UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2016
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 000-52161
Jammin Java Corp.
(Exact name of registrant as specified in its charter)
| Nevada | 26-4204714 | |
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(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
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730 Tejon St. Denver, Colorado |
80211 | |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (323) 556-0746
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $0.001 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ |
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Non-accelerated filer ☐ (Do not check if a smaller reporting company) |
Smaller reporting company ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the closing price of such common equity on the OTCQB market as of July 31, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $24,948,964.
At May 3, 2016, there were 130,134,439 shares of the issuer’s common stock outstanding, which number does not include 250,000 shares which were agreed to be issued in March 2016 and which the registrant plans to issue shortly after such date.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Form 10-K”), particularly in Item 1, “Business,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the documents incorporated by reference, includes “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, revenue, 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 in this Form 10-K. 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.
The information contained in this Form 10-K is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Annual Report and in our other reports filed with the Securities and Exchange Commission.
In this Annual Report on Form 10-K, 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.
AVAILABLE INFORMATION
We are subject to the information and reporting requirements of the Exchange Act, under which we file periodic reports, proxy and information statements and other information with the United States Commission. Copies of the reports, proxy statements and other information may be examined without charge at the Public Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, or on the Internet at http://www.sec.gov. Copies of all or a portion of such materials can be obtained from the Public Reference Room of the SEC upon payment of prescribed fees. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room.
USE OF CERTAIN DEFINED TERMS
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Jammin Java” and “Jammin Java Corp.” refer specifically to Jammin Java Corp.
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In addition, unless the context otherwise requires and for the purposes of this report only:
| · | “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; |
| · | “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and |
| · | “Securities Act” refers to the Securities Act of 1933, as amended. |
You should carefully consider the risk factors described below, as well as the other information included in this Annual Report on Form 10-K prior to making a decision to invest in our securities.
HISTORY
The Company was incorporated in Nevada in September 2004 under the name “Global Electronic Recovery Corp.” In February 2008, we changed our name to “Marley Coffee Inc.” when we merged our then newly-formed subsidiary, “Marley Coffee Inc.” into the Company. In July 2009, we changed our name to “Jammin Java Corp.” when we merged our newly-formed subsidiary, Jammin Java Corp., into our Company. Our common stock is quoted on the OTCQB maintained by the OTC Market (“OTCQB”), under the symbol “JAMN.”
CURRENT BUSINESS OPERATIONS
Overview
We provide premium roasted coffee and specialty coffee on a wholesale level to the service, hospitality, office coffee service and big box store markets, as well as to a variety of other business channels. Specifically, we currently provide award winning sustainably grown, ethically-farmed and artisan roasted gourmet coffee through multiple United States and international distribution channels. We intend to develop a significant share of these markets and achieve a leadership position by capitalizing on the global recognition of the “Marley” brand name. We hope to capitalize on the guidance and leadership of our Chairman, Rohan Marley, and to increase our sales through the marketing of products using the likeness of, and reflecting the personality of, Mr. Marley. Additionally, through a licensing agreement with the family of the late reggae performer, Robert Nesta Marley, professionally known as Bob Marley (whose family members include Rohan Marley, our Chairman and the son of Bob Marley)(as described below), we are provided the worldwide right to use the name “Marley Coffee” and reasonably similar variations thereof.
We believe the key to our growth is a multichannel distribution and sales strategy. Since August 2011, we have been introducing a wide variety of coffee products through multiple distribution channels using the Marley Coffee brand name. The main channels of revenue for the Company are now and are expected to continue to be domestic retail in both grocery and away from home (for example, consumption at the office and on the go), international distribution, and online retail.
In order to market our products in these channels, we have developed a variety of coffee products in varying formats. The Company offers an entire line of coffee in whole bean and ground form with varying sizes including 2.5 ounce (oz), 8oz, 12oz and 2 pound (lbs) sizes. The Company also offers a “single serve” solution with its compostable Single-Serve Pods for Bunn® and other pod-based home and office brewers. The Company recently launched its Marley Coffee recyclable RealCup; compatible cartridges, for use in most models of Keurig®’s K-Cup brewing system.
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License Agreement with Fifty-Six Hope Road
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 (“Fifty-Six Hope Road” and the “FSHR License Agreement”). Rohan Marley, our Chairman, owns an interest in and serves as a director of Fifty-Six Hope Road. Pursuant to the FSHR License Agreement, Fifty-Six 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. Fifty-Six 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, Fifty-Six 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 FSHR 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 Fifty-Six Hope Road. Additionally, FSHR has the right to approve all Licensed Products, all advertisements in connection therewith and all product designs and packaging. The agreement also provides that FSHR 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 Fifty-Six 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 FSHR License Agreement, and such deferred payments shall be paid on a quarterly-basis thereafter until paid in full. At January 31, 2016, $264,670 is owed for such royalty fees.
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 Fifty-Six Hope Road. Pursuant to the MP Agreement, Mother Parkers is required to, among other things, supply all ingredients and materials, labor, manufacturing equipment and other resources necessary to manufacture and package the Product, develop coffee blends set forth in specifications provided by the Company from time to time, procure coffee beans in the open market (or from the Company’s designee) at favorable prices, set prices for the Product in a manner that is competitive in the market place and deliver Product logo/brand designs to the Company for approval prior to manufacturing any such Product. We are required to, among other things, cross-promote the Product, use Product images and marketing materials provided by Mother Parkers to promote the Product, and provide the services of Rohan Marley (our Chairman) at a minimum of five locations per year at the Company’s sole cost and expense. There are no minimum volume or delivery requirements under the MP Agreement. Pursuant to the MP Agreement, Mother Parkers agreed to pay us a fee of $0.06 per capsule for Talkin’ Blues products and $0.04 per capsule for all other Product sold by Mother Parkers under the terms of the agreement, which payments are due in monthly installments. The MP Agreement has a term of five years, provided that it automatically renews thereafter for additional one year periods if not terminated by the parties, provided further that we are not able to terminate the agreement within the first 12 months of the term of the agreement and if we terminate the agreement or take any action that lessens or diminishes Mother Parkers’ exclusive rights under the agreement during months 12 through 36 of the agreement, we are required to pay Mother Parkers a fee of $600,000 and reimburse Mother Parkers for any out of pocket costs incurred by Mother Parkers for inventory and other materials that are unsalable or unusable after such termination. We also receive revenues through the sale by Mother Parkers of our roast coffee in Canada, whereby we receive a portion of the gross revenues of such sales.
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Sales and Marketing Agreement With National Coffee Service & Vending
On April 25, 2011, the Company entered into an Exclusive Sales and Marketing Agreement (the “NCSV Agreement”) with National Coffee Service & Vending (“NCSV”). Pursuant to the NCSV Agreement, we agreed to appoint NCSV as our exclusive agent and distributor of “Jammin Java Coffee” brand roasted coffee within the U.S. (the “Products”) in the office coffee vending, office products, water, and other industries featuring a “break room,” and divisions and offshoots thereof. Pursuant to the NCSV Agreement, we share net profits generated by this agreement with NCSV on a 60/40 basis (with 60% of such net profits being provided to the Company).
Pursuant to the NCSV Agreement, NCSV is responsible for marketing and distributing Products and we agreed to refer all inquiries for purchase of the Products to NCSV (subject to small quantities of Products being referred to separate sub-agents). We also agreed not to compete with NCSV for sales and to refer to NCSV any sales relating to the Products and channels covered by the NCSV Agreement.
The NCSV Agreement remains in effect until April 25, 2014, and automatically renews for additional two year periods thereafter on a rolling basis, unless terminated by either party at least 30 days prior to the end of such applicable renewal term. The agreement was not terminated as of April 25, 2014, and therefore automatically renewed for an additional two year period. The NCSV Agreement can be terminated in the event of a breach of the NCSV Agreement (by the non-breaching party) or if the terminating party pays the non-terminating party a lump sum equal to the estimated net profit which would have been due to the non-terminating party if the NCSV Agreement had remained in effect for an additional 24 months from the termination date of the NCSV Agreement (based on the prior 12 months’ net profit).
Grocery Sales Process Agreements
The Company has hired two national food brokerage companies to help it represent, market and merchandise its products at grocery retail on a store level. The Company engaged Alliance Sales & Marketing, a private food broker based in Charlotte, North Carolina, to help increase its new market penetration nationally in the grocery and natural foods retail sector. The Alliance Sales & Marketing contract is month to month unless terminated by either party at least 30 days prior to the end of such applicable renewal term. The Company pays up to 4% of revenues on accounts the broker represents if they meet certain pre-established goals. A total of $218,368 had been accrued for amounts payable under this agreement as of January 31, 2016.
The Company also uses Harlow HRK to help manage its Kroger business. The Harlow HRK contract is month-to-month unless terminated by either party at least 30 days prior to the end of such applicable renewal term. The Company pays up to 4% of revenues on accounts the broker represents if they meet certain pre-established goals. The total due to Harlow HRK at January 31, 2016 for commissions was $8,254.
Roasting Agreements
The Company primarily receives its coffee from two main suppliers; Mother Parkers and European Roasterie, Inc. The Company generally provides these suppliers with desired taste profiles for various Company products, as well as related packaging and marketing materials, and the suppliers are generally responsible for sourcing and supplying the roasted beans for those products in quantities the Company orders from time to time. We are responsible for carrying out sales and marketing for our products. Our suppliers handle shipping to our distributors and customers. We receive the gross proceeds from the sale of our products and then pay our suppliers for the cost of goods sold. Pricing is subject to change based on prevailing market prices, with 30 days’ written notice. We bear all of the cost of bad debts or uncollectable accounts.
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Supply and Distribution Agreement
On July 28, 2015, we entered into a Supply and Distribution Agreement with C&V International Co., Ltd. (“C&V”), pursuant to which we agreed to supply C&V coffee and Marley Coffee branded products for distribution by C&V, as our exclusive distributor, in South Korea (a) through the food service, online, grocery retail and convenience business channels; and (b) to Marley Coffee branded Cafes operating in South Korea (which cafes are owned and operated by third parties and with which we have no affiliation, other than in connection with the supply of coffee and Marley Coffee branded products being sold at such cafes). There are twelve current Marley Coffee branded cafes open in South Korea, with the goal of expanding that number to thirty within the next three years. C&V was also granted a right of first refusal (subject to certain terms and conditions described in the agreement), for a period of two years from our entry into the agreement (subject to the requirement to negotiate in good faith to extend such right of first refusal period prior to the expiration thereof), to become our exclusive distributor in each country in Asia that we may choose to distribute products to in the future.
The agreement has a term through September 1, 2024, automatically renewable for additional one year terms thereafter on each of the five anniversaries of the end of the initial term, unless either party gives the other at least 90 days’ notice of their intention not to renew. The agreement may also be terminated by either party upon the breach of any material term of the agreement by the other party, provided the breaching party is given fifteen business days to cure any breach, and such breach is not timely cured.
C&V agreed to pay us certain pre-agreed to prices for the products sold and we agreed to sell such products to C&V at competitive price levels. We are also required to meet certain minimum quantity and quality requirements in connection with the supply of coffee and products under the agreement and C&V is required to purchase all coffee and products from us, subject to certain rights to acquire third party coffee, only to the extent that we fail to meet certain quantity and quality requirements set forth in the agreement and further fail to timely cure such failures. The agreement contains usual and customary representations, covenants, indemnification rights, limits on liability and confidentiality requirements.
Recent Events
On April 20, 2016, the Company entered into a settlement agreement and release with one of its officer and director insurance providers, pursuant to which among other things, the provider agreed to buy out the Company’s officer and director liability insurance policy for the period from March 15, 2011 to March 15, 2012 for $400,000, which the Company expects to receive approximately 30 days after the entry into the settlement.
Products and Revenue Channels
The Company’s objective is to position Marley Coffee as the premiere brand across all of the distribution channels for which we license the use of the “Marley” name and to capitalize on the likeness, philosophies and strategies of our Chairman, Rohan Marley.
We are focused on three business verticals and selling strategies which all complement each other, which are all part of our broader distribution strategy, but not treated as separate channels: Domestic, International, and our eBusiness subscription model. All three of these channels distribute the Company’s wide variety of product offerings.
Domestic grocery is the core focus of the Company with the strategy of continuing to expand into key markets and gaining new accounts and building on the base of accounts we have already. Within the U.S. grocery and specialty retail channel, the Company’s products are distributed through several distributors such as UNFI, Kehe, C&S and DPI and we also distribute directly to certain customers. We sell to retailers such as Krogers, HEB, Wegmans, Safeway, Albertsons, Sprouts, Target, Jewel-Osco, Market Basket, Whole Foods, South Eastern Grocers, Ahold, Hannafords, Shaw’s, Fairways, Ingles, Acme, Meijers, Lucky’s Markets and Farm Fresh. During the past year we have expanded our distributor relationships nationally in the United States. We expect our ongoing discussions with retailers will enable us to place our products in more chains throughout the year and we continue to seek to expand our product placement with grocery retailers and distributors throughout the United States and internationally.
