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4-Traders Homepage  >  Equities  >  OTC Bulletin Board  >  Jammin Java Corp    JAMN

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JAMMIN JAVA : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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06/23/2016 | 06:38pm CEST

Unless the context requires otherwise, references to the "Company," "we," "us," "our," "Jammin Java" and "Jammin Java Corp." refer specifically to Jammin Java Corp.

In addition, unless the context otherwise requires and for the purposes of this report only:



?   "Exchange Act" refers to the Securities Exchange Act of 1934, as amended;

?   "SEC" or the "Commission" refers to the United States Securities and Exchange
    Commission; and

?   "Securities Act" refers to the Securities Act of 1933, as amended.



You should carefully consider the risk factors described below, if any, and those described in our Annual Report on Form 10-K for the year ended January 31, 2016, filed with the SEC on May 5, 2016 (the "Annual Report"), as well as the other information included in this Quarterly Report on Form 10-Q, the Annual Report and in our other reports filed with the SEC, prior to making a decision to invest in our securities.



FORWARD-LOOKING STATEMENTS


This Quarterly Report on Form 10-Q and the documents incorporated by reference, include "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. Examples of forward-looking statements include, but are not limited to any statements, predictions and expectations regarding our earnings, revenues, sales and operations, operating expenses, anticipated cash needs, capital requirements and capital expenditures, needs for additional financing, use of working capital, plans for future products, services and distribution channels, anticipated growth strategies, planned capital raises, ability to attract distributors and customers, sources of net revenue, anticipated trends and challenges in our business and the markets in which we operate, the impact of economic and industry conditions on our customers and our business, customer demand, our competitive position, the outcome of any litigation against us, critical accounting policies and the impact of recent accounting pronouncements. Additional forward-looking statements include, but are not limited to, statements pertaining to other financial items, plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact. Forward-looking statements are often identified by the use of words such as "may," "might," "intend," "should," "could," "can," "would," "continue," "expect," "believe," "anticipate," "estimate," "predict," "potential," "plan," "seek" and similar expressions and variations or the negativities of these terms or other comparable terminology.

These forward-looking statements are based on the expectations, estimates, projections, beliefs and assumptions of our management based on information currently available to management, all of which is subject to change. Such forward-looking statements are subject to risks, uncertainties and other factors that are difficult to predict and could cause actual results to differ materially from those stated or implied by our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified under "Risk Factors" in Item 1A of our Annual Report. We undertake no obligation to revise or update publicly any forward-looking statements to reflect events or circumstances after the date of such statements for any reason except as otherwise required by law.

In this Form 10-Q, we may rely on and refer to information regarding the market for our products and our industry in general, which information comes from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.



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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the unaudited financial statements and notes thereto and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended January 31, 2016.

Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated financial statements included above under "Part I - Financial Information" - "Item 1. Financial Statements".



Overview


We provide premium roasted coffee and specialty coffee on a wholesale level to the service, hospitality, office coffee service and big box store markets, as well as to a variety of other business channels. Specifically, we currently provide award winning sustainably grown, ethically-farmed and artisan roasted gourmet coffee through multiple United States and international distribution channels. We intend to develop a significant share of these markets and achieve a leadership position by capitalizing on the global recognition of the "Marley" brand name. We hope to capitalize on the guidance and leadership of our Chairman, Rohan Marley, and to increase our sales through the marketing of products using the likeness of, and reflecting the personality of, Mr. Marley. Additionally, through a licensing agreement with the family of the late reggae performer, Robert Nesta Marley, professionally known as Bob Marley (whose family members include Rohan Marley, our Chairman and the son of Bob Marley)(as described below), we are provided the worldwide right to use the name "Marley Coffee" and reasonably similar variations thereof.

We believe the key to our growth is a multichannel distribution and sales strategy. Since August 2011, we have been introducing a wide variety of coffee products through multiple distribution channels using the Marley Coffee brand name. The main channels of revenue for the Company are now and are expected to continue to be domestic retail in both grocery and away from home (for example, consumption at the office and on the go), international distribution, and online retail.

In order to market our products in these channels, we have developed a variety of coffee products in varying formats. The Company offers an entire line of coffee in whole bean and ground form with varying sizes including 2.5 ounce (oz), 8oz, 12oz and 2 pound (lbs) sizes. The Company also offers a "single serve" solution with its compostable Single-Serve Pods for Bunn® and other pod-based home and office brewers. The Company recently launched its Marley Coffee recyclable RealCup; compatible cartridges, for use in most models of Keurig®'s K-Cup brewing system.

