Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this "Report") and our audited consolidated financial statements and notes thereto for the year ended December 31, 2025 included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission ("SEC") on March 31, 2026.

This Report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "believe," "expect," "intend," "anticipate," "estimate," "may," "will," "can," "plan," "predict," "could," "future," "continue," variations of such words, and similar expressions. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined at the beginning of this Report under "Cautionary Notice Regarding Forward-Looking Statements" and in Item 1A of our most recent Annual Report on Form 10-K filed with the SEC, and in our other reports we file with the SEC, including our periodic reports on Form 10-Q and current reports on Form 8-K. These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We develop, produce, market and distribute premium beverages that we sell and distribute primarily in North America through our network of independent distributors and directly to our national and regional retail accounts. We also sell premium soda beverage products in select international markets. Our premium soda beverage products are sold primarily in grocery stores, convenience and gas stores, on fountain in restaurants, "up and down the street" in independent accounts such as delicatessens, sandwich shops and burger restaurants, as well as through our national accounts with several large retailers. We refer to our network of independent distributors as our direct store delivery ("DSD") channel, and we refer to our national and regional accounts who receive shipments directly from us as our direct to retail ("DTR") channel. We do not directly manufacture any of our premium soda beverage products but instead outsource the manufacturing process to third-party contract manufacturers. We also sell various premium beverage soda products online, including soda with customized labels, wearables, candy and other items, and we license our trademarks for use on products sold by other manufacturers.

Our company is a Washington corporation formed in 2000 as a successor to Urban Juice and Soda Company Ltd., a Canadian company formed in 1986. Our principal place of business is located at 1522 Western Ave, STE 24150, Seattle, WA 98101. Our telephone number is (206) 624-3357.

	●	Expand the Jones Soda glass bottle business in existing and new sales channels including its zero sugar line;
	●	Expand its focus on lifestyle opportunities including new partnerships with iconic brands;
	●	Expand into functional health and nutrition market.

Business Strategy

The Company is pursuing a strategy designed to strengthen its established premium craft soda business and broaden its portfolio through three complementary platforms: Core Beverages, Consumer Lifestyle and Functional Health and Nutrition. These platforms are intended to build on the recognition and distribution of the Jones brand, extend consumer engagement through product innovation and strategic collaborations, and address evolving demand for better-for-you beverages, nutrition and wellness products. The timing, scope and results of these initiatives will depend on market demand, access to capital, operating resources and execution.

Our Focus: Sales Growth

Management's principal commercial priorities are to strengthen core beverage distribution and innovation, leverage consumer lifestyle partnerships and product extensions, and develop the functional health platform with disciplined investment and integration. The Company will evaluate these initiatives based on demand, profitability, working capital requirements and available funding.

Core Beverages

Core Beverages remains the foundation of the Company's business. Jones Soda offers premium craft sodas in distinctive flavors, with consumer-submitted photographs featured on its packaging, and distributes products through retail, foodservice, distributor and direct-to-consumer channels. The Company intends to support this business through distribution development, flavor innovation, packaging initiatives, fountain offerings and targeted marketing. The Company is also expanding its offerings to address consumers seeking alternatives to traditional sugar-sweetened soft drinks. Jones Zero Sugar, its zero-sugar, zero-calorie craft soda offering, was launched in Canada in 2026, and the Company is evaluating opportunities to expand the line in the United States. Additional innovation and selective opportunities to broaden the core beverage portfolio may support growth, although no particular level of sales or distribution is assured.

Consumer Lifestyle

The Consumer Lifestyle platform seeks to extend the Company's brands and consumer relationships into adjacent beverage, food and lifestyle categories through product launches, brand collaborations, licensing and, where appropriate, acquisitions. The Company has developed collaborative products and marketing programs associated with Bethesda Softworks' Fallout franchise, including collectible and specialty beverage offerings, and has announced a collaboration with Crayola. Such arrangements may involve limited-edition flavors, distinctive packaging, branded merchandise and cross-category product concepts. The Company believes these initiatives can deepen consumer engagement and create incremental distribution opportunities, although performance may depend on the terms, duration and renewal of the relevant partnerships. The Company may also evaluate additional lifestyle-oriented beverage and food products, including adult beverage offerings where commercially and legally appropriate.

