones Soda (Canada) Inc. and Jones Soda Co. (USA) Inc., may borrow a maximum aggregate amount of up to $2.0 million, subject to satisfaction of certain conditions. Under this Credit Facility, we may periodically request advances for up to 75% of our eligible accounts receivable, bearing interest at the prime rate plus 2%, but not be less than 5.25% per annum, with a minimum payment of $5,000 per month. The Credit Facility has an initial one-year term, which will be automatically extended unless either party gives notice of non-renewal. The Credit Facility is guaranteed by us and is secured by a first priority security interest in all of our assets. The Credit Facility contains customary representations and warranties as well as affirmative and negative covenants. As of the date of this Report, we are in compliance with all debt covenants and we have not drawn on the facility.

In January 2012, we entered into a placement agent agreement with Rodman & Renshaw, LLC (Rodman & Renshaw), pursuant to which Rodman & Renshaw agreed to use its reasonable best efforts to arrange for the sale of our registered securities. We agreed to pay Rodman & Renshaw an aggregate fee equal to 8% of the gross proceeds received in the offering and agreed to customary representations, warranties, and indemnification by us.

In February 2012, we entered into a Securities Purchase Agreement with certain purchasers (Purchasers), arranged by Rodman & Renshaw, pursuant to which we sold to the Purchasers in a registered offering 6,415,000 shares of our common stock and warrants to purchase up to 3,207,500 shares of common stock. The securities were sold in units, consisting of one share of common stock and a warrant to purchase 0.5 of a share of common stock, at a price of $0.50 per unit, for an aggregate offering price of $3,207,500 (Offering). The warrants are not exercisable for six months following their issuance. After deducting the placement agent fee and our estimated offering expenses, and excluding the proceeds, if any, from the exercise of the warrants issued in the Offering, the net proceed were approximately $2.8 million. (See Note 15).

Taking into account the net proceeds raised through our registered offering in February 2012, we believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through December 31, 2012. Our 2012 operating plan does not factor in the use of our Credit Facility, which we may use for inventory purchases. Additionally, as of the date of this Report, our 2012 operating plan does not require us to obtain additional financing; however, we will require additional financing to support our working capital needs beyond 2012. The amount of additional capital we will require, the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including the performance of our business and the market conditions for debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our sales volume goals and otherwise successfully execute our operating plan, which is based on our realigned product portfolio, including our re-launched WhoopAss Energy Drink in addition to our new product offering, Au Naturel, that we plan to launch in the second quarter 2012 to enhance our sparkling portfolio. However, the introduction of new 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 costs associated with our growth plan. We believe it is imperative to meet these sales objectives and continue to expand our distribution network and increase sales volume in order to lessen our reliance on external financing in the future. 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 cost containment measures, leaving us little room for further reductions in such costs without affecting our ability to increase top-line growth.

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 the termination of our sponsorship arrangement with the New Jersey Nets (see Note 11).

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. In the event we require additional financing to support our working capital needs or to fund strategic growth plans, we believe various debt and equity financing alternatives will be available to us. However, new debt or equity financing arrangements may not be available to us when needed on acceptable terms, if at all. Additionally, these alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic transactions that we consider to be 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; however, we may not, enter into any such agreements or transactions.

Further, our ability to access the capital markets for an equity financing may be impacted by the bid price deficiency for continued listing of our common stock on the Nasdaq Capital Market. We may not be able to regain compliance with the minimum bid price requirement or succeed in an appeal of a delisting determination to a Hearings Panel. Even if we regain compliance or succeed in an appeal, we may not be able to continue to satisfy the minimum bid price requirement or any of the other requirements for continued listing on the Nasdaq Capital Market. If we are delisted from the Nasdaq Capital Market, trading of our common stock most likely would be conducted in the over-the-counter market (OTC) Bulletin Board market, an electronic bulletin board established for unlisted securities. The level of trading activity of our common stock may decline if it is no longer listed on the Nasdaq Capital Market and such delisting could cause our stock to be classified as "penny stock," which would adversely affect the market liquidity of our common stock.

The uncertainties relating to our ability to successfully execute our 2012 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 with our bid price deficiency, continue to raise substantial doubt about our ability to continue as a going concern. Our audited financial statements for the year ended December 31, 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.

Use of estimates

The preparation of the 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 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 capital 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.

Cash and cash equivalents

We consider all highly liquid short-term investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents.