License Agreement with Fifty-Six Hope Road Music Limited

On September 13, 2012, the Company entered into a fifteen (15) year license agreement (renewable for two additional fifteen (15) year terms thereafter in the option of the Company) with an effective date of August 7, 2012 with Fifty-Six Hope Road Music Limited, a Bahamas international business company ("56 Hope Road" and the "56 Hope Road License Agreement"). Rohan Marley, our Chairman, owns an interest in and serves as a director of 56 Hope Road. Pursuant to the 56 Hope Road License Agreement, 56 Hope Road granted the Company a worldwide, exclusive, non-transferable license to utilize the "Marley Coffee" trademarks (the "Trademarks") in connection with (i) the manufacturing, advertising, promotion, sale, offering for sale and distribution of coffee in all its forms and derivations, regardless of portions, sizes or packaging (the "Exclusive Licensed Products") and (ii) coffee roasting services, coffee production services, and coffee sales, supply, distribution and support services, provided that the Company may not open retail coffee houses utilizing the Trademarks. 56 Hope Road owns and controls the intellectual property rights in and to the late reggae performer, Robert Nesta Marley, professionally known as Bob Marley, including the Trademarks. In addition, 56 Hope Road granted the Company the right to use the Trademarks on advertising and promotional materials that pertain solely to the sale of coffee cups, coffee mugs, coffee glasses, saucers, milk steamers, machines for brewing coffee, espresso and/or cappuccino, grinders, water treatment products, tea products, chocolate products, and ready-to-use (instant) coffee products (the "Non-Exclusive Licensed Products", and together with the Exclusive Licensed Products, the "Licensed Products"). Licensed Products may be sold by the Company pursuant to the 56 Hope Road License Agreement through all channels of distribution, provided that, subject to certain exceptions, the Company cannot sell the Licensed Products by direct marketing methods (other than the Company's website), including television, infomercials or direct mail without the prior written consent of 56 Hope Road. Additionally, 56 Hope Road has the right to approve all Licensed Products, all advertisements in connection therewith and all product designs and packaging. The agreement also provides that 56 Hope Road shall own all rights to any domain names (including marleycoffee.com), incorporating the Trademarks.



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In consideration for the foregoing licenses, the Company agreed to pay royalties to 56 Hope Road in an amount equal to 3% of the net sales of all Licensed Products on a quarterly basis. In addition, such royalty payments are to be deferred during the first 20 months of the term of the 56 Hope Road License Agreement, and such deferred payments shall be paid on a quarterly-basis thereafter until paid in full. For the three months ended April 30, 2016 and 2015, $77,653 and $58,609, respectively, was payable for such royalty fees. The total accounts payable to 56 Hope Road, a related party, as of April 30, 2016 is $297,324.

We have been notified by 56 Hope Road of our alleged breach of certain of the terms of the License Agreement, including, but not limited to, our failure to deliver quarterly statements in a timely manner, our failure to timely make licensing payments, and our failure to deliver audited financial statements in a timely manner. Some of these breaches are due to cash flow issues and corporate governance matters. We are working with 56 Hope Road in an effort to resolve the alleged breaches and we are optimistic that we will be able to resolve the issues and will be able to put in place corporate governance procedures to alleviate certain of the issues raised moving forward.

Mother Parkers License Agreement

On May 20, 2014, we entered into an Amended and Restated License Agreement with Mother Parkers Tea & Coffee Inc. ("Mother Parkers" and the "MP Agreement"), which amended and restated a prior license agreement entered into between the parties in October 2011. A significant portion of the Company's revenue comes from sales to and through Mother Parkers. As described in greater detail in the Current Report on Form 8-K filed with the Commission on April 30, 2014, the Company also entered into a Subscription Agreement with Mother Parkers in April 2014, pursuant to which Mother Parkers purchased 7,333,529 units from the Company for $2.5 million, each unit consisting of one share of the Company's common stock; and one warrant to purchase one share of common stock at $0.51135 per share for a term of three years.

Pursuant to our relationship with Mother Parkers, Mother Parkers produces Marley Coffee RealCups for us. For direct sales of RealCups (e.g., in jurisdictions in which Mother Parkers does not have exclusive rights as described below) we purchase the RealCups from Mother Parkers and handle all aspects of selling, merchandising and marketing products to retailers. Pursuant to the MP Agreement, the Company granted Mother Parkers the exclusive right to manufacture, process, package, label, distribute and sell single serve hard capsules (which excludes single serve soft pods) (the "Product") on behalf of the Company in Canada, the United States of America and Mexico. The rights granted under the MP Agreement are subject to certain terms and conditions of our license agreement with 56 Hope Road. Pursuant to the MP Agreement, Mother Parkers is required to, among other things, supply all ingredients and materials, labor, manufacturing equipment and other resources necessary to manufacture and package the Product, develop coffee blends set forth in specifications provided by the Company from time to time, procure coffee beans in the open market (or from the Company's designee) at favorable prices, set prices for the Product in a manner that is competitive in the market place and deliver Product logo/brand designs to the Company for approval prior to manufacturing any such Product. We are required to, among other things, cross-promote the Product, use Product images and marketing materials provided by Mother Parkers to promote the Product, and provide the services of Rohan Marley (our Chairman) at a minimum of five locations per year at the Company's sole cost and expense. There are no minimum volume or delivery requirements under the MP Agreement. Pursuant to the MP Agreement, Mother Parkers agreed to pay us a fee of $0.06 per capsule for Talkin' Blues products and $0.04 per capsule for all other Product sold by Mother Parkers under the terms of the agreement, which payments are due in monthly installments. The MP Agreement has a term of five years, provided that it automatically renews thereafter for additional one year periods if not terminated by the parties, provided further that we are not able to terminate the agreement within the first 12 months of the term of the agreement and if we terminate the agreement or take any action that lessens or diminishes Mother Parkers' exclusive rights under the agreement during months 12 through 36 of the agreement, we are required to pay Mother Parkers a fee of $600,000 and reimburse Mother Parkers for any out of pocket costs incurred by Mother Parkers for inventory and other materials that are unsalable or unusable after such termination. We also receive revenues through the sale by Mother Parkers of our roast coffee in Canada, whereby we receive a portion of the gross revenues of such sales.