Functional Health and Nutrition

The Functional Health and Nutrition platform is intended to broaden the Company's portfolio into products addressing consumer interest in nutrition, sustained energy, active lifestyles, metabolic health and healthy aging. The Company is also evaluating a potential functional health product opportunity for a targeted launch in 2027, subject to product development, regulatory review and commercial considerations. The Company expects to assess additional opportunities involving differentiated formulations, established brands and strategic acquisitions. References to anticipated products or benefits reflect business objectives and do not constitute assurances of product efficacy, regulatory approval or future commercial results.

Transition from Hemp-Derived Products

The Company has determined to exit its HD9 hemp-derived intoxicating beverage business in light of changes in federal law and its decision to concentrate resources on its Core Beverages, Consumer Lifestyle and Functional Health platforms. The Continuing Appropriations, Agriculture, Legislative Branch, Military Construction and Veterans Affairs, and Extensions Act, 2026 (Public Law 119-37), enacted November 12, 2025, amended the federal statutory definition of hemp. Subsequent legislation (Public Law 119-103) established two relevant effective dates: November 12, 2026, for provisions excluding certain products containing cannabinoids that cannot be naturally produced by the cannabis plant; and December 11, 2026, for most other amendments, including restrictions applicable to certain intoxicating hemp-derived consumer products. The application of these provisions depends on product formulation and other applicable legal requirements. Management intends to cease HD9 sales before the applicable effective dates, consistent with its legal compliance obligations, and to wind down related inventory, distribution and commercial arrangements. The Company does not currently expect to pursue further investment in HD9 products. The exit could affect revenue, inventories, contractual obligations and transition costs, and the Company continues to evaluate these matters.

Results of Operations

The following selected financial and operating data are derived from our condensed consolidated financial statements and should be read in conjunction with our condensed consolidated financial statements.

Three months ended September 30, 2026 and 2025

		2026				2025
		(Dollars in thousands)				(Dollars in thousands)				% Change
Revenue		$	13,705			$	4,500				205	%
Cost of Goods Sold			(8,985	)			(3,201	)			181	%
Gross Profit			4,720				1,299				263	%
% of Revenue			34	%			29	%

Quarter Ended September 30, 2026 Compared to Quarter Ended September 30, 2025

Revenue

For the quarter ended September 30, 2026, revenue increased by approximately $9.2 million, or 205%, to approximately $13.7 million compared to approximately $4.5 million for the quarter ended September 30, 2025. The increase in sales revenue was primarily the result of Fallout branded products sold through our club and DTC channels. HD9 Sales declined from $0.8M to $0.0M due to federal hemp THC ban that comes into effect December 11, 2026 in the quarter ended September 30, 2026 compared to the same quarter in 2025. The company expects to cease all HD9 product sales in the fourth quarter prior to the ban coming into effect December 11, 2026.

For the quarter ended September 30, 2026, trade spend and promotional allowances, which reduced the amount of revenue for the sales of our product, totaled approximately $1.6 million, an increase of approximately $0.9 million, or 128%, compared to approximately $0.7 million for the quarter ended September 30, 2025, primarily driven trade spend associated with our Fallout branded products sold through our club channel.

Gross Profit

For the quarter ended September 30, 2026, gross profit increased by approximately $3.4 million, or 263%, to approximately $4.7 million compared to approximately $1.3 million for the quarter ended September 30, 2025 as a result of higher sales revenue in the current quarter. For the quarter ended September 30, 2026, gross margin increased to 34% from 29% in the quarter ended September 30, 2025. This five percentage point increase in gross profit margin was primally driven by better purchase economics on higher purchase volumes. Additionally, there was significantly increased DTC sales in the quarter compared to the prior year, which have a higher gross margin than the retail business. The Company intends to continue to focus on additional opportunities to reduce product costs & freight and warehousing costs.

Selling and Marketing Expenses

Selling and marketing expenses for the quarter ended September 30, 2026 were approximately $2.3 million, an increase of approximately $1.3 million, or 130%, from approximately $1.0 million for the quarter ended September 30, 2025. This increase was primarily a result of an increase in broker and royalty payments related to Fallout product sales. Selling and marketing expenses as a percentage of revenue decreased to 17.0% in the third quarter ended September 30, 2026 from 22.5% in the same period in 2025. We intend to continue to look for clear return on investment from our selling and marketing expenses to drive profitable sales. For the three months ended September 30, 2026 and 2025, non-cash expenses included in selling and marketing expenses (stock compensation and depreciation) were approximately $0.1 million and $0.0 million, respectively.