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We create and sell a variety of coffee products for almost every coffee distribution channel. We sell 8 ounce (oz) and 12oz ground and whole bean bagged coffee primarily to the retail grocery channel. We sell 2lb whole bean and 2.5oz fractional packs primarily to the food service and Office Coffee Service or Breakroom industry.
In late November 2012, we launched our Marley Coffee RealCups; a single serve; compatible cartridge, for use in most models of Keurig®’s K-Cup brewing system. The coffee single serve channel is the fastest growing sector of the coffee industry and the fastest growing part of our business. We generate revenues in this category in two ways 1) by selling directly to retailers; and 2) through a licensing agreement with our roasters Mother Parkers (described above). For direct sales, we handle all aspects of selling, merchandising and marketing of the products to retailers. Through the licensing agreement Mother Parkers develops the relationships with retailers and handles everything from selling, merchandising, discounting, promoting and marketing and we receive a licensing fee per cup sold as described above.
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 Company also sells to other online operators such as Amazon.com, coffeeicon.com, ecscoffee.com, officedepot.com and coffeewiz.com.
In the second half of fiscal 2016, we launched a new version of the Marley Coffee RealCup™ capsule that will be compatible with the Keurig®’s K-Cup brewing system (both generation 1 and K2.0). The recyclable RealCup™ will utilize a recyclable capsule that is accepted by many curbside recycling programs, which will be a key driving advantage to us over our competitors at retail.
We believe that our international business will be one of the critical components to our revenue growth and expansion. 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, Chile, Australia and Mexico. 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 distributors in South Korea, Australia, Mexico and Chile buy coffee from us here in the U.S. at wholesale prices and then resell the coffee to their customers. Our U.K. distributor roasts and packs Company approved coffee and resells it to customers throughout Europe.
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.
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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, coffeeicon.com, ecscoffee.com, officedepot.com and coffeewiz.com.
Products, Plan of Operations and Business Growth
During Fiscal 2015 and 2016, we established a national grocery distribution network, increased our brand awareness and strengthened our international presence. Two of the Company’s SKUs have now made it into 1/3 of U.S. grocery stores. For Fiscal 2017, our primary goal is to increase our velocity rate per store instead of increasing the number of our accounts.
We prepared and organized the operations of the Company to scale to $40 million in revenue without materially increasing our staffing needs from where they are currently.
The Company is organized around our three pillars of growth, which are domestic grocery, international and ecommerce.
Domestic Grocery
Domestic grocery is the core focus of the Company with the strategy of continuing to expand into key markets and gaining new accounts and building on the base of accounts we have already. Within the U.S. grocery and specialty retail channel, the Company’s products are distributed through several distributors such as UNFI, Kehe, C&S and DPI and we also distribute directly to certain customers. We sell to retailers such as Krogers, HEB, Wegmans, Safeway, Albertsons, Sprouts, Target, Jewel-Osco, Market Basket, Whole Foods, South Eastern Grocers, Ahold, Hannafords, Shaw’s, Fairways, Ingles, Acme, Meijers, Lucky’s Markets and Farm Fresh. During the past year we have expanded our distributor relationships nationally in the United States. We expect our ongoing discussions with retailers will enable us to place our products in more chains throughout the year and we continue to seek to expand our product placement with grocery retailers and distributors throughout the United States and internationally.
Over the course of the last few years, we gained distribution in over 11,500 stores in the United States, which represents 35% of all commodity volume (ACV) for all grocery. Throughout fiscal 2017, while we will still look to gain additional distribution, we are not pursuing it at the same pace we did during the past 18 months. Our objective for our existing distribution is to add more SKUs (Stock Keeping Units) to our current distribution, increase our turn rate (velocity), and build brand awareness to drive further growth.
One of our primary drivers is to enhance our brand and increase our turn rate on shelves. In order to accomplish that we will continue to promote the Marley Coffee brand as well as our Recyclable RealCup™. In July of fiscal 2016, we launched a new version of the Marley Coffee RealCup™ capsule that is compatible with the Keurig Green Mountain K2.0. The recyclable RealCup™ which utilize 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 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.
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We believe that our recyclable RealCup™ capsule (Ecocup) has been one of the most innovative and sustainable single serve products to hit the market and we’ve seen material growth results because of it. Keurig Green Mountain, the largest company in the single serve space in North America has expressed their belief that there should be a recyclable solution for K-Cups, however they have only set a 2020 target for their commitment to making 100% of their K-Cup packs recyclable, which we believe both validates what we’re doing and gives us a 5 year first mover competitive advantage.
Based on the positive feedback from retailers and customers as well as some preliminary sales information, EcoCup has had a very positive impact on our operations. We’ve even been nominated by the Nexty Awards and Beverage Awards for our innovation and packaging. Our preliminary data has shown that EcoCups by themselves have helped with incremental growth in accounts like Market Basket and Kroger.
International
Our international business is one of the key components of our revenues. For our international accounts, we rely on first in class operators to take our brand to market and handle all of the distribution and marketing for the products. We provide brand support to our international accounts. We currently have key distribution in several countries, which include Canada, the United Kingdom, South Korea, Mexico and Chile. These countries primarily sell to the food service industry, which includes hotels, restaurants and cafes. From their success in food service, they have expanded distribution into retail distribution. Mother Parkers takes our products to market in Canada through both a licensing agreement and buy-sell relationship. Our U.K. distributor roasts and packs Company approved coffee and resells it to customers throughout Europe.
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 Fifty-Six Hope Road), we generate revenue through coffee sold to Marley Coffee branded coffee shops in Korea (which we have no ownership or management in) and also general licensing fees through such coffee sales.
Through a distribution arrangement we have in place with C&V International, we generate revenue through coffee sold to Marley Coffee branded coffee shops in Korea (which we have no ownership in) and also general licensing fees through such coffee sales.
The JAB acquisition of GMCR could help get brewers into the market in which we would have the ability capitalize on.
Canada
In Canada, through Mother Parkers, the Company is distributed in grocery retail, OCS and food service.
Mother Parkers distributes our products in over 2,000 stores, including some of the largest retail chains in Canada, which include Loblaw’s, Sobey’s, ID Foods, COOP, London Drugs and Metro. Our goal is to establish distribution of RealCups in grocery stores for the next two years and then to introduce our bagged coffee by 2017. We estimate that Mother Parkers will sell approximately 15 million RecyclableRealCup™ through grocery retail, OCS and food service within this fiscal year.
Mother Parkers has also found success in bringing our coffee into its food service business. They have been able to establish our products in several large restaurant chains and expect to expand the business over the next few years. For its food service business, Mother Parkers currently buys 8 ounce, 2.5 ounce fractional packs and 2 pound bags directly from the Company. The projected volume for this year is approximately 140,000 pounds of coffee with plans to get to 500,000 pounds by 2017.
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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.
United Kingdom/ Europe
Our U.K. partners are still finding success in distribution at specialty and natural grocery stores throughout Europe.
South Korea
We have several initiatives that have launched or are launching this year. Being successful in South Korea has the potential to echo throughout Asia and we believe our success in South Korea will be a springboard to getting meaningful distribution elsewhere in Asia. Our South Korean partners currently buy green beans and roasted products from the Company.
For fiscal 2016 sales in South Korea totaled $828,723 for green coffee and whole bean coffee and for fiscal 2015 sales in South Korea totaled $227,751.
Chile
Chile is a great example of a distributor who has been a brand champion for us in the region. Through their guerilla marketing efforts by sponsoring surf competitions and music festivals like Lollapalooza, they have gained distribution in food service as well as retail grocery.
In food service, our distributor has secured over 350 accounts in the region from boutiques to large restaurant chains. They recently secured Castaño, one of the largest coffee chains in all of Chile with over 80 stores that can in total do ~132,000 lbs. of coffee per year (which began in summer 2015). In December of 2014, they gained distribution in 44 Subway sandwich stores and they have goals to be in 53 stores by the end of the year and to potentially expand into other countries.
Their success in food service has helped them quickly expand into grocery retail. They recently placed our products into 100 Unimarc and 50 Tottus supermarkets, two big retail chains in Chile. However, their biggest customer to date is Walmart, which they just landed. Walmart will be bringing in 3 bags of 227 grams (8oz) coffees into stores in an early summer launch in the 30 biggest stores, with the goal of getting to the other 120 stores in Chile within six months.
For fiscal 2016 sales in Chile totaled $808,658 and for fiscal 2015 sales in Chile totaled $196,099.
Online
During the fourth quarter of calendar 2014, we launched an innovative Coffee of the Month subscription service as well an online retail platform at https://shop.marleycoffee.com/. We anticipate this to be a key revenue driver in the upcoming year. The total online sales for the year ended January 31, 2016 were $49,900 compared to $-0- for the year ended January 31, 2015.
Our online business and social media presence is also critical in driving consumers to retail grocery stores. We have a robust social media presence with an aggregate of more than 2 million followers through Marley Coffee’s own accounts as well as our Chairman’s account. We believe we have the ability to connect with everyone from Baby Boomers who grew up listening to Bob Marley’s music to the Millennials who still connect with Bob Marley and the next generation of Marley music both offline and online. We believe the Company is naturally positioned to talk to all of these consumers digitally through our social media and at the shelf through our products and brand positioning.
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Patents, Trademarks and Licenses
As described above, pursuant to the September 13, 2012, FSHR License Agreement, Fifty-Six 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.
Additionally, the Company currently does business under the name “Marley Coffee”, the rights to which name is owned by Fifty-Six Hope Road.
The Company also maintains a website at http://www.marleycoffee.com (the rights to which domain name are owned by FSHR). The information on, or that may be accessed through, our website is not incorporated by reference into this report and should not be considered a part of this report.
Competition
Competition in the market for coffee and coffee related products is intense and we expect it to increase. Our most significant competitors, include premium coffee companies such as Starbucks, Peet’s Coffee, Keurig Green Mountain and other national, local and regional companies in the grocery retail and office coffee service and hospitality industry market, many of which have substantially greater financial, sales, marketing and human resources than we do.
We believe that our customers choose among coffee brands based on the total value proposition that includes quality, variety, convenience, personal taste preference, price and social/sustainable consciousness. We believe that our market share in the category is driven by the quality of our product and the sustainable message we convey while being competitively priced in the premium category.
Product Research and Development
We did not expend any significant funds on research and development activities for the fiscal years ended January 31, 2016 or January 31, 2015.
Employees
As of April 30, 2016, we had 12 full-time and two part-time employees. We also utilize independent contractors and consultants to assist us with key functions. Our agreements with these independent contractors and consultants are usually short-term. We believe that our relations with our employees, independent contractors and consultants are good. None of our employees are represented by a union or covered by a collective bargaining agreement.
An investment in our common stock is highly speculative, and should only be made by persons who can afford to lose their entire investment in us. You should carefully consider the following risk factors and other information in this annual report before deciding to become a holder of our common stock. If any of the following risks actually occur, our business and financial results could be negatively affected to a significant extent.
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Risks Associated with Our Liquidity and Need for Additional Funding
We have had negative cash flows from operations and there is substantial doubt about our ability to continue as a going concern and if we are not able to generate positive cash flow, our business operations may fail.
Although our sales and revenues have increased significantly on an annual basis, the Company has 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. 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 issuance of its common stock. 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.
The Company owes a significant amount of money to Mother Parkers.
As of January 31, 2016, the Company owed a significant amount of accounts payable, including approximately $2.05 million to Mother Parkers in consideration for distribution services rendered. Mother Parkers has previously advised us that if we are not able to pay them amounts due past the 120 day net terms they have provided us, they will not provide additional credit and will stop distributing our products. As of the filing date of this statement, our debt with Mother Parkers is below 120 days. As described above, Mother Parkers is one of our largest distributors, representing over half of our revenues for the twelve months ended January 31, 2016, and in the event they stop distributing our products our results of operations will be materially adversely effected and we may be forced to curtail or abandon our business operations. We recently raised funding through the sale of convertible notes, as described above, to pay down a portion of the amounts we owed to Mother Parkers, provided that in the future we may be required to raise additional debt or equity funding (including in order to repay such convertible notes), which may not be available on favorable terms, if at all.
We may incur additional indebtedness which could reduce our financial flexibility, increase interest expense and adversely impact our operations.
In the future, we may incur significant amounts of additional indebtedness in order to make acquisitions or continue our business plan. Our level of indebtedness could affect our operations in several ways, including the following:
| · | a significant portion of our cash flows could be used to service our indebtedness; |
| · | a high level of debt would increase our vulnerability to general adverse economic and industry conditions; |
| · | any covenants contained in the agreements governing our outstanding indebtedness could limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments; |
| · | a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, our competitors may be able to take advantage of opportunities that our indebtedness may prevent us from pursuing; and |
| · | debt covenants to which we may agree may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry. |
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A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flows to pay the principal or interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. If we do not have sufficient funds and are otherwise unable to arrange financing, we may have to sell significant assets or have a portion of our assets foreclosed upon which could have a material adverse effect on our business, financial condition and results of operations.