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Sales and Distribution Agreements and Understandings

The Company has entered into informal sales arrangements, not documented by definitive agreements, with several coffee distributors, beverage services and retailers around the world.

In Canada, Mother Parkers Tea & Coffee Inc. is the Company's distributor for the food service channel, which sells to restaurant chains like Milestones, Original Joe's and Elephant and Castle. Mother Parkers Tea & Coffee also brings the Company's products into retailers such as Loblaw's, Sobey's, ID Foods, COOP and Metro. Their success has led to about a 60% ACV for the entire country.

In the United States, for the commercial break room channel, the Company uses its national sales representatives, National Coffee Service & Vending (NCS&V), to distribute to various retailers and distributors.

In addition to distributions through NCS&V, the Company conducts sales directly to retailers as well as to distributors. In order to get in front of retail and distributor accounts, we rely on the experience and relationships of our staff to acquire both groups. Our marketing efforts are comprised of in store promotions, in store demos, external marketing programs, public relations, social media, tradeshows and general advertising.

Within the U.S. grocery and specialty retail channel, the Company utilizes two national brokerage companies to represent, market and merchandise its products in the conventional grocery market. The Company works with Alliance Sales & Marketing, a private food broker based in Charlotte, North Carolina, to increase its new market penetration nationally in the grocery and natural foods retail sector. The Company also uses Harlow HRK to help manage its Kroger business.

Within the U.S. grocery and specialty retail channel, the Company's products are distributed through several distributors such as UNFI, Kehe, C&S and DPI and we also distribute directly to certain retailers.

The Company has strengthened its online presence by selling through a multitude of online retailers such as Amazon.com, Cooking.com, coffeeicon.com, ecscoffee.com, officedepot.com and coffeewiz.com.

Products, Plan of Operations and Business Growth

During Fiscal 2015 and 2016, we established a national grocery distribution network, increased our brand awareness and strengthened our international presence. Two of the Company's SKUs have now made it into 1/3 of U.S. grocery stores. For Fiscal 2017, our primary goal is to increase our velocity rate per store instead of increasing the number of our accounts.

We prepared and organized the operations of the Company to scale to $40 million in revenue without materially increasing our staffing needs from where they are currently.

The Company is organized around our three pillars of growth, which are domestic grocery, international and ecommerce.



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Domestic Grocery


Domestic grocery is the core focus of the Company with the strategy of continuing to expand into key markets and gaining new accounts and building on the base of accounts we have already. Within the U.S. grocery and specialty retail channel, the Company's products are distributed through several distributors such as UNFI, Kehe, C&S and DPI and we also distribute directly to certain customers. We sell to retailers such as Krogers, HEB, Wegmans, Safeway, Albertsons, Sprouts, Target, Jewel-Osco, Market Basket, Whole Foods, South Eastern Grocers, Ahold, Hannafords, Shaw's, Fairways, Ingles, Acme, Meijers, Lucky's Markets and Farm Fresh. During the past year we have expanded our distributor relationships nationally in the United States. We expect our ongoing discussions with retailers will enable us to place our products in more chains throughout the year and we continue to seek to expand our product placement with grocery retailers and distributors throughout the United States and internationally.

Over the course of the last few years, we gained distribution in over 11,500 stores in the United States, which represents 35% of all commodity volume (ACV) for all grocery. Throughout fiscal 2017, while we will still look to gain additional distribution, we are not pursuing it at the same pace we did during the past 18 months. Our objective for our existing distribution is to add more SKUs (Stock Keeping Units) to our current distribution, increase our turn rate (velocity), and build brand awareness to drive further growth.

One of our primary drivers is to enhance our brand and increase our turn rate on shelves. In order to accomplish that we will continue to promote the Marley Coffee brand as well as our Recyclable RealCup™. In July of fiscal 2015, we launched a new version of the Marley Coffee RealCup™ capsule that is compatible with the Keurig Green Mountain K2.0. The recyclable RealCup™ utilizes a recyclable capsule that is accepted by many curbside recycling programs. The technology and intellectual property is owned by Mother Parkers, however we are one of the first and primary super premium product to launch in market amongst Mother Parkers portfolio of brands especially at our scale.

Based on our current distribution in the U.S. and an average of three SKUS of RealCups™ per store, if we can get an additional customer to purchase one SKU per store, per week, within our existing distribution, we believe we can generate approximately ~$8 million in additional revenue per year. Our next objective is to get all nine Recyclable RealCup™ Marley Coffee SKUs within our current distribution. SKUs or Stock Keeping Units are a store's or catalog's product and service identification code, often portrayed as a machine-readable bar code that helps items be tracked for inventory.