General and Administrative Expenses

General and administrative expenses for the quarter ended September 30, 2026 were approximately $2.0 million compared to $1.7 million in the quarter ended September 30, 2025 or an increase of $0.3 million. This increase was primary related to increased salary and benefits during the current quarter compared to the same quarter in 2025. General and administrative expenses as a percentage of revenue decreased to 14.5% in the third quarter ended September 30, 2026 from 37.5% in the same quarter in 2025. We intend to continue to look for additional opportunities to reduce our G&A costs. For the three months ended September 30, 2026 and 2025, non-cash expenses included in general and administrative expenses (stock compensation and depreciation) were approximately $0.4 million and $0.4 million, respectively.

Income Tax Expense

We incurred income tax expense of $nil and $0.002 million during the quarters ended September 30, 2026 and 2025, respectively. We have not recorded any tax benefit for the gain in our U.S. operations as we have recorded a full valuation allowance on our U.S. net deferred tax assets. We expect to continue to record a full valuation allowance on our U.S. net deferred tax assets until we sustain an appropriate level of taxable income through improved U.S. operations. Our effective tax rate is based on recurring factors, including the forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a full valuation allowance on our U.S. net deferred tax assets.

Net Income

Net Income for the quarter ended September 30, 2026 was approximately $0.5 million compared to net loss of approximately $1.4 million for the quarter ended September 30, 2025, an improvement of $1.9 million. This increase in net income was primarily attributable to higher gross profit and selling, general, and administrative expenses being a much lower percentage of revenue as compared to the prior year.

Nine months ending September 30, 2026 and 2025

		2026				2025
		(Dollars in thousands)				(Dollars in thousands)				% Change
Revenue		$	36,305			$	13,624				166	%
Cost of Goods Sold			(24,895	)			(9,302	)			168	%
Gross Profit			11,410				4,322				164	%
% of Revenue			31	%			32	%

Nine Months Ended September 30, 2026 Compared to Nine Months Ended September 30, 2025

Revenue

For the nine months ended September 30, 2026, revenue increased by approximately $22.7 million, or 166%, to approximately $36.3 million compared to approximately $13.6 million for the nine months ended September 30, 2025. The increase in sales revenue was primarily the result of Fallout branded products sold through our club and DTC channels. HD9 sales declined from $2.6M to $0.2M due to the federal hemp THC ban that comes into effect December 11, 2026 in the nine months ended September 30, 2026 compared to the same period in 2025. The company expects to cease all HD9 product sales in the fourth quarter prior to the ban coming into effect December 11, 2026.

For the nine months ended September 30, 2026, trade spend and promotional allowances, which reduced the amount of revenue for the sales of our product, totaled approximately $4.2 million, an increase of approximately $2.6 million, or 162%, compared to approximately $1.6 million for the nine months ended September 30, 2025, primarily driven by trade spend associated with our Fallout branded products sold through our club channel.

Gross Profit

For the nine months ended September 30, 2026, gross profit increased by approximately $7.1 million, or 164%, to approximately $11.4 million compared to approximately $4.3 million for the nine months ended September 30, 2025 as a result of higher sales revenue in the nine months period. For the nine months ended September 30, 2026, gross margin decreased to 31% from 32% in the prior period. A contributing factor to the change in gross margin was the significant decrease in high-margin HD9 sales over the nine months ended September 30, 2026, approximately 0% of net revenues, as compared to the same period in 2025, approximately 19% of net revenues.

Selling and Marketing Expenses

Selling and marketing expenses for the nine months ended September 30, 2026 were approximately $6.3 million, an increase of approximately $3.1 million, or approximately 97%, from approximately $3.2 million for the nine months ended September 30, 2025. This increase was primarily a result of an increase in broker and royalty payments related to Fallout product sale. Selling and marketing expenses as a percentage of revenue decreased to 17.3% in the nine months ended September 30, 2026 from 23.4% in the same period in 2025. We intend to continue to look for clear return on investment from our selling and marketing expenses to drive profitable sales. For the nine months ended September 30, 2026 and 2025, non-cash expenses included in selling and marketing expenses (stock compensation and depreciation) were approximately $0.3 million and $0.1 million, respectively.

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2026 were approximately $4.9 million compared to $4.2 million in the nine months ended September 30, 2025 or an increase of $0.7 million. This increase was primary related to increased salary and benefits during the current nine month period compared to the same period in 2025. General and administrative expenses as a percentage of revenue decreased to 13.5% in the nine months ended September 30, 2026 from 31.0% in the same period in 2025. We intend to continue to look for additional opportunities to reduce our G&A costs. For the nine months ended September 30, 2026 and 2025, non-cash expenses included in general and administrative expenses (stock compensation and depreciation) were approximately $0.6 million and $0.7 million, respectively.

