10-Q: Jones Soda Posts Q2 Profit on Cannabis Unit Sale

Jones Soda Co. reported a net income of $2.6 million for Q2 2025, primarily driven by the strategic divestiture of its cannabis beverage business, despite a decline in core soda revenue.

Summary

• Net income for the second quarter ended June 30, 2025, was $2.611 million, a significant improvement from a net loss of $1.568 million in the prior year quarter.
• The improvement in net income was primarily due to a $3.663 million gain on the disposition of the cannabis (THC) beverage subsidiaries.
• Revenue from continuing operations decreased by 26.4% to $4.894 million for Q2 2025, down from $6.659 million in Q2 2024.
• For the six months ended June 30, 2025, net income was $1.759 million, compared to a net loss of $2.720 million for the same period in 2024.
• Gross profit for Q2 2025 decreased by 28% to $1.628 million, with gross margin slightly down to 33.3% from 33.4% in Q2 2024.
• Selling and marketing expenses decreased by 39% to $1.060 million in Q2 2025, and general and administrative expenses decreased by $0.9 million to $1.3 million.
• The company sold its cannabis (THC) beverage business for $3.0 million in promissory notes and $0.06 million in inventory, and entered into a trademark license agreement for cannabis-related IP.
• A new loan agreement with Two Shores Capital Corp. provides up to $5 million in financing, replacing a previous $2 million facility, and is secured by all U.S. assets.
• The company issued a $0.45 million promissory note to its Chairman of the Board, with $0.17 million repaid during Q2 2025 and an additional $0.14 million repaid subsequent to quarter-end.
• Management identified material weaknesses in internal controls over financial reporting related to accounting personnel transitions and resource adequacy, with remediation plans underway.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the significant net income achieved from the strategic sale of the cannabis business and substantial reductions in operating expenses. The new financing facility also addresses immediate liquidity concerns. However, the underlying decline in core revenue, persistent 'going concern' doubt, and identified material weaknesses in internal controls temper the overall positive outlook.

Positives

• Achieved a net income of $2.611 million in Q2 2025, a substantial improvement from a net loss in the prior year, primarily due to the strategic disposition of cannabis subsidiaries.
• Realized a significant one-time gain of $3.663 million from the sale of the cannabis beverage business.
• Reduced operating expenses significantly, with selling and marketing expenses decreasing by 39% and general and administrative expenses by 31% for the six months ended June 30, 2025.
• Secured a new, larger revolving credit facility of up to $5 million with Two Shores Capital Corp., enhancing liquidity and expanding the borrowing base to include inventory and customer purchase orders.
• Net cash used in operating activities improved to $2.591 million for the six months ended June 30, 2025, compared to $3.025 million in the prior year period.
• Accumulated deficit decreased to $91.190 million as of June 30, 2025, from $92.949 million at December 31, 2024.
• Strategic pivot to focus on higher-margin products and growing market segments, including modern sodas (Pop Jones, Fiesta Jones), hemp-derived products (Mary Jones), and planned alcohol-infused beverages (Spiked Jones).
• Management believes current cash, projected sales, and new financing are sufficient to fund operations for at least 12 months.

Negatives

• Revenue from continuing operations decreased by 26.4% in Q2 2025 and 18.8% for the six months ended June 30, 2025, primarily due to lower core soda sales and direct-to-consumer business.
• Gross profit declined by 28% in Q2 2025 and 22% for the six months ended June 30, 2025, due to lower sales revenue and higher initial product costs for new products.
• Cash balance decreased to $0.650 million as of June 30, 2025, from $1.275 million at December 31, 2024.
• Working capital decreased to $1.6 million as of June 30, 2025, from $2.0 million at December 31, 2024.
• Experienced recurring losses from operations and negative cash flows from operating activities, raising substantial doubt about the company's ability to continue as a going concern.
• Identified material weaknesses in internal controls over financial reporting due to accounting personnel transitions and insufficient resources/training in the accounting department.
• Core soda sales for 2025 are expected to end the year down slightly over the prior year's total core soda sales.

Risks

• Ability to successfully execute growth strategy and operating plans.
• Ability to continue to raise capital to finance operations.
• Ability to manage operating expenses and generate cash flow from operations.
• Competition against larger, well-funded, established companies in the beverage industry.
• Ability to respond to changes in consumer beverage marketplace, including health concerns and legislative initiatives against sweetened beverages.
• Ability to successfully develop and launch new products that match consumer trends.
• Ability to maintain brand image and product quality and avoid risks from product issues such as recalls.
• Ability to establish, maintain, and expand distribution arrangements with independent distributors and retailers.
• Reliance on third-party contract manufacturers and potential supply chain disruptions, including raw material costs and glass shortages.
• Ability to attract and retain key personnel.
• Ability to protect trademarks and trade secrets.
• Litigation or legal proceedings, which could expose the company to significant liabilities and damage its reputation.
• Ability to comply with numerous regulations to which the business is subject.
• Ability to maintain an effective information technology infrastructure and prevent security breaches.
• Fluctuations in fuel and freight costs.
• Fluctuations in currency exchange rates, particularly between the United States and Canadian dollars.
• Tariffs affecting raw materials or finished goods transported between the United States and Canada.
• Regional, national, or global economic, political, social, and other conditions that may adversely impact the business.
• Ability to maintain effective disclosure controls and procedures and internal control over financial reporting.
• Dilutive and other adverse effects on existing shareholders and stock price arising from future securities issuances.
• Limitations to common stock trading on the OTCQB Marketplace and the Canadian Stock Exchange, including trading activity, volatility, or market liquidity.
• Ongoing lawsuit from the California Department of Public Health (CDPH) regarding Mary Jones hemp-infused sodas in California.
• Lawsuit by a supplier for $342,373 concerning alleged breach of contract and unjust enrichment, with the company intending to file a counterclaim.

