Jones Soda Co - Are We Keeping Up?

I first reported on what a disaster Jones Soda (JSDA) was going to be for investors back in April, where I showed where the growth in earnings had come and I concluded those items would "murder" earnings in the future.

Jones Soda has since had two quarterly earnings reports so it is time to take another look, in particular, the last earnings release.

I can hardly get past the highlights:

• 1,722,795 total cases compared to 961,000 cases one year ago
• Revenue increased 29.8% to $13.0 million compared to $10.0 million a year ago.
• Gross margin decreased to 34.2% versus 38.0% last year
• Diluted earnings per share were $0.00 compared to $0.10 a year ago.

The first two points ought to send anyone still vested utterly running from this stock. They have a 79% increase in the number of case equivalents sold but only a 30% increase in revenue. That is an utter implosion of earning potential. To their credit, the third point shows that they managed to only lose 3.8% of their gross margin and on the surface this appears very good as this kind of implosion of earnings could put them into irrecoverable loss position.

As an investor you'd expect a 79% increase in sales to result in a 79% increase in earnings, but the 4th point shows that earning are now non-existent and not the 18c per share as a back of the napkin calculation would lead you to expect. Jones Soda has growth here, but so far entirely at the expense of profitability.

So, looking a little deeper... They had earnings of $40.7 thousand compared to earnings of $2.3 million, or another way of expressing that was that earnings were about 5600% higher a year earlier, or alternatively, this quarter's earnings are 1.8% of the earnings one year ago, 98.2% of the "earnings" disappeared... That is known as an implosion of earnings...

But, that's just on the surface. Above I mentioned how a 79% increase in output with only a 30% increase in revenue could put them in an irrecoverable loss position. One has to ask whether they are in fact in an irrecoverable loss position. Over a year earlier the operating expenses increased to 38.4% of the revenue, from 31.1%, and that is enormous, an increase from $3.1 million to $5.0 million, or an increase of $1.9 million, fully 14.5% of the revenue. The cost of goods increase by $2.3 million, for total increase in costs of $4.2 million, yet the revenue was only up by $3 million. In addition, the licensing revenue was also down by $0.1 million, so "total revenue" was actually only up by $2.9 million.

Having an extra $4.2 million in costs and only an extra $2.9 million in total revenue is very bad. And looking at page 5 of the financial reports what has happened leaps off the page. Looking at the operations only, the earnings before taxes for the three months ending June 30, 2006 were $836 thousand, or about 3.5c per share. After paying taxes as investors ought to expect them to be paid, without that monkey business accounting that grossly overstates earnings and allows executives to have cash-out-the-options liquidity events, the eps ought to have been around 2c, not the misleading-about-operations 10c.

For the quarter ending June 30th of this year they have a $504k loss on operations, or about 2c/share. It wasn't much better the March 31st quarter as that one shows a $428k loss, so the loss on their operations has increased by 18% between quarters, yet at the end of the magic of accounting both quarters actually showed positive earnings, $40.7k and $58.3k. Make no mistake here, Jones Soda's operations are currently being run in a loss position. What is giving the appearance of making ends meet is interest income and deferred taxes.

Interest income was $441k in the March 31 quarter and $416k in the June 30th quarter. This interest income is the largest contributor to giving the appearance of making ends meet and will decline as the capital is spent on expanding the operation and covering the deficit in earnings. The other item that enables the company to look like it isn't in a loss position on operations is income tax benefits. For the March 31 quarter $45k of the "earnings" is positive taxes. For the June 30th quarter there is $128k of positive taxes. So, $416k in interest and $128k in positive taxes enables Jones Soda to show $40k of earnings instead of $504k of losses in the most recent quarter.

So, they have these enormous "growth" plans, a network of 15,000 retail outlet to market their soda through, but where do the earnings come from? Growth at the expense of a profit margin isn't a good thing and the financial reports do not explain how this will be turned around.