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, subject to our ability to retain the license rights to the "Marley"
name which we are currently in litigation regarding, as described below. We hope
to capitalize on the guidance and leadership of our management team, and to
increase our sales through the marketing of products. 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 former Chairman and the son of Bob Marley)(as described below),
which we are currently in litigation to attempt to stop from being terminated,
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.
We have also started to develop a suite of products under the Jammin Java Coffee
brand to complement our existing lines of coffee.
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 "Long-Term License"). Rohan Marley, our former Chairman, owns
an interest in and serves as a director of 56 Hope Road. Pursuant to the
Long-Term License, 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 Long-Term License 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 Long-Term License, and
such deferred payments shall be paid on a quarterly-basis thereafter until paid
in full. For the six months ended July 31, 2016 and 2015, $128,587 and $58,609,
respectively, was incurred for such royalty fees. The total accounts payable to
56 Hope Road, a related party, as of July 31, 2016 is $347,412.
Short Term License Agreement and Promissory Note
On June 27, 2016, and effective June 24, 2016, 56 Hope Road provided us notice
of the termination of the Long-Term License. 56 Hope Road terminated the
Long-Term License due to our alleged breach of certain of the terms of the
Long-Term License agreement, including, but not limited to, our failure to
deliver quarterly statements in a timely manner, our failure to timely make
licensing payments, our failure to deliver audited financial statements in a
timely manner, and the Securities and Exchange Commission's complaint against
us. Some of these breaches were due to cash flow issues and corporate governance
The immediate effect of the termination of the Long-Term License was minimal, as
effective immediately thereafter we entered into the Short-Term License
On July 6, 2016, (1) we and Hope Road Merchandising, LLC ("HRM"), which
exclusively controls all licensing of 56 Hope Road's intellectual property
rights, entered into a Short Term License Agreement (the "Short-Term License");
(2) we entered into a Secured Promissory Note in favor of 56 Hope Road (the
"Secured Note"); and (3) we and 56 Hope Road entered into a Security Agreement
to secure amounts owed under the Secured Note, each as described in greater
The Short-Term License provides us the right to use the Trademarks from June 27,
2016 until December 27, 2016 (a term of six months)(subject to HRM's right to
terminate the license in the event we breach the terms thereof or any of the
terms of the Secured Note or Security Agreement), provided that the Short-Term
License can be extended in the sole discretion of HRM (at our request) for an
additional six month term after expiration thereof. Other than the term of the
agreement, the Short-Term License has substantially similar terms as the
Long-Term License (except as discussed above), with the addition of requiring us
to provide customer and vendor lists to HRM and providing HRM an irrevocable
license to use such information. Additional requirements associated with our
entry into the Short-Term License with HRM was that (i) we immediately provide
all deficient quarterly and annual statements due; and (ii) we allow 56 Hope
Road or its affiliates to have discussions with our current and potential
business partners relating to whether there is a basis for a continued
relationship with us, and to have discussions with unrelated third parties that
56 Hope Road may have an interest in once the Short-Term License expires.
The Secured Note evidences $297,324 due to 56 Hope Road pursuant to the terms of
the Long-Term License, which amount accrues interest until paid at 0.71% per
annum (7.5% per annum if not paid in full at maturity) and was due and payable
on August 31, 2016, but has not been repaid to date and is currently in default.
Amounts due under the Secured Note are secured by the Security Agreement. The
Secured Note contains customary representations and events of default.
The Security Agreement provides 56 Hope Road a security interest in
substantially all of our assets to secure our payment of the Secured Note.
56 Hope Road/HRM Purported License Termination and Lawsuit
On July 21, 2016, HRM and 56 Hope Road provided us notice of the termination of
the Short-Term License, and demanded that all use of the Trademarks cease
56 Hope Road terminated the Short-Term License, due to our alleged breach of
certain of the terms of the Short-Term License, including, but not limited to,
our failure to deliver quarterly statements and annual audited financial
statements in a timely manner, and issues raised regarding security interests
alleged to have been granted by us in connection with the licenses, to various
third parties in alleged violation of the licenses, which we were alleged to
have not timely cured.
We believe that the termination notice received on July 21, 2016 as well as the
termination of the Long-Term License, was without merit and that 56 Hope Road
has no reasonable basis for such terminations.
After we received the July 21, 2016, notice of termination, both sides worked to
resolve the termination and to negotiate a forbearance of the alleged defaults.
One of the conditions of the forbearance set by HRM was for the Company to
engage a restructuring consultant to provide a picture of the Company and a
potential turnaround plan. After discussion between the parties, both we and HRM
agreed that we would engage r2 advisors llc ("R2"), a company with whom neither
we nor HRM had any prior relationship. R2 provided the preliminary assessment of
the Company; however, after the preliminary assessment was prepared, HRM's
representatives determined that the assessment was biased towards the Company
and unfairly promoted the Company's point of view. We vigorously disagree with
Notwithstanding our attempt to work in good faith through the issues raised with
HRM in the termination notice, and without prior notice, on August 1, 2016, 56
Hope Road and HRM filed a complaint against us in the Superior Court of the
State of California, County of Los Angeles, Central Division (Case No.