Risks Associated with the Complaint Filed Against Us by the SEC
The November 2015 complaint filed against us by the SEC may have a significant negative impact on us.
As described below under “Part I” – “Item 2. Legal Proceedings”, on November 17, 2015, the SEC filed a complaint against us and certain other defendants in the United States District Court Central District of California Western Division. Pursuant to the complaint, the SEC alleged that Shane Whittle (our former officer and director) orchestrated a “pump and dump” scheme with certain other of the defendants in connection with our common stock. The scheme allegedly involved utilizing our July 2009 reverse merger transaction to secretly gain control of millions of our shares, spreading the stock to offshore entities, and dumping the shares on the unsuspecting public after the stock price soared following fraudulent promotional campaigns undertaken by Mr. Whittle and certain other of the defendants in or around 2011. The complaint also alleges that to boost our stock price and provide cash to the Company, Mr. Whittle and certain other of the defendants orchestrated a sham financing arrangement designed to create the false appearance of legitimate third-party interest and investment in the Company through a non-existent entity, Straight Path Capital, pursuant to which we raised approximately $2.5 million through the sale of 6.25 million shares of common stock in 2011. The SEC also alleges that Mr. Whittle and others caused us to make public announcements which caused our stock price to rise, which helped facilitate the alleged frauds among other allegations spelled out more completely in the complaint. The SEC’s complaint charges us (along with certain of the other defendants) with conducting an illegal offering in violation of Sections 5(a) and 5(c) of the Securities Act and further charges the other defendants with various other violations of the securities laws. The SEC is seeking injunctions, disgorgement, prejudgment interest, and penalties as well as penny stock bars against all of the individual defendants and an officer-and-director bar against Mr. Whittle.
The fact that the Company is the subject of a complaint filed by the SEC, actions we may take to defend ourselves from the allegations made in the complaint, as well as negative perceptions of the public due to the fact that we are subject to the complaint, and shareholder litigation in connection therewith, or threatened in connection therewith, may have the effect of: keeping us from securing an up-listing to a major stock exchange; limiting our options for future financing and reducing liquidity; raising the costs of future financing; raising legal, accounting and insurance costs; reducing available cash for operations and the satisfaction of outstanding liabilities; taking resources (including cash and management time and focus) away from operations; negatively affecting our stock price, liquidity and reputation in the marketplace; creating events of default under loan agreements and other material agreements; causing employees to resign or seek alternative employment; forcing us to pay legal and other costs, including potential legal settlements, in connection with shareholder litigation; causing customers and suppliers to cease doing business with us; and making new investors, joint venture partners, service providers, lenders, and other parties less likely to do business with, or enter into transactions with us; all of which may have a significant negative impact on our results of operations, the value of our securities, our ability to raise funding in the future, our revenues and our long-term viability, all of which could lead to the value of the Company’s common stock declining in value or becoming worthless.
These risks are exacerbated by the fact that we have limited financial and legal resources to effectively defend claims and allegations in a court of law, due to the fact that we have a small number of officers, directors and employees and due to the fact that we currently have limited cash on hand and have limited funding options available to us.
The Company has reached a settlement in principle with the Commission to settle the claims made by the Commission, which has not yet been formally approved or accepted by the Commission to date, and may not be approved or accepted. In the event the Company were to have to pay significant fines or disgorgement in the matter described above, and the Company was unable to raise sufficient funding to pay such fines or disgorgement, the Company could be forced to suspend its activities, terminate its operations or seek bankruptcy protection.
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In the event that we are found to have violated the Securities Act, or consent to a final judgment agreeing to a permanent enjoinment from violating the Securities Act in future, it could have a material adverse effect on our ability to raise funding and create additional liability for us.
In the event that we are found to have violated the Securities Act, or consent to a final judgment agreeing to a permanent enjoinment from violating the Securities Act in future, it could cause us to be deemed to be a ‘bad actor’ under Rule 506 of the Securities Act and/or disqualified by the requirements of Rule 262 of Regulation A, which could prevent us from relying on an exemption from registration for the sale and issuance of securities under Regulation D or A, respectively. This could make it harder for us to sell shares privately and negatively affect our ability to raise capital. Additionally, it is possible that for the following three years, we may be unable to avail ourselves of the statutory safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995. As a result, we may face additional liability for our forward-looking statements. Both of which could have a material adverse effect on our operations and cash flows, and could cause the value of our securities to decline in value.
Risks Associated with Our Industry, Contracts and Operations
FSHR can terminate the FSHR License Agreement under certain circumstances.
Pursuant to the terms and conditions of the FSHR License Agreement, FSHR can terminate that agreement under certain circumstances, subject where applicable and as described in the agreement, our right to cure such breaches and other events, including: in the event the Securities and Exchange Commission or any similar government agency in any country, territory or possession makes any negative or unlawful finding regarding our activities. Notwithstanding our categorical denial of the allegations made in the SEC’s November 2015 complaint, as discussed below under “Part I” - “Item 2. Legal Proceedings”, in the event the SEC’s complaint constitutes a “negative or unlawful finding regarding our activities” or we consent to any actions against us by the SEC in connection with the allegations made by the SEC in the November 2015 complaint which constitute a “negative or unlawful finding regarding our activities”, FSHR can terminate the FSHR License Agreement.
The termination of the FSHR License Agreement would have a material adverse effect on our results of operations and assets, could force us to scale back and/or abandon our business operations, or force us to seek bankruptcy protection and could cause the value of our common stock to decline in value or become worthless. As we’ve stated above, none of the officers in the Company have been named in the SEC suit and we believe that we will be found innocent of the charges alleged. Rohan Marley, our Chairman and founder believes that the SEC investigation is news from 2011 and that the current management alongside himself has been doing everything in its power to clean house and build a worldwide coffee company. Something he had envisioned since 1999. He and the Company will continue to both help the SEC in this matter as well as vigorously defend itself against the allegations made against us by the SEC.
We rely upon key personnel and if they leave us, our business plan and results of operations could be adversely affected.
We rely heavily on our Chief Executive Officer, Brent Toevs, our President, Chief Operating Officer, Secretary and Treasurer, Anh Tran, and the Chairman of our Board of Directors, Rohan Marley, for our success. Their experience and input create the foundation for our business and are responsible for the directorship and control over our activities. Moving forward, should we lose the services of these individuals for any reason, we will incur costs associated with recruiting a replacement and delays in our operations. If we are unable to replace such principal with another suitably trained individual or individuals, we may be forced to scale back or curtail our business plan and activities. As a result of this, your investment in us could become devalued or worthless. We currently have an aggregate of $2 million in Directors’ and Officers’ liability insurance in place covering our officers and directors, provided that on April 20, 2016, the Company entered into a settlement agreement and release with one of its officer and director insurance providers, pursuant to which among other things, the provider agreed to buy out the Company’s officer and director liability insurance policy for the period from March 15, 2011 to March 15, 2012 for $400,000, which the Company expects to receive approximately 30 days after the entry into the settlement. As such, we currently have no insurance in place covering the period from March 15, 2011 to March 15, 2012.
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Actual or perceived conflicts of interest may exist between us and our Chairman and another related party and supplier.
Rohan Marley, our Chairman, owns an interest in and serves as a director of Fifty-Six Hope Road with whom we are party to the FSHR License Agreement on which we are substantially dependent. During the years ended January 31, 2016 and 2015, respectively there are licensing fees accrued and payable of $260,496 and $265,960 to Fifty-Six Hope Road. Additionally, during the years ended January 31, 2016 and 2015, the Company made purchases of $602,191 and $764,598, respectively, from Marley Coffee Ltd. (“MC”) a producer of Jamaican Blue Mountain coffee that the Company purchases in the normal course of its business. The Company directs these purchases to third-party roasters for fulfillment of sales orders. The Company also received $97,796 and $34,348 in rebates from Marley Coffee during the years ended January 31, 2016 and 2015, respectively. The Company’s Chairman, Rohan Marley, is an owner of approximately 25% of the equity of MC.
Actual or perceived conflicts of interest between the Company, Mr. Marley, Fifty-Six Hope Road, and MC could have an adverse effect on our results of operations, our ability to maintain our relationships with Fifty-Six Hope Road, and MC, and may adversely affect the value of our common stock.
We rely on our License Agreement with Fifty-Six Hope Road Music Limited, our Roasting Agreement with Mother Parkers Tea & Coffee Inc., and various other agreements and understandings for our operations and revenues.
As described above under “Item 1. Business” – “Current Business Operations”, (a) on September 13, 2012, the Company entered into a license agreement with an effective date of August 7, 2012 with Fifty-Six Hope Road Music Limited, pursuant to which Fifty-Six Hope Road granted the Company a worldwide, exclusive, non-transferable license to utilize the “Marley Coffee” Trademarks in connection with Licensed Products; and (b) we also have an agreement in place with Mother Parkers Tea & Coffee Inc., pursuant to which we provide that entity the exclusive right to market and sell our Marley Coffee RealCups (the MP Agreement). We also have numerous informal sale arrangements and distribution understandings, not documented by definitive agreements, in place with several coffee distributors, beverage services and retailers.
We anticipate generating revenue moving forward as a result of the sale of coffee bearing the Trademarks, which we source primarily under the MP Agreement and our agreement with European Roasterie, Inc. and which we distribute primarily through the MP Agreement and through other various distribution understandings. As a result, if the FSHR License Agreement was to be terminated, the Roasting Agreement, or the MP Agreement were to be terminated or not renewed, or to a lesser extent, if our various informal sale arrangements were to be terminated, our operations could be adversely effected, our revenues (if any), could be adversely affected and we could be forced to curtail or abandon our operations, causing any investment in the Company to decline in value or become worthless.
Competition for coffee products and coffee brands is intense and could affect our future sales and profitability.
The coffee industry is highly fragmented. Competition in coffee products and brands are increasingly intense as relatively low barriers to entry encourage new competitors to enter the marketplace. In addition, we believe that maintaining and developing our brands is important to our success and the importance of brand recognition may increase to the extent that competitors offer products similar to ours. Many of our current and potential competitors have substantially greater financial, marketing and operating resources and access to capital than we do. Our primary competitors include Starbucks, Seattle’s Best, Caribou Coffee, Peet’s Coffee, Keurig Green Mountain (formerly Green Mountain Coffee Roasters), and other companies in the office coffee service and hospitality industry market. If we do not succeed in effectively differentiating ourselves from our competitors in the coffee industry, including by developing and maintaining our brands, or our competitors adopt our strategies, then our competitive position may be weakened and our sales of coffee, and accordingly our future revenues (if any), may be materially adversely affected.
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Our business is dependent on sales of coffee, and if demand for coffee decreases, our business would suffer.
All of our revenues are planned to be generated through the sale of coffee. Demand for coffee is affected by many factors, including:
| · | Changes in consumer tastes and preferences; |
| · | Changes in consumer lifestyles; |
| · | National, regional and local economic and political conditions; |
| · | Perceptions or concerns about the environmental impact of our products; |
| · | Demographic trends; and |
| · | Perceived or actual health benefits or risks. |
Because we are highly dependent on consumer demand for coffee, a shift in consumer preferences away from coffee would harm our business more than if we had more diversified product offerings. If customer demand for our coffee decreases, our sales, if any, would decrease and we would be materially adversely affected.
If we are unable to geographically expand our brand and products, our growth will be impeded which could result in reduced sales.
Our business strategy emphasizes, among other things, geographic expansion of our brand and products. Implementation of our expansion strategy is dependent on our ability to: (a) market our products on a national and economic scale; (b) increase our brand recognition on a national and international scale; (c) enter into distribution and other strategic arrangements with third party retailers; and (d) manage growth in administrative overhead and distribution costs likely to result from the planned expansion of our distribution channels. Our sales and profitability may be adversely affected if we fail to successfully expand our brand and the geographic distribution of our branded products. In addition, our expenses could increase and our profits could decrease as we implement our growth strategy.
Since we rely heavily on common carriers to ship our coffee on a daily basis, any disruption in their services or increase in shipping costs could adversely affect our relationship with our customers, which could result in reduced revenues, increased operating expenses, a loss of customers or reduced profitability.
We rely on a number of common carriers to deliver coffee to our customers. We have no control over these common carriers and the services provided by them may be interrupted as a result of labor shortages, contract disputes and other factors. If we experience an interruption in these services, we may be unable to ship our coffee in a timely manner, which could reduce our revenues and adversely affect our relationship with our customers. In addition, a delay in shipping could require us to contract with alternative, and possibly more expensive, common carriers and could cause orders to be cancelled or receipt of goods to be refused. Any significant increase in shipping costs could lower our profit margins or force us to raise prices, which could cause our revenue and profits to suffer.
Damage to our reputation or brand name, loss of brand relevance, product recalls, product liability, sales returns and warranty expense could negatively impact us.