We believe that our recyclable RealCup™ capsule (Ecocup) has been one of the most innovative and sustainable single serve products to hit the market and we've seen material growth results because of it. Keurig Green Mountain, the largest company in the single serve space in North America has expressed their belief that there should be a recyclable solution for K-Cups, however they have only set a 2020 target for their commitment to making 100% of their K-Cup packs recyclable, which we believe both validates what we're doing and gives us a 5 year first mover competitive advantage.

Based on the positive feedback from retailers and customers as well as some preliminary sales information, EcoCup has had a very positive impact on our operations. We've even been nominated by the Nexty Awards and Beverage Awards for our innovation and packaging. Our preliminary data has shown that EcoCups by themselves have helped with incremental growth in accounts like Market Basket and Kroger.




International



Our international business is one of the key components of our revenues. For our international accounts, we rely on first in class operators to take our brand to market and handle all of the distribution and marketing for the products. We provide brand support to our international accounts. We currently have key distribution in several countries, which include Canada, the United Kingdom, South Korea, Mexico and Chile. These countries primarily sell to the food service industry, which includes hotels, restaurants and cafes. From their success in food service, they have expanded distribution into retail distribution. Mother Parkers takes our products to market in Canada through both a licensing agreement and buy-sell relationship. Our U.K. distributor roasts and packs Company approved coffee and resells it to customers throughout Europe.



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The International Coffee Organization recently reported that it expects global coffee demand to rise 25% by 2021. We believe that we are in a strong position to capitalize on that growth and our goal is to continue finding top-tier operators like the ones we have in place in Canada, South Korea, Chile, Mexico and the United Kingdom. Through a distribution arrangement we have in place with C&V International (which has no relation to 56 Hope Road), we generate revenue through coffee sold to Marley Coffee branded coffee shops in Korea (which we have no ownership or management in) and also general licensing fees through such coffee sales.

Through a distribution arrangement we have in place with C&V International, we generate revenue through coffee sold to Marley Coffee branded coffee shops in Korea (which we have no ownership in) and also general licensing fees through such coffee sales.



Canada


In Canada, through Mother Parkers, the Company is distributed in grocery retail, OCS and food service.

Mother Parkers distributes our products in over 2,000 stores, including some of the largest retail chains in Canada, which include Loblaw's, Sobey's, ID Foods, COOP, London Drugs and Metro. Our goal is to establish distribution of RealCups in grocery stores for the next two years and then to introduce our bagged coffee by 2017. We estimate that Mother Parkers will sell approximately 15 million RecyclableRealCup™ through grocery retail, OCS and food service within this fiscal year.

Mother Parkers has also found success in bringing our coffee into its food service business. They have been able to establish our products in several large restaurant chains and expect to expand the business over the next few years. For its food service business, Mother Parkers currently buys 8 ounce, 2.5 ounce fractional packs and 2 pound bags directly from the Company. The projected volume for this year is approximately 140,000 pounds of coffee with plans to get to 500,000 pounds by 2017.

For fiscal 2016 total sales in Canada totaled $922,517 and total RealCup licensing was $572,612 and total sales for the year ended January 31, 2015 was $1,546,422. For the years ended January 31, 2016 and 2015 the total sales and total licensing with Mother Parker's was equal to $1,495,128 and $1,546,422, respectively. For the three month periods ended April 30, 2016 and 2015, total sales in Canada totaled $157,077 and $219,803, respectively. The total owed to Mother Parkers at April 30, 2016 is $2,232,088 and at April 30, 2015 $2,480,206 was due to Mother Parkers for coffee purchases. The total accounts receivable due from Mother Parkers as of April 30, 2016 and 2015 is $463,906 and $810,498, respectively.




United Kingdom/ Europe



Our U.K. partners are still finding success in distribution at specialty and natural grocery stores throughout Europe.



South Korea


We have several initiatives that have launched or are launching this year. Being successful in South Korea has the potential to echo throughout Asia and we believe our success in South Korea will be a springboard to getting meaningful distribution elsewhere in Asia. Our South Korean partners currently buy green beans and roasted products from the Company.

For fiscal 2016 sales in South Korea totaled $828,723 for green coffee and whole bean coffee and for fiscal 2015 sales in South Korea totaled $227,751. For the three month periods ended April 30, 2016 and 2015, sales in South Korea sales totaled $0 and $295,759, respectively.



Chile


Chile is a great example of a distributor who has been a brand champion for us in the region. Through their guerilla marketing efforts by sponsoring surf competitions and music festivals like Lollapalooza, they have gained distribution in food service as well as retail grocery.



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In food service, our distributor has secured over 350 accounts in the region from boutiques to large restaurant chains. They recently secured Castaño, one of the largest coffee chains in all of Chile with over 80 stores that can in total do ~132,000 lbs. of coffee per year (which began in summer 2015). In December of 2014, they gained distribution in 44 Subway sandwich stores and they have goals to be in 53 stores by the end of the year and to potentially expand into other countries.

Their success in food service has helped them quickly expand into grocery retail. They recently placed our products into 100 Unimarc and 50 Tottus supermarkets, two big retail chains in Chile. However, their biggest customer to date is Walmart, which they just landed. Walmart will be bringing in 3 bags of 227 grams (8oz) coffees into stores in an early summer launch in the 30 biggest stores, with the goal of getting to the other 120 stores in Chile within six months.