BC628981). The complaint (a) seeks a declaratory judgment relating to the
termination of the licenses, (b) seeks damages for our alleged (i) breaches of
the Long-Term License and Short-Term License, (ii) tortious interference with 56
Hope Road's and HRM's economic relationships with licenses and prospective
licensees, and (iii) trademark infringement; (c) requests an accounting of our
books and records; and (d) requests punitive and exemplary damages in connection
with allegations of fraud and misrepresentation.
On August 4, 2016, we filed (a) a notice of removal with the court, requesting
the case be removed from state court to the United States District Court for the
Central District of California; (b) a request for a temporary restraining order
requesting the court to reinstate the Short-Term License until a final decision
on the pending lawsuit is determined; and (c) an answer to the complaint denying
the allegations of 56 Hope Road and HRM, including certain affirmative defenses,
and pleading counterclaims against (i) 56 Hope Road for breach of contract and
breach of implied covenants of good faith and fair dealing, (ii) 56 Hope Road
and HRM for intentional and negligent interference with prospective economic
advantage and intentional and negligent misrepresentation, and (iii) breach of
fiduciary duty against Rohan Marley, our former Chairman, and seeking that the
court enter judgment in favor of us on all claims alleged by 56 Hope Road and
HRM and further seeking economic damages, punitive and exemplary damages,
pre-and-post judgment interest and court costs from 56 Hope Road, HRM and Mr.
The case was then removed to the United States District Court of California
Western Division (Case No. 2:16-cv-05810-SVW-MRW). 56 Hope Road and HRM
subsequently amended their Complaint to seek damages for alleged breach of
contract in connection with the Long-Term License and Short-Term License,
declaratory relief in connection with the Long-Term License and Short-Term
License (i.e., that such agreements have been effectively terminated by us),
interference with prospective economic advantage, trademark infringement,
accountings, fraud, and indemnity. We denied the allegations, asserted certain
several affirmative defenses and filed counterclaims against Rohan Marley, our
former director, for breach of fiduciary duty and civil conspiracy, which claims
56 Hope Road, HRM and Mr. Marley have moved to be dismissed. Trial is currently
set for March 2017.
We vehemently deny the allegations made by 56 Hope Road and HRM, and plan to
vigorously defend ourselves against the claims made in the complaint. The
Company has no basis of determining whether there is any likelihood of material
loss associated with the claims and/or the potential and/or the outcome of
Current Status of Business Operations
As described above, we are currently in litigation with 56 Hope Road and HRM.
Additionally, since the date of our last filing, we have attempted to streamline
our business and cut costs while maintaining as many accounts as possible.
Additionally, we've been working on expanding our operations outside of the
"Marley Coffee" name. Meanwhile, we have tried to work with 56 Hope Road and HRM
to come to a viable business solution for the current litigation, but to date,
they are not willing to compromise.
Since the litigation began, we have worked to both maintain and restructure our
business. We have cut costs across the board, closed our main office and reduced
our employee head count. Our focus is on the maintenance of accounts to ensure
we have sufficient cash flow to keep the business afloat while seeking
alternative growth options.
We are not looking at bankruptcy restructuring as an option at the moment, as we
are trying to sustain the business, grow a new division, and continue with our
litigation. We have worked with our two largest debt holders in an effort to
restructure our debt. Specifically, Mother Parkers has agreed that all profits
and licensing fees from coffee which we sell through Mother Parkers will go to
pay down debt which we owe to Mother Parkers. Our other significant creditor
[ERI] is providing us credit to ship products to our customers for all bagged
coffee; however, we are allocating 30% of the profits of such orders back to ERI
to pay down our debt owed to them. We also have several other smaller debt
holders that we have structured a payment plan with, and some we have not. We
cannot guarantee that a debt holder will not try to put us into involuntary
bankruptcy, but we currently have no intention at this time of filing for any
type of bankruptcy protection.
The litigation is ongoing with a March 2017 trial date now set. At this time,
the litigation has not resulted in the Company being ordered to stop using the
Trademarks. We are seeking damages and a full legal recognition of the validity
of our license with 56 Hope Road as part of our counterclaims in the litigation.