We believe our success depends on our ability to maintain consumer confidence in the safety and quality of our products, build our brand image and brand recognition, and maintain our corporate reputation. Our product safety and quality protocols and those of our suppliers may not be adequate to avoid product recalls, sales returns or other product liability. Product safety or quality issues, actual or perceived, or allegations of product contamination or safety issues, even when false or unfounded, could subject us to product liability and consumer claims, tarnish the image of our brand and may cause consumers to choose other products. Product safety or quality issues or contamination, actual or perceived, may require us from time to time to recall a product, which could be costly and resource intensive. Our brand name and image could also be negatively affected by claims made against us by third parties alleging violations of law, including antitrust or competition laws. If we are unable to meet our sustainability targets (if any) or the claims made by us in connection with our products (including our EcoCup™), consumers may lose trust and confidence in our brand and our Company’s commitment to sustainability, and our brand could be damaged. Such issues, recalls, warranty expenses and claims could negatively affect our profitability and brand image.
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If we fail to continue to develop and maintain our brand, our business could suffer.
We believe that maintaining and developing our brand is critical to our success and that the importance of brand recognition may increase as a result of competitors offering products similar to ours. Our brand building initiative involves increasing the availability of our products on the Internet, in grocery stores, licensed locations and foodservice locations to increase awareness of our brand and create and maintain brand loyalty. If our brand building initiative is unsuccessful, we may never recover the expenses incurred in connection with these efforts and we may be unable to increase our future revenue or implement our business strategy. As part of our brand building initiative, we may revise our packaging or make other changes from time to time. If these changes are not accepted by customers, our business could suffer.
Our success in promoting and enhancing our brand will also depend on our ability to provide customers with high quality products and customer service. Although we take measures to ensure that we sell only high-quality coffee, we have no control over our coffee products once purchased by customers. Accordingly, customers may prepare coffee from our products in a manner inconsistent with our standards, store our coffee for long periods of time or resell our coffee without our consent, which in each case, potentially affects the quality of the coffee prepared from our products. If customers do not perceive our products to be of high quality, then our reputation and the value of our brand may be diminished and, consequently, our ability to implement our business strategy may be adversely affected.
Coffee costs have been very volatile over the last several years and increases in the cost of high-quality coffee beans could impact the profitability of our business.
In the past several years, we have experienced a dramatic increase in the price volatility of the coffee beans we purchase. We expect the coffee commodity market to continue to be challenging as it continues to be influenced by worldwide supply and demand, the relative strength of the United States Dollar and speculative trading. Coffee prices can also be affected by multiple factors in the producing countries, including weather, natural disasters, political and economic conditions, export quotas or similar factors.
Besides coffee, we face exposure to other commodity cost fluctuations, which could impair our profitability.
In addition to the increase in coffee costs discussed above, we are exposed to cost fluctuation in other commodities, including milk and fuel. For example, an increase in the cost of fuel could indirectly lead to higher electricity costs, transportation costs and other commodity costs. An increase in the cost of milk or other products, including sugar and other sweeteners, which coffee drinkers use to flavor and season their coffee could also lead to a decrease in the demand for our products. Much like coffee costs, the costs of these commodities depend on various factors beyond our control, including economic and political conditions, foreign currency fluctuations and global weather patterns. To the extent that we are unable to pass along such costs to our customers through price increases, our margins and profitability will decrease.
Changes in the coffee environment and retail landscape could impact our financial results.
The coffee environment is rapidly evolving as a result of, among other things, changes in consumer preferences; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive product and pricing pressures. In addition, the beverage retail landscape is very dynamic and constantly evolving, not only in emerging and developing marketplaces, where modern trade is growing at a faster pace than traditional trade outlets, but also in developed marketplaces, where discounters and value stores, as well as the volume of transactions through e-commerce, are growing at a rapid pace. If we are unable to successfully adapt to the rapidly changing environment and retail landscape, our share of sales, volume growth and overall financial results could be negatively affected.
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Consolidation in the retail channel or the loss of key retail or grocery customers could adversely affect our financial performance.
Our industry is being affected by the trend toward consolidation in the retail channel. Larger retailers may seek lower prices from us and may demand increased marketing or promotional expenditures, any of which could negatively affect the Company’s profitability. In addition, our success depends in part on our ability to maintain good relationships with key retail and grocery customers. The loss of one or more of our key customers could have an adverse effect on our financial performance.
In addition, because of the competitive environment facing retailers, many of our customers have increasingly sought to improve their profitability through increased promotional programs, pricing concessions, more favorable trade terms and increased emphasis on private label products. To the extent we provide concessions or trade terms that are favorable to customers, our margins would be reduced. Further, if we are unable to continue to offer terms that are acceptable to our significant customers or our customers determine that they need fewer products to service consumers; these customers could reduce purchases of our products or may increase purchases of products from our competitors, which would harm our sales and profitability.
Climate change may have a long-term adverse impact on our business and results of operations.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Decreased agricultural productivity in certain regions of the world as a result of changing weather patterns may limit availability or increase the cost of key agricultural commodities, such as coffee and tea, which are important sources of ingredients for our products, and could impact the food security of communities around the world. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.
We cannot predict the impact that the following may have on our business: (i) new or improved technologies, (ii) alternative methods of delivery, or (iii) changes in consumer behavior facilitated by these technologies and alternative methods of delivery.
Advances in technologies or alternative methods of delivery, including advances in vending machine technology and home coffee makers, or certain changes in consumer behavior driven by these or other technologies and methods of delivery could have a negative effect on our business. Moreover, technology and consumer offerings continue to develop, and we expect that new or enhanced technologies and consumer offerings will be available in the future. We may pursue certain of those technologies and consumer offerings if we believe they offer a sustainable customer proposition and can be successfully integrated into our business model. However, we cannot predict consumer acceptance of these delivery channels or their impact on our business. In addition, our competitors, many of whom have greater resources than us, may be able to benefit from changes in technologies or consumer acceptance of alternative methods of delivery, which could harm our competitive position. We may not be able to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery, or effectively adjust our product mix, service offerings, and marketing and merchandising initiatives for products and services that address, and anticipate advances in, technology and market trends. If we are not able to successfully respond to these challenges, our business, financial condition, and operating results could be harmed.
Adverse public or medical opinion about caffeine may harm our business.
Our coffee contains significant amounts of caffeine and other active compounds, the health effects of some of which are not fully understood. A number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased heart rate, nausea and vomiting, restlessness and anxiety, depression, headaches, tremors, sleeplessness and other adverse health effects. An unfavorable report on the health effects of caffeine or other compounds present in coffee could significantly reduce the demand for coffee, which could harm our business and reduce our sales and profits. Also, we could become subject to litigation relating to the existence of such compounds in our coffee; any such litigation could be costly and could divert management attention.
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Adverse publicity regarding product quality or food and beverage safety, whether or not accurate, may harm our business.
We may be the subject of complaints or litigation from customers alleging beverage and food-related illnesses or other quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect us, regardless of whether such allegations are true or whether we are ultimately held liable. In addition, any litigation relating to such allegations could be costly and could divert management attention.
Failure to comply with applicable laws and regulations could harm our business and financial results.
Our policies and procedures are designed to comply with all applicable laws, accounting and reporting requirements, tax rules and other regulations and requirements, including those imposed by the SEC, as well as applicable trade, labor, healthcare, privacy, food, anti-bribery and corruption and merchandise laws. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to additional or changing legal and regulatory requirements, our ongoing expansion into new markets and new channels, together with the fact that foreign laws occasionally conflict with domestic laws. In addition to potential damage to our reputation and brand, failure to comply with the various laws and regulations as well as changes in laws and regulations or the manner in which they are interpreted or applied, may result in civil and criminal liability, damages, fines and penalties, increased cost of regulatory compliance and restatements of our financial statements. Future laws or regulations (or the cost of complying with such laws, regulations or requirements) could also adversely affect our business and results of operations.
Adverse changes in global and domestic economic conditions or a worsening of the United States economy could materially adversely affect us.
Our sales and performance depend significantly on consumer confidence and discretionary spending, which are still under pressure from United States and global economic conditions. A worsening of the economic downturn and decrease in consumer spending may adversely impact our sales, ability to market our products, build customer loyalty, or otherwise implement our business strategy and further diversify the geographical concentration of our operations. For example, we are highly dependent on consumer demand for specialty coffee and a shift in consumer demand away from specialty coffee due to economic or other consumer preferences would harm our business.
We believe that our future success will depend in part on our ability to obtain and maintain protection of our intellectual property and brand names.
Our success will depend in part on our ability to maintain and enforce the Trademarks we license through the FSHR License Agreement (described above) and additional trademarks and service marks we may obtain in the future (together with the Trademarks, the “Marks”) registered by the Company. In the future, competitors or other third parties could claim that the Marks infringe on their rights, which could force us to defend infringement actions or challenge the validity of the third parties’ trademarks in court. Furthermore, we may have to take action, file lawsuits and expend significant resources in the future to protect the Marks and stop other parties from infringing on the use of such Marks and we may not have sufficient resources to pursue such litigation or actions. Any expenses we are forced to expend in defending our Marks or stopping third parties from infringing on such Marks will decrease the amount of working capital we have available for our business activities and could cause us to curtail or abandon our operations.
Risks Associated with Our Outstanding Convertible Notes
We have various outstanding convertible notes which are convertible into shares of our common stock at a discount to market.
As described above under “Part II” – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources” – “Funding and Financing Agreements”, we sold various convertible promissory notes from September 2015 to March 2016. The conversion prices of the convertible notes initially vary from between 60% to 65% of the market value of our common stock, subject in many cases to anti-dilution and other rights which may result in such conversion prices declining. As a result, any conversion of the convertible notes and sale of shares of common stock issuable in connection with the conversion thereof may cause the value of our common stock to decline in value, as described in greater detail under the Risk Factors below. Notwithstanding the above, we hope to repay the convertible notes in full before any conversions take place.
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The issuance and sale of common stock upon conversion of the convertible notes may depress the market price of our common stock.
If sequential conversions of the convertible notes and sales of such converted shares take place, the price of our common stock may decline, and as a result, the holders of the convertible notes will be entitled to receive an increasing number of shares in connection with conversions, which shares could then be sold in the market, triggering further price declines and conversions for even larger numbers of shares, to the detriment of our investors. The shares of common stock which the convertible notes are convertible into may be sold without restriction pursuant to Rule 144. As a result, the sale of these shares may adversely affect the market price, if any, of our common stock.
In addition, the common stock issuable upon conversion of the convertible notes may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. The convertible notes will be convertible into shares of our common stock at a discount to market as described above, and such discount to market provides the holders with the ability to sell their common stock at or below market and still make a profit. In the event of such overhang, the note holders will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock cannot absorb the discounted shares, then the value of our common stock will likely decrease. Notwithstanding the above, we hope to repay the convertible notes in full before any conversions take place.
The issuance of common stock upon conversion of the convertible notes will cause immediate and substantial dilution.
The issuance of common stock upon conversion of the convertible notes will result in immediate and substantial dilution to the interests of other stockholders since the holders of the convertible notes may ultimately receive and sell the full amount of shares issuable in connection with the conversion of such convertible notes. Although certain of the convertible notes may not be converted if such conversion would cause the holders thereof to own more than 4.99% or 9.99% of our outstanding common stock, this restriction does not prevent the holders of the convertible notes subject to such restrictions from converting some of their holdings, selling those shares, and then converting the rest of its holdings, while still staying below the 4.99%/9.99% limit. In this way, the holders of the convertible notes could sell more than any applicable ownership limit while never actually holding more shares than the applicable limits allow. If the holders of the convertible notes choose to do this, it will cause substantial dilution to the then holders of our common stock. Notwithstanding the above, we hope to repay the convertible notes in full before any conversions take place.
The continuously adjustable conversion price feature of the convertible notes could require us to issue a substantially greater number of shares, which may adversely affect the market price of our common stock and cause dilution to our existing stockholders.
Our existing stockholders will experience substantial dilution upon any conversion of the convertible notes. The convertible notes are convertible into shares of common stock at a conversion price equal to a discount to the market value of our common stock as described above. As a result, the number of shares issuable could prove to be significantly greater in the event of a decrease in the trading price of our common stock, which decrease would cause substantial dilution to our existing stockholders. As sequential conversions and sales take place, the price of our common stock may decline, and if so, the holders of the convertible notes would be entitled to receive an increasing number of shares, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution to our existing stockholders and would likely cause the value of our common stock to decline.
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We could face significant penalties for our failure to comply with the terms of our outstanding convertible notes.
As described below under “Part II” – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources” – “Funding and Financing Agreements”, we sold various convertible promissory notes from September 2015 to March 2016. The various notes contain positive and negative covenants and customary events of default including requiring us in many cases to timely file SEC reports. Some of our SEC reports have not been filed on a timely basis to date and in the event we fail to timely file our SEC reports in the future, or any other events of defaults occur under the notes, we could face significant penalties and/or liquidated damages and/or the conversion price of such notes could be adjusted downward significantly, all of which could have a material adverse effect on our results of operations and financial condition, or cause any investment in the Company to decline in value or become worthless.