Income Tax Expense

We incurred $0.0 million and $0.01 million of income tax expense during the nine months ended September 30, 2026 and 2025. We have not recorded any tax benefit for the loss in our U.S. operations as we have recorded a full valuation allowance on our U.S. net deferred tax assets. We expect to continue to record a full valuation allowance on our U.S. net deferred tax assets until we sustain an appropriate level of taxable income through improved U.S. operations. Our effective tax rate is based on recurring factors, including the forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a full valuation allowance on our U.S. net deferred tax assets.

Net Income (loss)

Net loss for the nine months ended September 30, 2026 was approximately $0.1 million compared to net income of approximately $0.3 million for the nine months ended September 30, 2025. The $0.4 million year-over-year decrease in net income reflected the absence in 2026 of the gain on disposition of subsidiaries recognized in 2025, partially offset by improved operating results from higher revenue and gross profit. Refer to the accompanying consolidated statements of operations for additional detail.

.

Seasonality and other fluctuations

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. Sales may fluctuate materially on a quarter to quarter basis or an annual basis when we launch a new product or fill the "pipeline" of a new distribution partner or a large retail partner. Sales results may also fluctuate based on the number of stock keeping units ("SKU") selected or removed by our distributors and retail partners through the normal course of serving consumers in the dynamic, trend-oriented beverage industry. 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.

Liquidity and Capital Resources

As of September 30, 2026, and December 31, 2025, the Company had cash of approximately $4.4 million and $3.6 million, respectively, and working capital (deficiency) of approximately $2.1 million and ($0.5 million), respectively. The Company reported a net loss from continuing operations of approximately $0.1 million for the nine months ended September 30, 2026, compared to a net income from continuing operations of approximately $0.3 million for the nine months ended September 30, 2025. As of September 30, 2026, the Company's accumulated deficit increased to approximately $94.8 million, compared to approximately $94.7 million as of December 31, 2025.

For the nine months ended September 30, 2026, net cash used in operating activities of continuing operations was approximately $2.3 million, compared with approximately $4.0 million in the corresponding period of 2025, an improvement of approximately $1.6 million. Operating cash flows in 2026 were affected by increased investment in working capital to support sales growth. The statement of cash flows reflects cash uses of approximately $3.9 million from inventory and $2.0 million from accounts receivable, partially offset by cash provided by increases of approximately $1.5 million in accrued expenses and $0.5 million in accounts payable. The increases in inventories and accounts receivable were associated with the higher level of business activity, although the timing of collections, inventory purchases and payments to suppliers may cause operating cash flows to fluctuate from period to period.

For the nine months ended September 30, 2026, investing activities provided net cash of approximately $1.5 million, compared to $1.0 million in 2025. The increase was primarily due to $1.4 million proceeds from sale of the note receivable.

For the nine months ended September 30, 2026, net cash provided by financing activities totaled approximately $1.6 million. This amount primarily reflects net proceeds of $1.7 million from private placement and $0.2 million proceeds from the exercise of stock options, which was partially offset by a payment of approximately $0.2 million on an outstanding promissory note and $0.2 million repayments under the Company's insurance financing agreement.

Although the Company generated net income during the third quarter of 2026 and improved its cash balance and working capital position, it has a history of operating losses and negative cash flows from operating activities. Management continues to pursue initiatives to improve operating performance and liquidity, including strengthening core beverage distribution, pursuing consumer lifestyle and functional health opportunities, controlling operating costs, and managing working capital. The Company also maintains a $10.0 million credit facility with Two Shores Capital Corp. (the "Credit Facility"), under which advances bear interest at 13.75% per annum. All present and future obligations of the Loan Subsidiary under the 2Shores Loan Credit Facility are secured by a first-priority security interest in all assets of the Company, the Loan Subsidiary, and the Company's other U.S. subsidiaries. The amount of additional borrowing capacity, if any, is subject to the Credit Facility's terms and applicable borrowing conditions. Notwithstanding improvements in financial performance and management's plans, substantial doubt remains regarding the Company's ability to continue as a going concern within one year after the issuance date of the financial statements, as further discussed in Note 1 to the condensed consolidated financial statements.

Critical Accounting Policies and Estimates

See the information concerning our critical accounting policies and estimates included under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, filed with the SEC on March 31, 2026. There have been no material changes in our critical accounting policies during the nine months ended September 30, 2026.