Credit is still tight, although we have been able to structure a credit deal
with National Coffee Roasters for our ground and whole bean products. We are
also currently seeking additional funds to help with single serve capsule
Separately, we are developing a line of non-'Marley Coffee' related products
under the Jammin Java name, which we plan to distribute through our existing
channels with a planned launch date of no later than February 2017. This line of
products will feature premium coffee in a number of formats, including ground,
whole bean, and Keurig®, Nespresso®, and Dolce Gusto® compatible single
We have already discussed our new brand with current and potential customers and
have received positive feedback and commitments to order once we launch. These
products will not require us to pay licensing fees. We anticipate beginning to
generate revenues from these sales starting mid-February 2017.
We are also looking at a potential acquisition opportunities in the roasting and
distribution space. We have built a robust distribution network with strong
connections to our customers and their buyers over the past several years and we
believe that we can succeed in growing another brand as we have done previously
with 'Marley Coffee'.
We need to raise additional cash in order to pay our expenses and repay our
outstanding promissory notes and other liabilities. If we are 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 July 31, 2016 and 2015
Net sales. Net sales for the three months ended July 31, 2016 and 2015 was
$1,697,783 and $2,868,021, respectively, which represents a decrease of
$1,170,238 or 41% from the previous period.
Total cost of sales. Total cost of sales for the three months ended July 31,
2016 and 2015 was $1,394,818 and $2,059,049, respectively, which represents a
decrease of $664,231 from the previous period. The decrease in total cost of
sales was mainly the result of the decrease in sales.
Gross Profit. Gross Profit was $302,965 and $808,972, respectively, for the
three months ended July 31, 2016 and 2015, which represents a decrease of
$506,007 or 63%. Gross profit as a percentage of net sales was 18% and 28% for
the three months ended July 31, 2016 and 2015, respectively. Gross profit as a
percentage of net sales decreased as a result of litigation issues regarding the
license with 56 Hope Road.
Compensation and benefits expenses. Compensation and benefits expenses were
$828,689 and $777,961, respectively, for the three months ended July 31, 2016
and 2015, which represents an increase of $50,728 or 7%. Compensation and
benefits expenses increased as a result of increased stock-based compensation.
Selling and marketing expenses. Selling and marketing expenses for the three
months ended July 31, 2016 and 2015 was $618,771 and $601,152, respectively,
which represents an increase of $17,619 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 July 31, 2016 and 2015 was $370,629 and $363,349,
respectively, which represents an increase of $7,280 or 2% from the previous
Total operating expenses. Total operating expenses for the three months ended
July 31, 2016 and 2015 was $1,818,089 and $1,742,462, respectively, which
represents an increase of $75,627 or 4% from the previous period. Total
operating expenses increased as a result of the changes described above.
Other income (expense). Other income for the three months ended July 31, 2016
was $11,424 compared to other expense for the three months ended July 31, 2015
of $32,537. Other income increased as a result of gains on disposal of fixed
Interest expense. Interest expense for the three months ended July 31, 2016 and
2015 was $669,622 and $2,468, respectively, which represents an increase of
$667,154 from the previous period. Interest expense increased as a result of our
short term financing agreements incurred in and outstanding during the current
quarter, as described in greater detail in Note 5 to the financial statements
Change in Derivative liability. The change in fair value of derivative liability
was $720,897 and $0, respectively, for the three months ended July 31, 2016 and
2015. The change in fair value of derivative liability is the result of
additional derivative instruments listed below under convertible promissory
Net Loss. Net Loss was $2,894,219 and $968,495, respectively, for the three
months ended July 31, 2016 and 2015, which represents an increase of $1,925,724
or 199%. Net Loss increased as a result of the reasons described above.
Comparison of the Six Months Ended July 31, 2016 and 2015
Net Sales. Net sales for the six months ended July 31, 2016 and 2015 was
$4,425,782 and $5,449,448 respectively, which represents a decrease of
$1,023,666 or 19% from the previous period. The decrease was due to litigation
issues regarding the license with 56 Hope Road.
Total cost of sales. Total cost of sales for the six months ended July 31, 2016
and 2015 was $3,181,688 and $3,843,861 respectively, which represents a decrease
of $662,173 or 17% from the previous period. The decrease in total cost of sales
was mainly the result of the decreased sales.
Gross Profit. Gross Profit was $1,244,094 and $1,605,587, respectively, for the
six months ended July 31, 2016 and 2015, which represents a decrease of $361,493
or 23%. Gross profit as a percentage of sales was 28% and 29% for the six months
ended July 31, 2016 and 2015, respectively.
Compensation and benefits expenses. Compensation and benefits expenses were
$1,799,392 and $1,750,767, respectively, for the six months ended July 31, 2016
and 2015, which represents an increase of $48,625 or 3%. Compensation and
benefits expenses increased as a result of increased stock-based compensation.