We currently owe a significant amount of money under our outstanding convertible notes.
As of the date of this filing we owed approximately $1.0 million under the outstanding convertible promissory notes, net of discount, and $778,951 for conversion feature – derivative liability, described below under “Part II” – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources” – “Funding and Financing Agreements”. We do not have sufficient funds to repay such notes and if we are unable to raise additional funds in the future to repay such amounts, which may not be available on favorable terms, if at all, such failure could have a material adverse effect on our financial condition or results of operations and cause any investment in the Company to decline in value or become worthless.
Risks Associated with Our Securities
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common stock.
Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock or where shares are to be issued to our officers, directors and applicable consultants, free trading shares pursuant to our Form S-8 registration statements. Our Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing shareholders, which may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.
The British Columbia Securities Commission has issued a cease trade order affecting the Company’s common stock.
Because the Company did not comply with certain Canadian securities filings requirements, the Company’s common stock is not eligible to be traded in British Columbia and is subject to a Cease Trade Order. At this stage in the Company’s development, the Company has determined to invest its resources in other aspects of its business rather than incurring the significant expense to regain compliance with the British Columbia Securities Commission requirements. The cease trade order or the fact that British Columbia has issued the cease trade order may have a negative effect on our securities which may cause them to decline in value or be worth less than a similar company which is not subject to the cease trade order.
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We face a risk of a change in control due to the fact that our current officers and directors do not own a majority of our outstanding voting stock.
Our current officers and our directors do not hold voting control over the Company. As a result, our shareholders who are not officers and directors of us may be able to obtain a sufficient number of votes to choose who serves on our Board of Directors and/or to remove our current directors from the Board of Directors. Because of this, the current composition of our Board of Directors may change in the future, which could in turn have an effect on those individuals who currently serve in management positions with us. If that were to happen, our new management could affect a change in our business focus and/or curtail or abandon our business operations, which in turn could cause the value of our securities, if any, to decline or become worthless.
There is currently a volatile, sporadic and illiquid market for our common stock.
Our securities are currently quoted on the OTCQB under the symbol “JAMN,” however, we currently have a volatile, sporadic and illiquid market for our common stock, which is subject to wide fluctuations in response to several factors, including, but not limited to:
| · | actual or anticipated variations in our results of operations; | |
| · | our ability or inability to generate new revenues; | |
| · | increased competition; and | |
| · | conditions and trends in the market for coffee and coffee related products. |
Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price and liquidity of our common stock.
Moving forward, the Company may undertake steps to uplist its common stock to the NYSE MKT or NASDAQ Capital Market, in the event the Company can meet all applicable uplisting criteria.
Investors may face significant restrictions on the resale of our common stock due to federal regulations of “penny stocks.”
We are subject to the requirements of Rule 15(g)9, promulgated under the Exchange Act, as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the SEC defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
The exercise of the Mother Parkers Warrant may cause significant dilution to existing shareholders.
The Warrants to purchase 7,333,529 shares of common stock held by Mother Parkers have an exercise price of $0.51135 per share, a term of three years (expiring April 24, 2017) and prohibit Mother Parkers from exercising such Warrants to the extent such exercise would result in the beneficial ownership of more than 9.99% of the Company’s common stock, subject to Mother Parkers’ right to waive such limitation with 61 days prior written notice. The exercise of the Warrant could cause substantial dilution to existing shareholders.
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We currently have no plans to pay dividends on our common stock.
We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our Board of Directors. As a result, only appreciation of the price of our common stock, which may not occur, will provide a return to our stockholders.
There may be future sales of our common stock, which could adversely affect the market price of our common stock and dilute a shareholder’s ownership of common stock.
The exercise of any options granted to executive officers, directors and other employees under our equity compensation plans, and other issuances of our common stock could have an adverse effect on the market price of the shares of our common stock. We are not restricted from issuing additional shares of common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive shares of common stock. Sales of a substantial number of shares of our common stock in the public market or the perception that such sales might occur could materially adversely affect the market price of the shares of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.
Risks Related to Our Status as a Public Company
Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protections against interested director transactions, conflicts of interest and similar matters.
The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and NYSE MKT Exchanges and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures.
Because our Directors are not independent directors, we do not currently have independent audit or compensation committees. As a result, our Directors have the ability to, among other things, determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and any potential investors may be reluctant to provide us with funds necessary to expand our operations.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, Directors and members of board committees required to provide for our effective management as a result of the Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of Directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly, or deter qualified individuals from accepting these roles.
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We have reported several material weaknesses in the effectiveness of our internal controls over financial reporting, and if we cannot maintain effective internal controls or provide reliable financial and other information, investors may lose confidence in our SEC reports.
We reported material weaknesses in the effectiveness of our internal controls over financial reporting related to the lack of segregation of duties and the need for a stronger internal control environment. In addition, we concluded that our disclosure controls and procedures were ineffective and that material weaknesses existed in connection with such internal controls. Specifically, management identified the following control deficiencies that represent material weaknesses at January 31, 2016:
| (1) | lack of a functioning audit committee and lack of a majority of outside directors on the Company’s Board of Directors capable to oversee the audit function; and |
| (2) | ineffective controls over period end financial disclosure and reporting processes. |
During fiscal year 2016, we have remediated the following prior year material weaknesses:
| (a) | inadequate segregation of duties due to limited number of personnel, which makes the reporting process susceptible to management override; and |
| (b) | insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements. |
Specifically, we added sufficient personnel in our finance/accounting department with specific responsibilities to provide checks and balances to achieve proper segregation of duties. We also improved the completeness and quality of documentation for our internal control processes over financial reporting.
Internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of our financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles, or GAAP. Disclosure controls generally include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Effective internal controls over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial and other reports and effectively prevent fraud. If we cannot maintain effective internal controls or provide reliable financial or SEC reports or prevent fraud, investors may lose confidence in our SEC reports, our operating results and the trading price of our common stock could suffer and we might become subject to litigation.
Because we are a small company, the requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Act, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company with listed equity securities, we must comply with the federal securities laws, rules and regulations, including certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act and the Dodd-Frank Act, related rules and regulations of the SEC, with which a private company is not required to comply. Complying with these laws, rules and regulations will occupy a significant amount of time of our sole director and management and will significantly increase our costs and expenses, which we cannot estimate accurately at this time. Among other things, we must:
| · | establish and maintain a system of internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; |
| · | prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws; |
| · | maintain various internal compliance and disclosures policies, such as those relating to disclosure controls and procedures and insider trading in our common stock; |
| · | involve and retain to a greater degree outside counsel and accountants in the above activities; |
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| · | maintain a comprehensive internal audit function; and |
| · | maintain an investor relations function. |
In addition, being a public company subject to these rules and regulations may require us to accept less director and officer liability insurance coverage than we desire or to incur substantial costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
On June 25, 2013, and effective August 1, 2013, we entered into a lease agreement for office space located at 4730 Tejon Street, Denver, Colorado 80211. The office space encompasses approximately 4,800 square feet. The lease has a term of 36 months expiring on July 31, 2016, provided that we have two additional three year options to renew the lease after the end of the initial term. Rent during the first three year option period escalates at the rate of 4% per year (starting with the last monthly rental cost of the initial term of the agreement, described below), and rent during the second three year option period will be at a rental cost mutually agreed by the Company and the landlord. Rent due under the initial term of the agreement is as follows:
| · | $7,858 per month from August 1, 2013 to July 31, 2014; | |
| · | $8,172 per month from August 1, 2014 to July 31, 2015; and | |
| · | $8,499 per month from August 1, 2015 to July 31, 2016. |
We also had an option to renew this lease for an additional three year term, which option we have exercised as of the date of this annual report, and which three year renewal term provides for rent as follows:
| · | $8,839 per month from August 1, 2016 to July 31, 2017; | |
| · | $9,192 per month from August 1, 2017 to July 31, 2018; and | |
| · | $9,560 per month from August 1, 2018 to July 31, 2019. |
Finally, we have the option to extend the lease for an additional three year term, through July 21, 2022, with a rental cost per month negotiated in good faith by the parties based on then-current market rates, provided that we provide notice of our intent to extend such lease at least 120 days prior to the end of the then term.
On April 9, 2014, the Company entered into a lease agreement for office and warehouse space located at 4725-4745 Lipan St, Denver, Colorado 80211. The rental space encompasses approximately 3,466 square feet of office and warehouse space and approximately a 4,000 square foot yard. The lease expires on June 30, 2017, provided we have the right to one five year renewal term, with rent set at the “market value” of the last year of the initial lease term. Rent due under the initial term of the agreement is as follows:
| · | $0 per month from April 15, 2014 to June 30, 2014; | |
| · | $2,800 per month from July 1, 2014 to June 30, 2015; | |
| · | $2,950 per month from July 1, 2015 to June 30, 2016; and | |
| · | $3,150 per month from July 1, 2016 to June 30, 2017. |
The rights to the lease were sold during 2015, and the purchaser currently pays the monthly rental cost due under such lease, provided that the Company remains legally obligated under such lease pursuant to its terms.
On April 28, 2014, the Company entered into a lease agreement for retail space located at 1536 Wynkoop, Denver, Colorado 80202. The rental space encompasses approximately 121 square feet which we use as a Bike Café Kiosk. The lease has a term of 60 months. Rent is $1,500 per month for the first year, increasing with the annual increase in the consumer price index thereafter on the annual anniversary date of the lease.
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From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
On July 28, 2014, Shane Whittle, individually, a former significant shareholder and officer and director of the Company (“Whittle”) filed a complaint against the Company in the District Court, City and County of Denver, State of Colorado (Case No. 2014-CV-032991 Division: 209). The complaint alleged that Whittle entered into a consulting agreement with the Company for which the Company failed to make payments and that Rohan Marley, as both a director of the Company and of Marley Coffee Canada, Inc., additionally agreed that, as part of Whittle’s consulting compensation, the Company would assume a debt owed by Marley Coffee Canada to Whittle. The cause of action set forth in the complaint includes breach of contract. Damages claimed by Whittle included $60,000 under the consulting agreement and $19,715 related to payments assumed by the Company.
Effective on March 31, 2015, the Company and Mr. Whittle entered into a Settlement Agreement and Release of Claims (the “Settlement”), pursuant to which the parties agreed to dismiss their claims associated with the District Court, City and County of Denver, State of Colorado (Case No. 2014-CV-032991 Division: 209), lawsuit described above. Pursuant to the terms of the Settlement, the Company agreed to pay Mr. Whittle $80,000 which was accrued as of January 31, 2015 (to be paid in equal payments of $10,000 per month beginning on April 1, 2015, of which $10,000 is in default), the Company agreed to withdraw from a joinder in connection with the Federal Action pending between the parties (and certain other parties) as described below, the parties provided each other mutual releases and the parties agreed to mutually dismiss, with prejudice, their claims.
On September 30, 2014, Whittle individually, and derivatively on behalf of Marley Coffee LLC (“MC LLC”) filed a complaint against Rohan Marley, Cedella Marley, the Company, Hope Road Merchandising, LLC, Fifty-Six Hope Road Music Limited, and Marley Coffee Estate Limited in the United States District Court for the District of Colorado (Civil Action No. 2014-CV-2680).
The complaint alleges that Whittle entered into a partnership with Rohan Marley, the son of the late reggae music legend Robert Nesta Marley p/k/a Bob Marley, to sell premium coffee products branded after the name and likeness of Rohan Marley. The causes of action set forth in the complaint include, among others, racketeering activity, trademark infringement, breach of fiduciary duty, civil theft, and civil conspiracy (some of which causes of action are not directly alleged against the Company), which are alleged to have directly caused Whittle and Marley Coffee LLC substantial financial harm.
Damages claimed by Whittle and MC LLC include economic damages to be proven at trial, profits made by defendants, treble damages, punitive damages, attorneys’ fees and pre and post judgment interest.
Subsequently, all but the civil conspiracy claim against the Company was dismissed and the court ordered Whittle to amend his complaint to provide only for an alleged claim of breach of fiduciary duty (not against the Company) and conspiracy claims as an individual (not on a derivative basis). Prior to the filing of this report, Mr. Whittle and the Company agreed in principle to settlement terms, provided the parties are still negotiating the final terms of such settlement. Notwithstanding the parties’ agreement in principle, the outcome of this lawsuit cannot be predicted with any degree of reasonable certainty. In the event the matter is not settled, the Company intends to continue to vigorously defend itself against Whittle’s and MC LLC’s claims.