Fair value of financial instruments

The carrying amounts for cash and cash equivalents, receivables and payables approximate fair value due to the short-term maturity of these instruments. The carrying value of other long-term liabilities approximated fair values because the underlying interest rates approximate market rates at the balance sheet dates.

Accounts receivable

Our accounts receivable balance includes balances from trade sales. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance for doubtful accounts based primarily on historical write-off experience. Account balances that are deemed uncollectible, are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Allowances for doubtful accounts of $102,000 and $166,000 as of December 31, 2011 and 2010, respectively, are netted against accounts receivable. Activity in the allowance for doubtful accounts consists of the following for the years ended December 31 (in thousands):

	2011				2010
Balance, beginning of year	$	166			$	87
Net charges to bad debt expense	211				182
Write-offs	(275		)		(103		)
Balance, end of year	$	102			$	166

Inventories

Inventories consist of raw materials and finished goods and are stated at the lower of cost or market and include adjustments for estimated obsolete or excess inventory. Cost is based on actual cost on a first-in first-out basis. Raw materials that will be used in production in the next twelve months are recorded in inventory, and amounts to be used in production beyond twelve months, if any, are considered long-term assets and are recorded in other assets. The provisions for obsolete or excess inventory are based on estimated forecasted usage of inventories. A significant change in demand for certain products as compared to forecasted amounts may result in recording additional provisions for obsolete inventory. Provisions for obsolete or excess inventory are recorded as cost of goods sold. We recorded a charge for the write-down of excess GABA inventory during the year ended December 31, 2010 (see Note 12).

Fixed assets

Fixed assets are recorded at cost less accumulated depreciation and depreciated on the declining balance basis over the estimated useful lives of the assets as follows:

Asset		Rate
Equipment		20% to 30%
Vehicles and office and computer equipment		30%
Leasehold improvements		Shorter of useful life or lease term
Equipment under capital lease		Lease term which approximates its useful life

Impairment of long-lived assets

Long-lived assets, which include capital and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The fair value of the assets is estimated using the higher of discounted future cash flows of the assets or estimated net realizable value. Long-lived assets are grouped at the lowest level for which there are identifiable cash flows when evaluating for impairment. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There are no outstanding intangible assets as of December 31, 2011 and 2010.

Foreign currency translation

The functional currency of our Canadian subsidiary is the Canadian dollar. We translate assets and liabilities related to these operations to U.S. dollars at the exchange rate in effect at the date of the consolidated balance sheet; we convert revenues and expenses into U.S. dollars using the average monthly exchange rates. Translation gains and losses are reported as a separate component of accumulated other comprehensive income.

Revenue recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Revenue is recorded net of provisions for discounts, slotting fees and promotion allowances. For the years ended December 31, 2011 and 2010, our revenue was reduced by $1.8 million and $1.6 million, respectively, for slotting fees and promotion allowances. All sales to distributors and customers are final; however, in limited instances, due to product quality issues or distributor terminations, we may accept returned product. To date, such returns have not been material.

Licensing revenue is recorded when we receive a sale confirmation from the third party.

Shipping and handling costs

Shipping and handling amounts paid to us by customers are included in revenue and total $339,000 and $397,000 for the years ended December 31, 2011 and 2010. The actual costs of shipping and handling paid by us are included in cost of sales.

Advertising costs

Advertising costs, which also include promotions and sponsorships, are expensed as incurred. During the years ended December 31, 2011 and 2010, we incurred advertising costs of $2.1 million and $1.1 million, respectively.

In August 2011, we announced that we agreed to terminate the Amended Sponsorship Agreement with the New Jersey Nets, dated October 29, 2007, ending the agreement five years early. In connection with the termination, we agreed to pay $500,000, which included 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 (see Note 11).

Income taxes

We account for income taxes by recognizing the amount of taxes payable for the current year and deferred tax assets and liabilities for future tax consequences of events at enacted tax rates that have been recognized in our financial statements or tax returns. We perform periodic evaluations of recorded tax assets and liabilities and maintain a valuation allowance, if considered necessary. The determination of taxes payable for the current year includes estimates. We believe that we have appropriate support for the income tax positions taken, and to be taken, on our tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. No reserves for an uncertain income tax position have been recorded for the years ended December 31, 2011 or 2010.

Net loss per share

Basic net loss per share is computed using the weighted average number of common shares outstanding during the periods, excluding reacquired stock and common stock held in escrow that is subject to cancellation if certain criteria are not achieved. Diluted earnings per share is computed by adjusting the weighted average number of common shares by the effective net exercise or conversion of all dilutive securities. In 2011 and 2010, due to the net loss, all outstanding equity options are anti-dilutive.