For fiscal 2016 sales in Chile totaled $808,658 and for fiscal 2015 sales in Chile totaled $196,099. For the three month periods ended April 30, 2016 and 2015, sales in Chile totaled $213,420 and $184,240, respectively.



Online


During the fourth quarter of calendar 2014, we launched an innovative Coffee of the Month subscription service as well an online retail platform at https://shop.marleycoffee.com/. We anticipate this to be a key revenue driver in the upcoming year. The total online sales for the year ended January 31, 2016 were $49,900 compared to $-0- for the year ended January 31, 2015.

Our online business and social media presence is also critical in driving consumers to retail grocery stores. We have a robust social media presence with an aggregate of more than 2 million followers through Marley Coffee's own accounts as well as our Chairman's account. We believe we have the ability to connect with everyone from Baby Boomers who grew up listening to Bob Marley's music to the Millennials who still connect with Bob Marley and the next generation of Marley music both offline and online. We believe the Company is naturally positioned to talk to all of these consumers digitally through our social media and at the shelf through our products and brand positioning.

Commitment to Reduce Cash Compensation

Throughout fiscal 2016, the Company issued shares of common stock as partial consideration for services rendered to its officers, directors and employees in an effort to maximize its cash on hand and improve liquidity. During the remainder of fiscal 2017, the Company plans to pay the salaries of its officers and employees in cash, provided that where possible, the Company intends to continue to use common stock in lieu of cash consideration, and has continued to pay certain of its employees in stock instead of cash during fiscal 2017. As the Company continues to grow it will need to raise additional cash in order to maintain its growth and fund its operations. If the Company is unable to access additional capital moving forward, it will hurt our ability to maintain growth and possibly jeopardize our ability to maintain our current operations. We may not be able to increase sales, reduce expenses or obtain additional financing, if necessary, at a level to meet our current obligations to continue as a going concern.

The Company is focused on growing revenue while working to lower cost of sales and operating expenses, with the ultimate goal of generating net income.



RESULTS OF OPERATIONS


Comparison of the Three Months Ended April 30, 2016 and 2015

Revenue. Revenue for the three months ended April 30, 2016 and 2015 was $3,083,559 and $2,738,379, respectively, which represents an increase of $345,180 or 12.6% from the previous period. Revenue increased as a result of the Company's continued expansion into the retail grocery market and its continued growth of other business verticals.



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Discounts and allowances. Discounts and allowances for the three months ended April 30, 2016 and 2015 were $355,560 and $156,952, respectively, which represents an increase of $198,608 or 127% from the previous period. Discounts and allowances increased as a result of the corresponding increase in sales.

Net revenue. Net revenue for the three months ended April 30, 2016 and 2015 was $2,727,999 and $2,581,427, respectively, which represents an increase of $146,572 or 5.7% from the previous period.

Total cost of sales. Total cost of sales for the three months ended April 30, 2016 and 2015 was $1,786,870 and $1,784,812, respectively, which represents an increase of $2,058 from the previous period. The increase in total cost of sales was mainly the result of the increased sales offset by a reduction in cost of goods compared to the prior year.

Gross Profit. Gross Profit was $941,129 and $796,615, respectively, for the three months ended April 30, 2016 and 2015, which represents an increase of $144,514 or 18%. Gross profit as a percentage of net sales was 34.5% and 30.9% for the three months ended April 30, 2016 and 2015, respectively. Gross profit increased as a result of better managing our costs.

Compensation and benefits expenses. Compensation and benefits expenses were $970,703 and $972,806, respectively, for the three months ended April 30, 2016 and 2015, which represents a decrease of $2,103. Compensation and benefits expenses decreased as a result of decreased staff and more efficient operations.

Selling and marketing expenses. Selling and marketing expenses for the three months ended April 30, 2016 and 2015 was $600,709 and $521,116, respectively, which represents an increase of $79,593 or 15.3% from the previous period. Selling and marketing expenses increased as a result of selling and brokerage expenses of $262,156 for new placement in grocery stores during the first quarter offset by a decrease of $187,702 in advertising campaigns in new markets in the current period. We anticipate experiencing marketing expenses relative to our cash flow availabilities throughout fiscal 2017 as we will seek to expand our customer base even more and build out the Company brand.

General and administrative expenses. General and administrative expenses for the three months ended April 30, 2016 and 2015 was $771,303 and $492,824, respectively, which represents an increase of $278,479 or 56% from the previous period. The Company has accrued $700,000 for estimated settlement expense in the first quarter, which is offset by a $400,000 insurance settlement which was received in May 2016.

Total operating expenses. Total operating expenses for the three months ended April 30, 2016 and 2015 was $2,342,715 and $1,986,746, respectively, which represents an increase of $355,969 or 17.9% from the previous period. Total operating expenses increased as a result of the increases in legal fees and general and administrative expenses described above.

Other expense. Other expense for the three months ended April 30, 2016 and 2015 was $7,650 and $-0-, respectively. Other expense increased as a result of the financing expenses associated with our current liabilities, offset by the sale of fixed assets.