On December 15, 2014, a complaint was filed against the Company in the Superior Court of State of California, for the County of Los Angeles – Central Division (Case Number: BC566749), pursuant to which Sky Consulting Group, Inc. (“Sky”), made various claims against the Company, Mr. Tran, the Company’s President and Director, C&V International, and various other parties. The complaint alleged causes of action for breach of contract, fraud, negligent representation, intentional interference with contractual relationship and negligent interference with contractual relationship, relating to a May 2013 coffee distributor agreement between the Company and Sky, which provided Sky the right to sell Company branded coffee products in Korea. The suit seeks damages, punitive damages, court costs and attorney’s fees. The Company subsequently filed a motion to compel arbitration pursuant to the terms of the agreement, which was approved by the court on April 7, 2015. The parties subsequently entered arbitration in connection with the lawsuit. On September 8, 2015, the parties entered into a mutual settlement and release agreement, whereby Sky agreed to return 130,480 shares of common stock to the Company and stop distributing our products, displaying our tradenames or using our intellectual property; the parties agreed to each dismiss their claims/lawsuits; and each party provided the other a general release of all outstanding claims. The shares were returned to the Company and cancelled and the proceedings were dismissed on December 16, 2015.
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On November 17, 2015, the SEC filed a complaint against us (Case 2:15-cv-08921) in the United States District Court Central District of California Western Division. Also included as defendants in the complaint were Shane G. Whittle (our former Chief Executive Officer and Director) and parties unrelated to us, Wayne S. P. Weaver, Michael K. Sun, Rene Berlinger, Stephen B. Wheatley, Kevin P. Miller, Mohammed A. Al-Barwani, Alexander J. Hunter, and Thomas E. Hunter (collectively, the “Defendants”). Pursuant to the complaint, the SEC alleged that Mr. Whittle orchestrated a “pump and dump” scheme with certain other of the Defendants in connection with our common stock. The scheme allegedly involved utilizing our July 2009 reverse merger transaction to secretly gain control of millions of our shares, spreading the stock to offshore entities, and dumping the shares on the unsuspecting public after the stock price soared following fraudulent promotional campaigns undertaken by Mr. Whittle and certain other of the Defendants in or around 2011. The complaint also alleges that to boost our stock price and provide cash to the Company, Mr. Whittle and certain other of the Defendants orchestrated a sham financing arrangement designed to create the false appearance of legitimate third-party interest and investment in the Company through a non-existent entity, Straight Path Capital, pursuant to which we raised approximately $2.5 million through the sale of 6.25 million shares of common stock in 2011. The SEC also alleges that Mr. Whittle and others caused us to make public announcements which caused our stock price to rise, which helped facilitate the alleged frauds among other allegations spelled out more completely in the complaint. The SEC’s complaint charges us, Mr. Whittle, Mr. Weaver, Mr. Sun, Mr. Berlinger, Mr. Wheatley, Mr. Miller, and Mr. Al-Barwani with conducting an illegal offering in violation of Sections 5(a) and 5(c) of the Securities Act. The complaint further alleges that Mr. Whittle, Mr. Weaver, Mr. Sun, Mr. Berlinger, and the Hunters violated Section 10(b) of the Exchange Act and Rule 10b-5, and Mr. Whittle, Mr. Weaver, Mr. Sun, and Mr. Berlinger violated Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 thereunder. Mr. Whittle is additionally charged with violating Section 16(a) of the Exchange Act and Rule 16a-3, and the Hunters are charged with violations of Sections 17(b) of the Securities Act, which prohibits fraudulent touting of stock. The SEC is seeking injunctions, disgorgement, prejudgment interest, and penalties as well as penny stock bars against all of the individual Defendants and an officer-and-director bar against Mr. Whittle. The Company has reached a settlement in principle with the Commission to settle the claims made by the Commission, which has not yet been formally approved or accepted by the Commission to date, and may not be approved or accepted. In the event the Company were to have to pay significant fines or disgorgement in the matter described above, and the Company was unable to raise sufficient funding to pay such fines or disgorgement, the Company could be forced to suspend its activities, terminate its operations or seek bankruptcy protection.
In addition to the above, we may become involved in other material legal proceedings in the future.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information and Holders
Our common stock is quoted on the OTCQB market under the symbol “JAMN”.
The following table sets
forth the high and low trading prices of one (1) share of our common stock for each fiscal quarter over the past two fiscal years.
The quotations provided are for the over the counter market, which reflect interdealer prices without retail mark-up, mark-down
or commissions, and may not represent actual transactions. Our common stock trades on a limited, sporadic and volatile basis.
| PRICE RANGES | ||||||||
| QUARTER ENDED | HIGH | LOW | ||||||
| Fiscal Year Ended January 31, 2016 | ||||||||
| January 31, 2016 | $ | 0.19 | $ | 0.06 | ||||
| October 31, 2015 | $ | 0.24 | $ | 0.14 | ||||
| July 31, 2015 | $ | 0.31 | $ | 0.17 | ||||
| April 30, 2015 | $ | 0.30 | $ | 0.14 | ||||
| Fiscal Year Ended January 31, 2015 | ||||||||
| January 31, 2015 | $ | 0.21 | $ | 0.14 | ||||
| October 31, 2014 | $ | 0.30 | $ | 0.20 | ||||
| July 31, 2014 | $ | 0.44 | $ | 0.18 | ||||
| April 30, 2014 | $ | 0.41 | $ | 0.30 | ||||
Approximate Number of Equity Security Holders
As of May 3, 2016, there were 130,134,439 shares of our common stock issued and outstanding held by 24 shareholders of record. This number does not include stockholders for whom shares were held in “nominee” or “street name”. This number does not include 250,000 shares which were agreed to be issued in March 2016 and which the Company plans to issue shortly after May 3, 2016.
Because the Company did not comply with certain Canadian securities filings requirements, the Company’s common stock is not eligible to be traded in British Columbia and is subject to a Cease Trade Order. At this stage in the Company’s development, the Company has determined to invest its resources in other aspects of its business rather than incurring the significant expense to regain compliance with the British Columbia Securities Commission requirements.
Dividends
We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any dividends on our common stock in the foreseeable future. We intend to retain all earnings, if any, for the foreseeable future for use in the operation of our business and to fund future growth of our business.
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Recent Sales of Unregistered Securities
In September 2015, we sold the JSJ Convertible Note, the Typenex Convertible Note, the JMJ Convertible Note and the Vis Vires Convertible Note. Each of such notes is convertible into our common stock at a discount to the trading price of our common stock as described in greater detail below under “Part II” – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources” – “Funding and Financing Agreements”. We claim an exemption from registration for the issuances and sales of such convertible notes pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, since the foregoing issuances did not involve a public offering, the recipients were (a) “accredited investors”; and/or (b) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act, the recipients acquired the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities were offered without any general solicitation by us or our representatives. No underwriters or agents were involved in the foregoing issuances and grant and we paid no underwriting discounts or commissions. The securities sold are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.
As described below under “Part II” – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources” – “Funding and Financing Agreements”, on March 1, 2016, we entered into the JSJ side letter agreement which amended the terms of the JSJ Note as discussed above. To the extent such transaction is deemed the offer or sale of unregistered equity securities, we plan to claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, since the foregoing did not involve a public offering, the recipient was (i) an “accredited investor”; and/or (ii) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act, and the recipient acquired the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities were offered without any general solicitation by us or our representatives. No underwriters or agents were involved in the foregoing issuance and we paid no underwriting discounts or commissions. The securities are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.
As described above below under “Part II” – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources” – “Funding and Financing Agreements”, on March 8, 2016 and March 15, 2016, we sold Duck Duck the Duck Duck Notes. The notes are convertible into our common stock at a discount to the trading price of our common stock as described in greater detail above. We also agreed pursuant to the March 15, 2016 Duck Duck Note to issue Duck Duck 250,000 restricted shares of common stock. We claim an exemption from registration for the issuance of such convertible notes and shares pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, since the foregoing issuances did not involve a public offering, the recipient was (i) an “accredited investor”; and/or (ii) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act, and the recipient acquired the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities were offered without any general solicitation by us or our representatives. No underwriters or agents were involved in the foregoing issuance and we paid no underwriting discounts or commissions. The securities sold are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.
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As described below under “Part II” – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources” – “Funding and Financing Agreements”, on March 13, 2016, we sold Vis Vires the Vis Vires Convertible Note. The note is convertible into our common stock at a discount to the trading price of our common stock as described in greater detail above. We claim an exemption from registration for the issuance of such convertible note pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, since the foregoing issuance did not involve a public offering, the recipient was (i) an “accredited investor”; and/or (ii) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act, and the recipient acquired the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities were offered without any general solicitation by us or our representatives. No underwriters or agents were involved in the foregoing issuance and we paid no underwriting discounts or commissions. The securities sold are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.
As described below under “Part II” – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources” – “Funding and Financing Agreements”, on March 11, 2016, our Board of Directors approved the re-pricing of stock options to purchase an aggregate of 6 million shares of our common stock (2 million each to each of our executive officers and Chairman). To the extent such re-pricings constituted the offer and sale of securities, we believe that such transactions were exempt from registration pursuant to (a) Section 4(a)(2) of the Securities Act; and/or (b) Rule 506 of the Securities Act, and the regulations promulgated thereunder. With respect to the transactions described above, no general solicitation was made either by us or by any person acting on our behalf. The transactions were all privately negotiated, and none involved any kind of public solicitation. No underwriters or agents were involved in the foregoing grants and we paid no underwriting discounts or commissions. The securities sold are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. All recipients were officers and directors of the Company.
Use of Proceeds From Sale of Registered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
You should read the following discussion and analysis in conjunction with our Financial Statement and related Notes thereto included in Part II, Item 8 of this Report and the “Risk Factors” included in Part I, Item IA of this Report, before deciding to purchase, hold or sell our common stock.
Commitment to Reduce Cash Compensation
Throughout fiscal 2016, the Company issued shares of common stock as partial consideration for services rendered to its officers, directors and employees in an effort to maximize its cash on hand and improve liquidity. During the remainder of fiscal 2017, the Company plans to pay the salaries of its officers and employees in cash, provided that where possible, the Company intends to continue to use common stock in lieu of cash consideration, and has continued to pay certain of its employees in stock instead of cash during fiscal 2017. As the Company continues to grow it will need to raise additional cash in order to maintain its growth and fund its operations. If the Company is unable to access additional capital moving forward, it will hurt our ability to maintain growth and possibly jeopardize our ability to maintain our current operations. We may not be able to increase sales, reduce expenses or obtain additional financing, if necessary, at a level to meet our current obligations to continue as a going concern.
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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.
Fiscal Year End 2016 Guidance and Projections
| · | Our revenue expectations for fiscal 2017 are expected to be a continued 30% growth from fiscal 2016 depending on our ability to raise additional capital and continue to grow our business. This projection is based on the current organic growth we’ve seen in our current distribution. | ||
| · | We expect gross profit margins to increase to 30%-35% this fiscal year. | ||
| · | We anticipate losses narrowing even further in the first quarter of fiscal 2017 and our goal is to show positive EBITDA by the end of the year. | ||
| · | The Company is organized around our three pillars of growth, which are domestic, international and ecommerce. |
Business Growth
The Company is organized around our three pillars of growth, which are domestic, international and ecommerce.
| · | Domestic grocery sales – Our objective is to build deeper relationships and improve turn rates within our existing customers while continuing to expand into key accounts. We ended the year in approximately 11,500 grocery stores in the United States. | |
| · | eCommerce subscription model and social media growth – https://shop.marleycoffee.com/subscriptions/ recently launched and is starting to gain traction. We have been testing multiple initiatives to keep our site “sticky” for consumers. We are continuing to focus on our social media growth with the goal of driving Millennial consumers to our brand. |
| · | International - 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 Korea, Chile and the United Kingdom. |
| · | EcoCup launch – EcoCup’s success is built on the critical premise that it doesn’t require consumers to change their behavior. They continue to purchase and use the product as in the past but with a more sustainable end-of-life option. This continues to be one of the biggest launches for the Company in fiscal 2017. |
| · | We hope to resolve the pending SEC litigation and retain the Fifty-Six Hope Road license. |
RESULTS OF OPERATIONS
Comparison of the Years Ended January 31, 2016 and 2015
Revenue. Revenue for the years ended January 31, 2016 and 2015 was $12,312,620 and $9,569,791, respectively, which represents an increase of $2,742,849 or 29% 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 international and online sales.
Discounts and allowances. Discounts and allowances for the years ended January 31, 2016 and 2015 was $1,114,015 and $668,424, respectively, which represents an increase of $445,591 or 67% from the previous period. Discounts and allowances increased as a result of the corresponding increase in sales, discounts given to international customers, and promotions to clear out old inventory as we released the recyclable real cup in 2015.
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Net revenue. Net revenue for the years ended January 31, 2016 and 2015 was $11,198,605 and $8,901,367, respectively, which represents an increase of $2,297,238 or 26% from the previous period.
Total cost of sales. Total cost of sales for the years ended January 31, 2016 and 2015 was $8,025,368 and $6,955,321, respectively, which represents an increase of $1,070,047 or 15% from the previous period. The increase in total cost of sales was mainly the result of the 29% increase in sales, offset by a decrease in cost of goods from our roasters as we negotiated better prices during the year ended January 31, 2016 as compared to the prior year’s period.