Future Outlook

Management expects to see growth in the third and fourth quarters of 2025, driven by core soda, HD9, Spiked Jones, modern soda formats (Pop Jones and Fiesta Jones), direct-to-consumer sales, and growth in club, food service, and convenience store channels. The company plans to launch its line of hard craft sodas under the Spiked Jones brand in 2025 and Mary Jones zero sugar sodas in September 2025. Management believes current cash on hand, projected cash from product sales, and funds from the new loan agreement are sufficient to fund operations for at least 12 months.

Management Comments

• We are focusing on reducing operating expenses while bringing products to market with higher margins and potentially higher customer demand.
• We intend to continue to look for clear return on investment from our selling and marketing expenses to drive profitable sales.
• We intend to continue to look for additional opportunities to reduce our G&A costs beyond the cost reductions achieved in 2025.
• The new leadership team will ensure previously effective controls are followed by the time we report the third quarter interim results and reinforced adherence to the set of internal controls that Company has previously successfully abided by over the past years.

Industry Context

The company is evolving from a traditional craft soda company to a diverse beverage company, aiming to capitalize on growing market segments such as modern sodas (e.g., Poppi and Olipop) and alternative adult beverages (hemp-derived and alcohol-infused). This strategic shift aligns with broader consumer trends moving towards healthier and alternative beverage options, positioning the company to compete in emerging categories beyond its established glass bottle soda business.

Comparison to Industry Standards

• The company acknowledges the growth of industry competitors like Poppi and Olipop in the modern soda market, indicating a strategic alignment with proven consumer demand in this segment.
• The company believes its Mary Jones line is uniquely positioned to lead in the emerging alternative adult beverage category, leveraging over two decades of brand equity from Jones Soda, which offers an instantly recognizable name, loyal consumer base, and proven reputation for flavor innovation and quality, providing a built-in advantage over new and existing competitors.

Management Changes

Corporate Governance

Legal Proceedings

• The California Department of Public Health (CDPH) issued a cease-and-desist letter and subsequently filed an amended complaint on June 27, 2025, in Los Angeles Superior Court against Jones Soda and other businesses involved in the sale of Mary Jones hemp-infused sodas in California. The state alleged product labeling violations and the presence of hemp-derived THC isolate, which the company disputes.
• The company was served with a lawsuit by a supplier on August 11, 2025, concerning an alleged breach of contract and unjust enrichment in the amount of $342,373. The company intends to file a counterclaim against the plaintiff for an amount in excess of the alleged damages.

Related Party Transactions

• On May 2, 2025, the company entered into a Promissory Note with the Chairman of its Board of Directors for a principal amount of $0.45 million, carrying a fixed interest rate of 12% per annum and a $22,000 loan origination fee. $0.17 million was repaid during the three and six months ended June 30, 2025, with an additional $0.14 million repaid subsequent to quarter-end.

Stakeholder Impact

• Shareholders: Experienced a significant increase in net income due to a one-time gain, but face ongoing dilution risk from future equity issuances and warrants, and the stock price may be affected by the 'going concern' doubt and trading limitations on OTCQB/CSE.
• Employees: Changes in senior leadership and accounting personnel, with a focus on cost reduction, may impact roles and responsibilities.
• Customers: Introduction of new product lines (Pop Jones, Fiesta Jones, Spiked Jones, Mary Jones zero sugar) aims to expand offerings and meet evolving consumer demands, while the divestiture of the THC cannabis business streamlines the product portfolio.
• Suppliers: The company has commitments totaling $2.3 million for raw materials, and is involved in a lawsuit with a supplier, indicating potential impacts on supplier relationships.
• Creditors: The new $5 million revolving credit facility provides enhanced security for lenders with a first-priority interest in all U.S. assets, and the promissory note to the Chairman of the Board indicates reliance on related-party financing.

Next Steps

• Continue focusing on reducing operating expenses and bringing products to market with higher margins and potentially higher customer demand.
• Launch the line of Mary Jones zero sugar sodas in September 2025.
• Launch the line of hard craft sodas spiked with alcohol under the brand name Spiked Jones in 2025.
• Ensure previously effective internal controls are followed and reinforced by the new leadership team by the time of the third quarter interim results.

Key Dates

Recommendation

The company's Q2 2025 results present a mixed picture. While a significant net income was achieved, it was primarily driven by a one-time gain from the sale of the cannabis business, masking a continued decline in core beverage revenue. The strategic pivot towards modern sodas and alternative adult beverages is a positive long-term move, and the new financing facility addresses immediate liquidity concerns. However, the persistent 'going concern' doubt, ongoing legal challenges, and identified material weaknesses in internal controls warrant caution. A 'hold' recommendation is appropriate as the company navigates this transition, with potential for upside if new product lines gain traction and financial stability improves, but also significant risks remaining.

Keywords

Jones Soda, beverages, soft drinks, cannabis, hemp-derived, THC, soda, CPG, consumer goods, financial results, quarterly report, liquidity, going concern, strategic divestiture