Interest expense. Interest expense for the three months ended April 30, 2016 and 2015 was $516,753 and $7,105, respectively, which represents an increase of $509,648 from the previous period. Interest expense increased as a result of our short term financing agreements incurred in the quarter, as described in greater detail in Note 5 to the financial statements included herein.

Change in Derivative liability. The change in fair value of derivative liability was $75,914 and $-0-, respectively, for the three months ended April 30, 2016 and 2015, which represents an increase of $75,914 or 100%.



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Gain and Extinguishment of debt. We had $362,506 of gain on extinguishment of debt for three months ended April 30, 2016, compared to no gain on extinguishment of debt for the three months ended April 20, 2015.

Net Loss. Net Loss was $1,487,569 and $1,197,236, respectively, for the three months ended April 30, 2016 and 2015, which represents an increase of $290,333 or 24%. Net Loss increased as a result of the reasons described above, primarily due to the $700,00 settlement with the SEC which was offset by a $400,000 insurance settlement.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations primarily through the issuance of our common stock and debt agreements.

The following table presents details of our working capital deficit and cash and cash equivalents:



                   April 30, 2016      January 31, 2016      Increase / (Decrease)
Working Capital   $    (4,644,234 )   $      (4,232,446 )   $            (411,788 )
Cash              $       193,002     $         231,021     $             (38,019 )



At April 30, 2016, we had total assets of $2,389,776 and total liabilities of $6,533,836. Our current sources of liquidity include our existing cash and cash equivalents and borrowings under convertible promissory notes and other loans. For the three months ended April 30, 2016, we generated gross sales of $3,083,559 and we had a net loss of $1,487,569.

Total current assets of $1,639,239 as of April 30, 2016 included cash of $193,002, accounts receivable of $1,436,015 (which included $463,906 due from Mother Parkers), other current assets of $3,840 and $6,382 of prepaid expenses.

We had total assets as of April 30, 2016 of $2,389,776 which included the total current assets of $1,639,239, $148,307 of property and equipment, net, $578,663 of intangible assets and $23,567 of other assets.

We had total liabilities of $6,533,836 as of April 30, 2016, of which $6,283,473 were current liabilities, including, $3,635,442 of accounts payable (which included $2,232,088 of accounts payable to Mother Parkers, $297,324 royalty - related party relating to amounts accrued in connection with the 56 Hope Road License Agreement (described above)), $936,457 of accrued expenses, and $928,971 of notes payable, net of discount, in connection with short term financing agreements and a capital lease we entered into, as described in greater detail in Notes 5 and 8 to the financial statements included herein, and $782,603 conversion feature - derivative liability. Long term liabilities included convertible notes payable, net of discount, of $250,363.

We source coffee that we sell to our roaster, Mother Parkers, a related party and shareholder of the Company, who in turn sells it to its own customers. This is especially the case with Jamaican Blue Mountain coffee secured by us. At April 30, 2016, we are owed $463,906 by Mother Parkers. We also utilize the services of Mother Parkers, to roast coffee to our specifications for sale to the Company's customers. As a result, at April 30, 2016, we owe $2,232,088 to Mother Parkers for roasting services.

As of the filing of this report, we believe that our cash position, funds we may raise through offerings and sales of convertible notes, the line of credit described below, and the revenues we generate will be sufficient to meet our working capital needs for approximately the next twelve months based on our projections.



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Although our sales and revenues have increased significantly on an annual basis, the Company incurred a net loss of $5,201,917 and $10,280,985 for the years ended January 31, 2016 and 2015, respectively and had an accumulated deficit of $29,245,750 at January 31, 2016, compared to a net loss of $1,487,569 and $1,197,236 for the three months ended April 30, 2016 and 2015, respectively, and an accumulated deficit of $30,733,319 as of April 30, 2016. In addition, the Company has a history of losses and has not generated net income from operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The operations of the Company have primarily been funded by the sale of common stock and debt financing. The Company's ability to meet its obligations in the ordinary course of business is dependent upon its ability to sell its products directly to end-users and through distributors, establish profitable operations through increased sales and decreased expenses, and obtain additional funds when needed. We may not be able to increase sales or reduce expenses to a level necessary to meet our current obligations or continue as a going concern. As a result, the opinion the Company received from its independent registered public accounting firm on its January 31, 2016 financial statements contains an explanatory paragraph stating that there is substantial doubt regarding the Company's ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and may realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock. The accompanying financial statements do not contain any adjustments for this uncertainty.



Cash Flows



                                                            Three months ending April 30,
                                                                2016                2015
Net cash used in operating activities                    $      (267,361 )     $   (614,583 )
Net cash (used in) provided by investing activities      $             -       $    (55,523 )
Net cash provided by financing activities                $       229,342       $    439,026




Operating Activities


Compared to the corresponding period in 2015, net cash used in operating activities decreased by $347,222 for the three months ended April 30, 2016. Net cash used in operating activities for the three months ended April 30, 2016 was primarily due to $1,487,569 of net loss and $439,026 of increase in accrued expenses, offset by $75,914 change in fair value of derivative liability and share-based employee compensation of $771,225.