Gross profit. Gross profit was $3,173,237 and $1,946,046, respectively, for the years ended January 31, 2016 and 2015, which represents an increase of $1,227,191 or 63% from the prior period. Gross profit as a percentage of net sales was 28% and 22% for the years ended January 31, 2016 and 2015, respectively. Gross profit increased as a result of the reduction in cost of goods and better management of general and administrative and marketing expenses.
Compensation and benefits. Compensation and benefits expense was $3,708,352 and $4,465,889, respectively, for the years ended January 31, 2016 and 2015, which represents a decrease of $757,537 or 17% from the prior period. The decrease was mostly the result of the reduction in employees and non-cash compensation in the fourth quarter. Total compensation and benefits of $3,708,352 for the year ended January 31, 2016 included $1,874,606 paid in cash and $1,833,746 paid through the issuance of securities (including $1,713,764 attributable to stock options granted, $105,834 of year-end bonuses, and $95,854 of salaries paid through the issuance of common stock to employees and executive management).
Selling and marketing. Selling and marketing expense for the years ended January 31, 2016 and 2015 was $2,688,117 and $3,150,274, respectively, which represents a decrease of $462,157 or 15% from the previous period. The decrease was principally the result of a reduction in advertising campaigns undertaken in new markets during 2016. As our business has developed, our customer base has increased and sales have grown more organically. We anticipate, however, experiencing significant marketing expenses throughout fiscal 2017 as we will seek to expand our customer base even more and build out the Company brand.
General and administrative. General and administrative expense for the years ended January 31, 2016 and 2015 was $1,594,808 and $2,807,296, respectively, which represents a decrease of $1,212,488 or 43% from the previous period. The decrease was principally the result of reduction in expansion of the business and reduced professional fees and payroll. General and administrative expense also decreased due to decreased corporate reporting expenses legal fees, and office supply expenses.
Total operating expenses. Total operating expenses for the years ended January 31, 2016 and 2015 was $7,991,277 and $10,423,459, respectively, which represents a decrease of $2,432,182 or 23% from the previous period. This increase was in connection with decreased compensation, marketing and selling and general administrative expenses.
Other expense. Other expense for the years ended January 31, 2016 and 2015 was $225,783 and $1,799,543 respectively, which represents a decrease of $1,573,760 or 87% from the previous period. Other expense decreased as a result of our costs associated with the Ironridge Global IV, Ltd. (“Ironridge”) transactions being finalized and completed (which included derivative accounting issues), offset by the change in fair value of derivative liabilities.
Interest expense. Interest expense for the years ended January 31, 2016 and 2015 was $150,298 and $4,029, respectively, which represents an increase of $146,269 or 3,630% from the previous period. The increase in interest expense was due to funding arrangements and derivative liabilities entered into during the end of FY2016.
Total other expense. Total other expense for the years ended January 31, 2016 and 2015 was $383,877 and $1,803,572, respectively, which represents a decrease of $1,419,695 or 79% from the previous period. Other expense decreased as a result of our costs associated with the Ironridge transactions being finalized and completed (which included derivative accounting issues), in 2015, offset by the change in fair value of derivative liabilities as of January 31, 2016.
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Net loss. Net loss was $5,201,917 and $10,280,985, respectively, for the years ended January 31, 2016 and 2015, which represents a decrease of $5,079,068 or 49%. Net loss decreased mainly as a result of the $2.4 million decrease in operating expenses which includes compensation, selling and marketing, and general and administrative expense, $1.5 million decrease in other expense, and the $1.2 million increase in gross profit for the year ended January 31, 2016.
| Reconciliation of February 2016 Financial Projections to Actual Year-End Results of Operations |
In February 2016, we released a Current Report on Form 8-K which included an unaudited preliminary financial forecast of our expected results of operations for fiscal 2016. In the Form 8-K, we forecasted gross revenues of approximately $12.3 million, a net of $11.2 million, and a gross profit of approximately $3.1 million and a net loss of approximately $1.6 million for the 2016 fourth quarter. The final audited financial statements included herein have almost no variance on the gross profit and net income compared to the projections released on February 10, 2016. We made adjustments during the year-end audit process related to stock compensation and the gain loss on derivatives making the final net loss for fourth quarter $1.5 million and for the fiscal year $5.2 million.
| 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 equivalents: |
| January 31, 2016 | January 31, 2015 | Increase / (Decrease) | ||||||||||
| Working Capital | $ | (4,532,446 | ) | $ | (1,233,415 | ) | $ | (3,299,031 | ) | |||
| Cash | $ | 231,021 | $ | 443,189 | $ | (212,168 | ) | |||||
At January 31, 2016, we had total assets of $2,489,481 and total liabilities of $5,917,197. Our current sources of liquidity include our existing cash and cash equivalents and cash from operations and funds raised through the sale of our securities and convertible securities (as described in greater detail below). For the year ended January 31, 2016, we generated gross sales of $12,312,620 and we had a net loss of $5,201,917.
Total current assets of $1,684,751 as of January 31, 2016 included cash of $231,021, accounts receivable of $1,415,559, $30,171 of prepaid assets and other current assets of $8,000.
We had total assets as of January 31, 2016 of $2,489,481 which included the total current assets of $1,684,751, $187,838 of property and equipment, net, $593,325 of intangible assets, and $23,567 of other assets.
We had total liabilities of $5,917,197 as of January 31, 2016, which were solely current liabilities and included $3,527,083 of accounts payable, $84,174 of accrued royalty – related party (relating to amounts accrued in connection with the FSHR License Agreement), and $497,431 of accrued expenses, $1,029,558 of convertible notes payable, net of discount, and $778,951 of conversion feature for the derivative liability.
Our revenues for fiscal 2016 improved by 29% while total operating expenses decreased by 23%. Gross margin improvements remain a key factor in our growth. Gross profit margins in fiscal 2016 were better than in 2015 but were still tight as significant discounts and deductions were given to gain distribution and market penetration. As these accounts mature, we expect our gross margins to increase in the upcoming year into the mid to high 30% range. Additionally, as our business expands, we expect to ship to some of our customers without a distributor, which will help improve gross margins.
The goal for the end of fiscal 2017 is to become EBITDA positive while increasing revenues. We will remain flexible in the implementation of our business strategy and will revise downward our funding requirements and further reduce our selling and marketing and our general and administrative expenses to a level that is in line with our financial means but consistent with our vision.
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Our ability to meet our obligations in the ordinary course of business is dependent upon our ability to sell our products directly to end users and through distributors, establish profitable operations through increased sales and decreased expenses and obtain additional funds when needed.
Although our sales and revenues have increased significantly on an annual basis, the Company has 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. 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 issuance of its common stock. 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, 2015 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.
In addition to the above, the Company’s largest supplier of products recently agreed to extend the Company’s required terms of payment from thirty days to one hundred and twenty days from the date product is received, which will provide the Company approximately $2.0 million of short term capital in the near term.
Cash Flows
| Year Ended January 31, | |||||||||
| 2016 | 2015 | ||||||||
| Net cash used in operating activities | $ | (2,096,525 | ) | $ | (2,695,394 | ) | |||
| Net cash provided by investing activities | $ | 83,644 | $ | 56,426 | |||||
| Net cash provided by financing activities | $ | 1,800,713 | $ | 2,495,035 | |||||
| Operating Activities |
| Compared to the corresponding period in 2015, net cash used in operating activities decreased by $868,869 for the year ended January 31, 2016. Net cash used in operating activities for the year ended January 31, 2016 was primarily due to $5,201,917 of net loss, offset by $1,713,764 in share based employee compensation, $1,034,183 in accounts payable, $204,284 in common stock issued for services, and $176,884 in depreciation, offset by a $311,307 decrease in accounts receivable compared to the prior fiscal year. |
| Investing Activities |
| Net cash used in investing activities for the year ended January 31, 2016 was solely due to the purchase and sale of property and equipment. |
| Financing Activities |
| Compared to the corresponding period in fiscal 2015, net cash provided by financing activities decreased by approximately $694,322 for the year ended January 31, 2016 primarily from the $1,957,312 loss on settlement of debt in 2015 as described below. |
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| 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, 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 right of first refusal is not assignable and expires upon the first to occur of two (2) years following the date of the Subscription and the date Mother Parkers enters into or takes certain bankruptcy related actions.
The Warrants have an exercise price equal to 150% of the Per Unit Price ($0.51135 per share), a term of three years and prohibit Mother Parkers from exercising such Warrants to the extent such exercise would result in the beneficial ownership of more than 9.99% of the Company’s common stock, subject to Mother Parkers’ right to waive such limitation with 61 days prior written notice.
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. As of January 31, 2016, the Company had borrowed a total of $250,000 under the Line of Credit and the balance due was $162,347.
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Convertible Note with JSJ Investments Inc.
On September 9, 2015, we sold a 12% Convertible Note to JSJ Investments Inc. (“JSJ” and the “JSJ Convertible Note”) in the amount of $275,000. Amounts owed under the JSJ Convertible Note accrue interest at the rate of 12% per annum (18% upon an event of default). The JSJ Convertible Note was originally payable by us on demand by JSJ at any time after March 6, 2016. We have the right to prepay the JSJ Convertible Note (a) for an amount equal to 135% of the then balance of such note until the 180th day following the date of the note, and (b) for an amount equal to 150% of the balance of such note subsequent to the maturity date (provided the holder consents to such payment after maturity).
The JSJ Convertible Note and all accrued interest is convertible at the option of the holder thereof into the Company’s common stock at any time. The conversion price of the JSJ Convertible Note is 60% (a 40% discount) to the third lowest intra-day trading price of the Company’s common stock during the 10 trading days prior to any conversion date of the note. In the event we do not issue the holder any shares due in connection with a conversion within three business days, we are required to issue the holder additional shares equal to 25% of the conversion amount, and an additional 25% of such shares for each additional five business days beyond such fourth business day that such failure continues. In the event we do not have a sufficient number of authorized but unissued shares of common stock to allow for the conversion of the note, the discount rate (40%) is increased by an additional 5%. In connection with the sale of the note, we agreed to pay $5,000 of JSJ’s legal fees.
The JSJ Convertible Note contains standard and customary events of default, including in the event we fail to timely file any and all reports due with the Securities and Exchange Commission. Upon the occurrence of an event of default, JSJ can demand that we immediately repay 150% of the outstanding balance of the JSJ Convertible Note together with accrued interest (and default interest, if any).
Pursuant to the terms of the JSJ Convertible Note, JSJ agreed not to engage in any short sales or hedging transactions of our common stock. At no time may the JSJ Convertible Note be converted into shares of our common stock if such conversion would result in JSJ and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may be increased by JSJ to up to increases to 9.99% upon not less than 61 days prior written notice to us.
On March 1, 2016, we entered into a side letter agreement with JSJ. Pursuant to the side letter agreement, JSJ agreed to extend the maturity date of the JSJ Note to December 9, 2016 (from March 9, 2016), and we agreed to amend the terms of the JSJ Note relating to prepayment, to allow us the right to prepay the JSJ Note (a) from March 1, 2016 to September 9, 2016, provided we pay a redemption premium of 135% of the principal amount of such note together with accrued interest thereon, and (b) from September 10, 2016 to the maturity date, provided we pay a redemption premium of 150% of the principal amount of such note together with accrued interest thereon. The side letter agreement also amended the JSJ Note to (a) allow JSJ the right at any time after September 9, 2016, to convert the amount owed under the JSJ Note into shares of our common stock at a 40% discount to the third lowest trade during the previous 10 trading days prior to the date of conversion, provided that in no event will such conversion price be less than $0.00005 per share; and (b) to add a 4.99% ownership limitation which prevents JSJ from converting the note into our common stock in the event it and its affiliates would beneficially own more than 4.99% of our common stock upon such conversion, provided that such percentage can be increased by JSJ with 61 days prior written notice up to 9.99%. The side letter agreement also amended the events of default under the JSJ Note to include other additional customary events of default, in the event we cease filing reports with the Securities and Exchange Commission or if we file a Form 15.
In connection with the parties’ entry into the side letter agreement, we paid JSJ $117,253, including $16,003 of interest due on the JSJ Note through March 1, 2016, $5,000 of JSJ’s legal fees and $96,250 in consideration for JSJ agreeing to extend the due date of the JSJ Note (which represents the prepayment penalty which would have been due had we repaid the JSJ Note when due).
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We hope to repay the JSJ Note prior to any conversion. In the event that the JSJ Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the JSJ Note is converted into common stock.
Convertible Promissory Note with Typenex Co-Investment, LLC
On September 14, 2015 (the “Closing Date”), the Company entered into a Securities Purchase Agreement dated September 14, 2015 (the “Typenex SPA”) with Typenex Co-Investment, LLC (“Typenex”). Pursuant to the Typenex SPA, the Company issued to Typenex a convertible promissory note (the “Typenex Note”) in the principal amount of $1,005,000, deliverable in four tranches as described below.