Comprehensive loss

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 is considered to be indefinitely reinvested.

Seasonality

Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. We historically have generated a greater percentage of our revenues during the warm weather months of April through September. 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.

Recent accounting pronouncements

In June 2011, the FASB issued Accounting Standard Update (ASU) 2011-05, Presentation of Comprehensive Income. ASU 2011-05 changes the way other comprehensive income (OCI) is presented within the financial statements. Our financial statements will be required to reflect net loss, OCI and total comprehensive loss in one continuous statement or in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12 that deferred the provisions of ASI 2011-05 relating to the requirement to report reclassification adjustments between OCI and net earnings in the statement of earnings. However, we have early implemented ASU2011-05, and the accompanying consolidated financial statements show net loss, OCI and total comprehensive loss in two separate, but consecutive statements.

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Shareholders’ Equity

At our 2011 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.

The 2011 Plan authorizes the issuance of 3,000,000 shares of our common stock. Starting in 2012, the number of shares authorized under the 2011 Plan also may be increased each January 1st 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 our outstanding shares of common stock on a fully diluted basis as of the end of the immediately preceding fiscal year.

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. Stock options are granted at the closing price of our stock on the date of grant for a ten-year term, and generally vest over a period of 48 months with the first 25% cliff vesting one year from the grant date and monthly thereafter. As of December 31, 2011, there were 2,604,374 shares of unissued common stock authorized and available for issuance under the 2011 Plan.

(a)	Stock options:

A summary of our stock option activity is as follows:

	Outstanding Options
	Number of Shares			Weighted Average Exercise Price
Balance at January 1, 2010	1,389,496			$	2.96
Options granted	877,000			0.89
Options exercised	(70,834	)		0.76
Options cancelled/expired	(405,878	)		2.45
Balance at January 1, 2011	1,789,784			$	1.96
Options granted	792,000			1.13
Options exercised	(25,288	)		0.68
Options cancelled/expired	(402,384	)		2.91
Balance at December 31, 2011	2,154,112			$	1.49
Exercisable, December 31, 2011	1,218,756			$	1.85
Vested and expected to vest	2,106,590			$	1.50

The following table summarizes information about stock options outstanding and exercisable under our stock incentive plans at December 31, 2011:

	Number Outstanding			Weighted Average Remaining Contractual Life (Years)			Weighted Average Exercise Price				Number Exercisable			Weighted Average Remaining Contractual Life (Years)			Weighted Average Exercise Price
$0.25 to $0.50	214,855			8.94			$	0.39			112,860			2.31			$	0.37
$0.51 to $1.09	1,089,506			8.61			0.83				678,289			3.75			0.81
$1.10 to $2.99	675,714			7.59			1.31				253,570			5.71			1.28
$3.00 to $3.99	124,287			6.36			3.29				124,287			6.36			3.29
$4.00 to $18.67	49,750			0.19			18.67				49,750			0.19			18.67
	2,154,112			7.56			1.49				1,218,756			6.40			1.85

(b)	Restricted stock awards:

During the year ended December 31, 2011, the Board granted 108,626 shares of restricted stock to employees and board members under the 2011 Plan. Restricted stock is valued at the grant date market price of the underlying securities. No monetary payment is required from the employees upon receipt of restricted stock.

A summary of our restricted stock activity is as follows:

	Restricted Shares			Weighted-Average Grant Date Fair Value				Weighted-Average Contractual Life
Non-vested restricted stock at January 1, 2010	33,833			$	6.06			8.01 yrs
Granted	231,875			1.12
Vested	(86,413	)		1.69
Cancelled/expired	(20,714	)		3.05
Non-vested restricted stock at January 1, 2011	158,581			$	1.52			9.44 yrs
Granted	108,626			0.63
Vested	(178,114	)		1.19
Cancelled/expired	(48,486	)		1.44
Non-vested restricted stock at December 31, 2011	40,607			$	0.68			9.69 yrs

We withheld a total of 47,770 shares as payment for withholding taxes due in connection with the vesting of restricted stock awards issued under the 2002 Plan for the year ended December 31, 2011 and the average price paid per share of $1.31 reflects the average market value per share of the shares withheld for tax purposes. We withheld a total of 3,338 shares as a payment for withholding taxes due in connection with the vesting of restricted stock awards issued under the 2002 plan for the year ended December 31, 2010 and the average price paid per share was $2.61.

(c) Stock-based compensation expense:

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 that are 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.

