Unless the context requires otherwise, references to the "Company," "we," "us,"
"our," "Jammin Java" and "Jammin Java Corp." refer specifically to Jammin Java
In addition, unless the context otherwise requires and for the purposes of this
? "Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
? "SEC" or the "Commission" refers to the United States Securities and Exchange
? "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.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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.
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
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.
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
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
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
The Company is organized around our three pillars of growth, which are domestic
grocery, international and ecommerce.
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
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
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.
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
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.
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
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,
United Kingdom/ Europe
Our U.K. partners are still finding success in distribution at specialty and
natural grocery stores throughout Europe.
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 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.
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
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
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.
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
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.
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%.
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
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
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
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.
Three months ending April 30,
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
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.
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
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.
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
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
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.
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.
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
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
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.
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
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.
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.
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