Investing Activities


We had no net cash used for investing activities for the three months ended April 30, 2016. Net cash used in investing activities for the three months ended April 30, 2015, was solely due to the purchase and disposal of property and equipment.




Financing Activities



Compared to the corresponding period in fiscal 2015, net cash provided by financing activities decreased by approximately $69,600 for the three months ended April 30, 2016 due to increased repayments on debt.

From time to time, we may attempt to raise capital through either equity or debt offerings. Our capital requirements will depend on many factors, including, among other things, the rate at which our business grows, with corresponding demands for working capital and expansion capacity. We could be required, or may elect, to seek additional funding through public or private equity, debt financing or bank financing.

Funding and Financing Agreements



Mother Parker's Investment


On April 24, 2014, the Company entered into a Subscription Agreement with Mother Parkers Tea & Coffee Inc. ("Mother Parkers" and the "Subscription"). Pursuant to the Subscription, Mother Parkers purchased 7,333,529 units from the Company, each consisting of (a) one share of the Company's common stock, $0.001 par value per share (the "Shares"); and (b) one (1) warrant to purchase one share of the Company's common stock (the "Warrants" and collectively with the Shares, the "Units") at a price per Unit equal to the fifty day weighted-average price per share of the Company's common stock on the OTCQB market, for the fifty trading days ending March 7, 2014 (the date the parties first discussed the transactions contemplated by the Subscription), which was $0.3409 (the "Per Unit Price"). The total purchase price paid for the Units was $2,500,000.



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Pursuant to the Subscription, we provided Mother Parkers a right of first refusal for a period of two (2) years following the Subscription (which has now expired), to purchase up to 10% of any securities (common stock, options or warrants exercisable for common stock) we propose to offer and sell in a public or private equity offering (the "ROFO Securities"), exercisable for 48 hours from the time we provide Mother Parkers notice of such proposed sale of ROFO Securities (subject where applicable to Mother Parkers meeting any prerequisites to participation in the offering). The right of first refusal does not apply to the issuance of (a) shares of common stock or options to employees, officers, directors or consultants of the Company in consideration for services, (b) securities exercisable or exchangeable for or convertible into shares of common stock issued and outstanding on the date of the Subscription, (c) securities issued pursuant to acquisitions or strategic transactions approved by the directors of the Company, provided that any such issuance shall provide the Company additional benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital, and (d) any debt securities (other than any debt securities exchangeable for or convertible into shares of common stock).

The Warrants have an exercise price equal to 150% of the Per Unit Price ($0.51135 per share), a term of three years and prohibit Mother Parkers from exercising such Warrants to the extent such exercise would result in the beneficial ownership of more than 9.99% of the Company's common stock, subject to Mother Parkers' right to waive such limitation with 61 days prior written notice.

As described above, we also had $463,906 of accounts receivable due from, and $2,232,088 of accounts payable owed to, Mother Parkers, as of April 30, 2016.



Line of Credit


The Company entered into an unsecured Revolving Line of Credit Agreement with Colorado Medical Finance Services, LLC, dba Gold Gross Capital LLC on June 9, 2015, with an effective date of February 16, 2015. The line of credit allows the Company the right to borrow up to $500,000 from the lender from time to time. On March 26, 2015, the lender advanced $250,000 to us under the terms of the line of credit. Amounts owed under the line of credit are to be memorialized by revolving credit notes in the form attached to the line of credit, provided that no formal note has been entered into to advance amounts borrowed to date. Amounts borrowed under the line of credit accrue interest at the rate of 17.5% per annum and can be repaid at any time without penalty. A total of 10% of the interest rate is payable in cash and the other 7.5% of the interest rate is payable in cash, or at the option of the lender and with our consent, or by a reduction in amounts owed to us by the lender in connection with the sale of coffee or other promotional activities. The line of credit expires, and all amounts are due under the line of credit on September 26, 2016. The line of credit contains customary events of default, and upon the occurrence of an event of default the lender can suspend further advances and require the Company to declare the entire amount then owed immediately due, subject to a 10 day period pursuant to which we have the right to cure any default. Upon the occurrence of an event of default the amounts owed under the line of credit bear interest at the rate of 20% per annum. Proceeds from the line of credit can be solely used for working capital purposes. The lender has no relationship with the Company or its affiliates. The balance due on the Line of Credit was $123,548 as of April 30, 2016.




Convertible Promissory Notes



As described in greater detail in Note 5 to the financial statements included herein and under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" - "Liquidity and Capital Resources" - "Funding and Financing Agreements" in our Annual Report on Form 10-K for the year ended January 31, 2016, as filed with the Securities and Exchange Commission on May 6, 2016, we have sold various convertible notes to date, which allow the holders thereof, subject to the terms thereof, to convert the amount owed into shares of our common stock at a discount to the then trading prices of our common stock. The total amount of the Convertible Promissory Notes is $1.63 Million as of April 30, 2016.