Selling and marketing expenses. Selling and marketing expenses for the six
months ended July 31, 2016 and 2015 were $1,219,480 and $1,122,268,
respectively, which represents a decrease of $97,212 or 9% from the previous
period. Selling and marketing expenses increased as a result of decreased
advertising campaigns in new markets in the current period. We anticipate
experiencing marketing expenses relative to our cash flow availabilities
throughout fiscal 2016 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
six months ended July 31, 2016 and 2015 were $1,141,932 and $856,173,
respectively, which represents an increase of $285,759 or 33% from the previous
period. General and administrative expenses increased this period as a result of
litigation issues regarding the license with 56 Hope Road.
Total operating expenses. Total operating expenses for the six months ended July
31, 2016 and 2015 were $4,160,804 and $3,729,208, respectively, which represents
an increase of $431,596 or 12% from the previous period. Total operating
expenses decreased as a result of the changes described above.
Other income (expense). Other income for the six months ended July 31, 2016 was
$3,774 and other expense for the six months ended July 31, 2015 was $32,537.
Other expense increased due to the sale of our business division as mentioned in
footnote 10 to the unaudited financial statements included herein.
Interest income (expense). Interest expense for the six months ended July 31,
2016 and 2015 was $1,186,375 and $9,573, respectively, which represents an
increase of $1,176,802 from the previous period. Interest expense increased as a
result of our short term financing and capital lease agreements incurred in the
quarter as described in greater detail in footnote 6 to the financial statements
Net Loss. Net Loss was $4,381,788 and $2,165,731, respectively, for the six
months ended July 31, 2016 and 2015, which represents an increase of $2,216,057
or 102%. Net Loss increased as a result of the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
issuance of our common stock.
The following table presents details of our working capital and cash and cash
July 31, 2016 January 31, 2016 (Decrease)
Working Capital $ (6,817,536 ) $ (4,232,446 ) $ (2,585,090 )
Cash and Cash Equivalents $ 137,561 $
231,021 $ (93,460 )
At July 31, 2016, we had total assets of $1,580,272 and total liabilities of
$8,115,078. Our current sources of liquidity include our existing cash and cash
equivalents, cash from operations and borrowings under convertible promissory
notes and other loans. For the six months ended July 31, 2016, we generated net
sales of $4,425,782 and we had a net loss of $4,381,788.
Total current assets of $957,739 as of July 31, 2016 included cash of $137,561,
accounts receivable of $714,069 (which included $430,325 due from Mother
Parkers), other current assets of $3,000 and $103,109 of prepaid expenses.
We had total assets as of July 31, 2016 of $1,580,272 which included the total
current assets of $957,739, $123,523 of property and equipment, net, $477,694 of
intangible assets and $21,316 of other assets.
We had total liabilities of $8,115,078 as of July 31, 2016, which were primarily
current liabilities and included $3,939,549 of accounts payable (which included
$2,169,533 of accounts payable to Mother Parkers, $347,412 royalty - related
party relating to amounts accrued in connection with the 56 Hope Road License
Agreements (described above)), $1,196,654 of accrued expenses and $1,475,376 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 $1,503,500
conversion feature - derivative liability.
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 July
31, 2016, we are owed $430,325 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 July 31, 2016, we owe $2,174,916 to Mother
Parkers for roasting services.
The Company incurred a net loss of $4,381,788 and $2,165,731 for the six months
ended July 31, 2016 and 2015, respectively and had an accumulated deficit of
$33,627,538 at July 31, 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.
Six months ended July 31,
Net cash provided by (used in) operating activities $ 141,666 $ (680,823 )
Net cash (used in) provided by investing activities $ 297 $
Net cash provided by financing activities $ (235,423 ) $
For the six months ended July 31, 2016, net cash provided by operating
activities was $141,666, compared to net cash used in operating activities of
$680,823 for the six months ended July 31, 2015, an increase of $822,489. Net
cash used in operating activities for the six months ended July 31, 2016 was
primarily due to $4,381,788 of net loss, offset by $644,983 change in fair value
of derivative liability and share-based employee compensation of $852,462.
Net cash used in investing activities for the six months ended July 31, 2016 and
2015, was solely due to the purchase and disposal of property and equipment.
Compared to the corresponding period in fiscal 2015, net cash used in financing
activities increased by approximately $458,984 for the six months ended July 31,
2016 due to reduced short term borrowings.
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 $430,325 of accounts receivable due from, and
$2,174,916 of accounts payable owed to, Mother Parkers, as of July 31, 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 total due on the third party loans as of July 31, 2016
Convertible Promissory Notes
As described in greater detail in Notes 5 and 10, 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 $1.49 million as of July 31, 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 July 31, 2016,
$322,511 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 July 31, 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 July 31, 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 six months ended July 31, 2016 and 2015, there were no accounting
standards or interpretations issued that are expected to have a material impact
on our financial position, operations or cash flows.
Accounting standards that have been issued by the FASB or other standards
setting bodies that do not require adoption until a future date are being
evaluated by the Company to determine whether adoption will have a material
impact on the Company's financial statements. Such pronouncements include the
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