At December 31, 2011, we had unrecognized compensation expense related to stock options and non-vested restricted stock of $567,000 and $20,000, respectively, to be recognized over weighted-average periods of 2.3 years and 1.2 years, respectively.

The following table summarizes the stock-based compensation expense (in thousands):

	2011				2010
Type of awards:
Stock options	$	400			$	521
Restricted stock	146				278
	$	546			$	799
Income statement account:
Promotion and selling	$	142			$	165
General and administrative	404				634
	$	546			$	799

We employ the following key weighted-average assumptions in determining the fair value of stock options, using the Black-Scholes option pricing model and the provisions of Staff Accounting Bulletin (SAB) 107 and 110, which allow the simplified method to estimate the expected term of "plain vanilla" options:

	Twelve Months Ended December 31,
	2011				2010
Expected dividend yield	—				—
Expected stock price volatility	99.2		%		93.0		%
Risk-free interest rate	2.1		%		2.6		%
Expected term (in years)	5.9 years				5.7 years
Weighted-average grant date fair-value	$	0.86			$	0.67

During the year ended December 31, 2011, no material modifications were made to outstanding stock options.

The aggregate intrinsic value of stock options outstanding at December 31, 2011 and 2010 was $0 and $264,000 and for options exercisable was $0 and $241,000, 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 year ended December 31, 2011 and 2010 was $14,000 and $60,000. There was no intrinsic value of restricted stock vested during the year ended December 31, 2011 and 2010.

(d)	Employee Stock Purchase Plan:

In May 2007, our shareholders approved our 2007 Employee Stock Purchase Plan (ESPP) which allows eligible employees to acquire shares of our common stock at a discount. The ESPP includes 300,000 shares available for issuance, and no amounts have been issued under the ESPP through December 31, 2011.

Subsequent Events

In January 2012, we entered into a placement agent agreement with Rodman & Renshaw, LLC (Rodman & Renshaw), pursuant to which Rodman & Renshaw agreed to use its reasonable best efforts to arrange for the sale of our registered securities. We agreed to pay Rodman & Renshaw an aggregate fee equal to 8% of the gross proceeds received in the offering and agreed to customary representations, warranties, and indemnification by us.

In February 2012, we entered into a Securities Purchase Agreement with certain purchasers, arranged by Rodman & Renshaw, pursuant to which we sold to the Purchasers in a registered offering 6,415,000 shares of our common stock and warrants to purchase up to 3,207,500 shares of common stock (Warrants). The securities were sold in units, consisting of one share of common stock and a warrant to purchase 0.5 of a share of common stock, at a price of $0.50 per unit, for an aggregate offering price of $3,207,500 (Offering). The warrants are not exercisable for six months following their issuance. After deducting the placement agent fee and our estimated offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants issued in the Offering, the net proceeds were approximately $2.8 million. The Offering closed on February 7, 2012.

Each Warrant will have an exercise price of $0.70 per share, for total potential additional proceeds to us of up to approximately $2,245,250 upon exercise of the Warrants. The Warrants are exercisable at any time on or after the six-month anniversary of the closing date and have a five-year term. The Warrants are exercisable for cash or, solely in the absence of an effective registration statement, by cashless exercise. The exercise price of the Warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions, and also upon any distributions to Company shareholders, business combinations, sale of substantially all assets and other fundamental transactions. The exercise of the Warrants is subject to certain beneficial ownership and other limitations set forth in the Warrants.

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Equity Financing

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 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.

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Lease Obligations

In June 2011, we entered into an office building sublease for use as our principal headquarters, as our previous lease expired in August 2011 and did 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 received a rent abatement period and a build out allowance that is being amortized over 10 years, the initial 5 year term plus one additional 5 year renewal period, which is the reasonably assured rental period given the economic consequences of an earlier move. The resulting deferred rent of $480,000 is included in Deferred Rent, current and Long-term liabilities - other in the accompanying consolidated balance sheets. During the initial term, there is an annual rent escalation which we would expect to continue in the renewal periods.

Also, under the terms, we were required to deliver a Letter of Credit (LOC) issued by KeyBank National Association for a portion of the 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 in the accompanying consolidated balance sheets. We have accrued for all rent expense that has been incurred but not paid.

Our scheduled payments, at December 31, 2011 were as follows (in thousands):

	Operating Lease
2012	$	201
2013	206
2014	211
2015	216
Thereafter	127
	$	961

During the years ended December 31, 2011 and 2010, we incurred rental expenses of $209,000 and $192,000, respectively.

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