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Third Party Loan


In October 2015, we borrowed $150,000 from a third-party lender. The October 2015 loan has a seven-month term, a total payback amount of $202,500 and is payable by way of 147 daily payments of $1,378. In November 2015, we borrowed $65,000 from the same lender. The November 2015 loan has a term of six months, a total payable amount of $89,700 and is payable by way of 126 daily payments of $712. In January 2016, we borrowed $220,000 from the same lender (of which $91,887.70 was new lending and $128,112.30 was used to repay the balance on the October 2015 loan). The January 2016 loan has a term of ten months, a total payback amount of $290,400 and is payable by way of 210 daily payments of $1,383. There was $215,173 outstanding as of January 31, 2016. In February 2016, we borrowed $100,000 from the same lender which has a six-month term, a total payback amount of $130,000 and is payable by way of 126 daily payments of $1,032. In April 2016, we borrowed $115,000 from the same lender (of which $90,000 was new lending and the remainder was used to pay back the balance on the November 2015 loan). The April 2016 loan has a term of eight months, a total payable amount of $158,700 and is payable by way of 168 daily payments of $945. The loans are secured by a security interest in all of our accounts, equipment, inventory and investment property. We have the right to repay the loans within the first 30 days after the effective date of each loan at the rate of 85% of the applicable repayment amount and between 31 and 90 days after the effective date of each loan at the rate of 90% of the applicable repayment amount. The interest rate on these loans range from 30-38% per annum. As of April 30, 2016, $259,907 is payable under the outstanding loans.



Factoring Agreement


In June 2016, we received $310,000 from a third-party lender as part of a factoring arrangement, where the third party purchased $418,500 of our receivables.

Off-Balance Sheet Arrangements

As part of our on-going business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of April 30, 2016, we are not involved in any unconsolidated SPEs.




Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our most significant judgments and estimates used in preparation of our financial statements.

Stock-Based Compensation. On January 1, 2006, we adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718 which establishes accounting for equity instruments exchanged for employee service. We utilize the Black-Scholes option pricing model to estimate the fair value of employee stock based compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.



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We estimated volatility by considering historical stock volatility. We have opted to use the simplified method for estimating the expected term of stock options equal to the midpoint between the vesting period and the contractual term.

Revenue Recognition. All revenue is recognized when persuasive evidence of an arrangement exists, the service or sale is complete, the price is fixed or determinable and ability to collect is reasonably assured. Revenue is derived from the sale of coffee products and is recognized on a gross basis upon shipment. The Company utilizes a third party for the production and fulfillment of orders placed by customers. Customers order directly from the Company and accordingly, the Company acts as a principal, takes title to the products, and has the risks and rewards of ownership, such as the risk of loss for collection, delivery and returns.

Impairment of Long-Lived Assets. Long-lived assets include a license agreement that was recorded at the estimated cost to acquire the asset (See Note 4 to the financial statements included in this report). The license agreement is reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Management evaluated the carrying value of the license and determined that no impairment existed at April 30, 2016 or 2015.

Accounts Receivable allowance. A provision for doubtful accounts is provided based on a combination of historical experience, specific identification and customer credit risk where there are indications that a specific customer may be experiencing financial difficulties.

Inventory Reserves. We estimate any required write-downs for inventory obsolescence by examining our inventories on a quarterly basis to determine if there are indicators that the carrying values could exceed net realizable value. Indicators that could result in additional inventory write-downs include age of inventory, damaged inventory, slow moving products and products at the end of their life cycles. While significant judgment is involved in determining the net realizable value of inventory, we believe that inventory is appropriately stated at the lower of cost or market.

Deferred Tax Asset Valuation Allowance. We follow the provisions of ASC 740 relating to uncertain tax provisions and have commenced analyzing filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As a result of adoption, no additional tax liabilities have been recorded. The Company files income tax returns in the U.S. federal jurisdiction and in certain state jurisdictions. The Company has not been subjected to tax examinations for any year and the statute of limitations has not expired. The Company recognizes deferred tax assets and liabilities for the expected future tax benefits or consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. These include establishing a valuation allowance related to the ability to realize certain deferred tax assets. To the extent future taxable income against which these assets may be applied is not sufficient, some portion or all of our recorded deferred tax assets would not be realizable.



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Recent Accounting Pronouncements

For the three months ended April 30, 2016 and 2015, there were no accounting standards or interpretations adopted, and management is still evaluating if adoption of the new accounting standards shown below are expected to have a material impact on our financial position, operations or cash flows.

Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU 2016-02 "Leases (Topic 842)"- In February 2016, the FASB issued ASU 2016-02, which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

ASB ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)," or ASU 2014-09 - In May 2014, the FASB issued ASU 2014-09, which supersedes the revenue recognition requirements of Accounting Standards Codification, or ASC, Topic 605 "Revenue Recognition." This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2017. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.

In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period ("ASU 2014-12"). The guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. The guidance will be effective for the Company in the fiscal year beginning January 1, 2016, and early adoption is permitted. The Company is currently evaluating the impact of this guidance, if any, on its financial statements.

Management is evaluating the significance of the recent accounting pronouncement ASU 2014-15, Presentation of Financial Statements - Going Concern (subtopic 205-40); disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, and has not yet concluded whether the pronouncement will have a significant effect on the Company's future financial statements. Such standard is effective for the Company for the fiscal year beginning February 1, 2017.

© Edgar Online, source Glimpses

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