The Typenex Note has a term of 20 months and an interest rate of 10% per annum (22% upon an event of default). The gross proceeds to the Company from the Typenex Note were $1,000,000, in the form of: (a) an initial tranche of $250,000 in cash (gross proceeds of $255,000, less $5,000 in expense reimbursements), and (b) three promissory notes of $250,000 each (collectively, the “Investor Notes”). Typenex may elect, in its sole discretion, to fund one or more of the Investor Notes. Absent such an election by Typenex, the Investor Notes will not result in cash proceeds to, or an obligation to repay on the part of, the Company. Each of the Investor Notes accrue interest at the rate of 10% per annum until paid (provided that all amounts due under the Investor Notes may be offset against amounts we owe Typenex in Typenex’s sole discretion), and as such, we do not anticipate owing any interest on the Investor Notes until such notes are funded by Typenex. Each of the Investor Notes are secured by a Membership Interest Pledge Agreement entered into by Typenex for our benefit.
Beginning on the date that is six (6) months after the Closing Date and on the same day of each month thereafter until the maturity date, so long as any amount is outstanding under the Typenex Note, the Company is required to pay to Typenex installments of principal equal to $75,000 (or such lesser principal amount as is then outstanding), plus the sum of any accrued and unpaid interest, at the request of Typenex. Payments of each installment amount may be made in cash, subject to the terms of the note. Alternatively, the Company may elect to pay an installment amount in Common Stock based on the Market Price.
Beginning six (6) months after the Closing Date, Typenex may convert the balance of the Typenex Note, or any installment or portion thereof, utilizing the conversion price calculation set forth below. Generally, the conversion price will be $0.30 per share; however, in the event the Company’s market capitalization falls below $3 million, then the conversion price is the lower of (a) $0.30 per share, and (b) the Market Price. The “Market Price” is calculated by applying a discount of 40% (provided that under certain events the discount may be increased to up to 60%, upon the occurrence of certain events (with a reduction of 5% per event) such as the value of common stock (as calculated in the note) declining below $0.10 per share; the Company not being DWAC eligible; the Company’s common stock not being DTC eligible; or the occurrence of any major default (as described in the note)), to the average of the three (3) lowest intra-day trading prices of the Company’s common stock during the ten (10) trading days immediately preceding the applicable conversion. Additionally, 20 days after shares issued upon redemption of the note are eligible to be freely traded by Typenex (as described in the note), there is a required true up, whereby Typenex is required to be issued additional shares in the event the trading price of the Company’s common stock has declined from the time of original issuance to the date such shares are ‘free trading’ as described in the Typenex Note.
The Company has the right to prepay the Typenex Note under certain circumstances, subject to payment of a 35% prepayment penalty during the first six months the note is outstanding and 50% thereafter.
If, at any time that the Typenex Note is outstanding, the Company sells or issues any common stock or other securities exercisable for, or convertible into, Common Stock for a price per share that is less than the conversion price applicable under the Typenex Note, then such lower price will apply to all subsequent conversions by Typenex for a period of 20 trading days.
The Typenex Note includes customary and usual events of default. In the event of a default, the Typenex Note may be accelerated by Typenex. The outstanding balance would be immediately due and payable. We are required to repay Typenex additional amounts (including the value of the amount then due in common stock, at the highest intraday trading price of the amount then due under the note) and/or liquidated damages in addition to the amount owed under the Typenex Note. In addition, we owe certain fees and liquidated damages to Typenex if we fail to timely issue shares of common stock under the Typenex Note.
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Typenex is prohibited from owning more than 4.99% of the Company’s outstanding shares, pursuant to the Typenex Note, unless the market capitalization of the Company’s common stock is less than $10,000,000, in which case Typenex is prohibited from owning more than 9.99% of the Company’s outstanding shares.
In March and April 2016, we repaid an aggregate of $150,000 ($75,000 in each of March and April) of the amount owed to Typenex in connection with a redemption request received from Typenex.
Amounts owed by us under the Typenex Note are secured by a first priority security interest granted to Typenex pursuant to the terms of a Security Agreement entered into with Typenex, in each of the Investor Notes.
The goal is for the Company to utilize this debt as growth capital to help accelerate projects that generate revenue. We hope to repay the Typenex Convertible Note prior to any conversion. In the event that the Typenex Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Typenex Note is converted into common stock.
Convertible Promissory Note with JMJ Financial
On September 16, 2015, we sold JMJ Financial (“JMJ”) a Convertible Promissory Note in the principal amount of up to $900,000 (the “JMJ Convertible Note”). The initial amount received in connection with the sale of the JMJ Convertible Note was $350,000, and a total of $431,200 is currently due under the JMJ Convertible Note (not including the interest charge described below), as all amounts borrowed under the note include a 10% original issue discount. Moving forward, JMJ may loan us additional funds (up to $900,000 in aggregate) at our request, provided that JMJ has the right in its sole discretion to approve any future request for additional funding. Each advance under the JMJ Convertible Note is due two years from the date of such advance, with the amount initially funded under the note due on September 16, 2017.
The JMJ Convertible Note (including principal and accrued interest and where applicable other fees) is convertible into our common stock, at any time, at the lesser of $0.75 per share or 65% (a 35% discount) of the two lowest closing prices of our common stock in the 20 trading days prior to the date of any conversion, provided that if we are not DWAC eligible at the time of any conversion an additional 10% discount applies, and in the event our common stock is not DTC eligible at the time of any conversion, an additional 5% discount applies. The JMJ Convertible Note provides that unless we and JMJ agree in writing, JMJ is not eligible to convert any amount of the note into common stock which would result in JMJ owning more than 4.99% of our common stock.
A one-time interest charge of 12% was applied to the principal amount of the note, which remains payable regardless of the repayment (or conversion) date of the note.
Until 180 days after the date of the note, we are able to prepay the note assuming we prepay all outstanding principal together with a penalty of 40% of such amount, interest, fees, liquidated damages (if any), and the original issuance discount due thereon; and after 160 days, we are not able to prepay the note without JMJ’s written approval.
We agreed that we would reserve 25 million shares of common stock for conversion of the note. In the event we fail to deliver shares within four days of the date of any conversion by JMJ, we are required to pay JMJ $2,000 per day in penalties.
The JMJ Convertible Note provides for customary events of default including, our failure to timely make payments under the JMJ Convertible Note when due, our entry into bankruptcy proceedings, our failure to file reports with the SEC, our loss of DTC eligibility for our common stock, and the investor’s loss of the ability to rely on Rule 144 of the Securities Act. Additionally, upon the occurrence of an event of default, as described in greater detail in the JMJ Convertible Note, and at the election of JMJ, we are required to pay JMJ, either (i) the amount then owed under the note divided by the applicable conversion price, on the date the default occurs or the default amount is demanded (whichever is lower), multiplied by the volume weighted average price on the date the default occurs or the default amount is demanded (whichever is higher), or (ii) 150% of the principal amount of the note, plus all of the unpaid interest, fees, liquidated damages (if any) and other amounts due. Any amount not paid when due accrues interest at the rate of 18% per annum until paid in full. JMJ is not required to provide us any written notice in order to accelerate the amounts owed under the JMJ Convertible Note in the event of the occurrence of an event of default.
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For so long as the JMJ Convertible Note is outstanding JMJ agreed not to effect any “short sales” of our common stock.
The goal is for the Company to utilize this debt as growth capital to help accelerate projects that generate revenue. We hope to repay the JMJ Convertible Note prior to any conversion. In the event that the JMJ Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the JMJ Note is converted into common stock.
September 2015 Convertible Promissory Note with Vis Vires Group
On September 24, 2015, we sold Vis Vires Group, Inc. (“Vis Vires”) a Convertible Promissory Note (with an issuance date of September 9, 2015) in the principal amount of $254,000 (the “Vis Vires 2015 Convertible Note”), pursuant to a Securities Purchase Agreement, dated September 9, 2015. The Vis Vires 2015 Convertible Note bears interest at the rate of 8% per annum (22% upon an event of default) and was due and payable on June 11, 2016, provided that we repaid the Vis Vires 2015 Convertible Note in full in March 2016.
The principal amount of the Vis Vires 2015 Convertible Note and all accrued interest was convertible at the option of the holder thereof into our common stock at any time following the 180th day after the Vis Vires 2015 Convertible Note was issued. The conversion price of the Vis Vires 2015 Convertible Note is equal to the greater of (a) 65% (a 35% discount) multiplied by the average of the lowest five closing bid prices of our common stock during the ten trading days immediately prior to the date of any conversion; and (b) $0.00009. At no time could the Vis Vires 2015 Convertible Note be converted into shares of our common stock if such conversion would have resulted in Vis Vires and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.
We had the right to prepay in full the unpaid principal and interest on the Vis Vires 2015 Convertible Note, upon notice, any time prior to the 180th day after the issuance date. Any prepayment was subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the Vis Vires 2015 Convertible Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.
We paid $4,000 of Vis Vires’s attorney’s fees in connection with the sale of the Vis Vires 2015 Convertible Note.
In March 2016, we paid $347,172 to satisfy the amount outstanding under the Vis Vires 2015 Convertible Note in full.
Third Party Loans
In October 2015, we borrowed $150,000 from a third-party lender. The October 2015 loan had a seven month term, a total payback amount of $202,500 and was 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 had a term of six months, a total payable amount of $89,700 and was 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). There was $215,173 outstanding as of January 31, 2016. 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. 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 rates on these loans range from 30-38% per annum.
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5% Convertible Promissory Notes with Duck Duck Spruce, LLC
On March 8, 2016, and March 15, 2016, we sold Duck Duck Spruce, LLC (“Duck Duck”) two 5% Convertible Promissory Notes with face amounts of $330,000, representing $300,000 borrowed from Duck Duck and a 10% original issue discount ($30,000), and $220,000, representing $200,000 borrowed from Duck Duck and a 10% original issue discount ($20,000), respectively (each a “Duck Duck Note”, and collectively, the “Duck Duck Notes”). The Duck Duck Notes accrue interest at the rate of 5% per annum (the lesser of 10% per annum and the highest rate allowed per law upon an event of default), and are due on December 8, 2016 (as to the March 9, 2016 note) and March 15, 2016 (as to the March 15, 2016 note), provided that if we repay the Duck Duck Notes more than 90 days after the issuance date thereof, the 5% interest which would have accrued through maturity is required to be paid to Duck Duck at the time of repayment.
The Duck Duck Notes can be repaid by us prior to the 180th day after the issuance date thereof along with a prepayment penalty of between 105% and 130% of the principal amount owed thereunder, plus interest (which as described above requires the total of interest through maturity if repaid more than 90 days after the issuance date). After the 180th day after the issuance date the notes cannot be repaid without the written consent of Duck Duck.
The Duck Duck Notes provide for standard and customary events of default such as failing to timely make payments under the Duck Duck Notes when due and the failure of the Company to timely comply with the Securities Exchange Act of 1934, as amended, reporting requirements.
The amounts owed under the Duck Duck Notes are convertible into shares of our common stock from time to time after the 180th day after the issuance date of thereof at the option of Duck Duck, at a 35% discount (increasing by 10% if we are placed on the “chilled” list with the DTC, increasing by 5% if we are not DWAC eligible, and increasing by another 5% upon the occurrence of any event of default under the note) to the average of the two lowest closing prices of our common stock during the 10 consecutive trading days prior to the date of conversion, provided that all conversions are subject to a floor of $0.05 per share.
At no time may the Duck Duck Notes be converted into shares of our common stock if such conversion would result in Duck Duck and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.
The March 15, 2016 Duck Duck Note also (a) required us to issue 250,000 shares of restricted common stock to Duck Duck in consideration for agreeing to the sale of such note; and (b) provided that as long as the note is outstanding, upon any issuance by us of any convertible debt security (whether such debt begins with a convertible feature or such feature is added at a later date) with any conversion price term more favorable than such Duck Duck Note, then at Duck Duck’s option, such conversion price term can apply to such March 15, 2016 Duck Duck Note.
We hope to repay the Duck Duck Notes prior to any conversion. In the event that the Duck Duck Notes are not repaid in cash in their entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Duck Duck Notes is converted into common stock.
March 2016 Convertible Promissory Note with Vis Vires Group
On March 16, 2016, we sold Vis Vires a Convertible Promissory Note (with an issuance date of March 11, 2016) in the principal amount of $225,000 (the “Vis Vires Convertible Note”), pursuant to a Securities Purchase Agreement, dated March 11, 2016. The Vis Vires Convertible Note bears interest at the rate of 8% per annum (22% upon an event of default) and is due and payable on December 15, 2016. The Vis Vires Convertible Note provides for standard and customary events of default such as failing to timely make payments under the Vis Vires Convertible Note when due and the failure of the Company to timely comply with the Securities Exchange Act of 1934, as amended, reporting requirements. Additionally, upon the occurrence of certain fundamental defaults, as described in the Vis Vires Convertible Note, we are required to pay Vis Vires liquidated damages in addition to the amount owed under the Vis Vires Convertible Note.
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The principal amount of the Vis Vires Convertible Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the 180th day after the Vis Vires Convertible Note was issued. The conversion price of the Vis Vires Convertible Note is equal to the greater of (a) 65% (a 35% discount) multiplied by the average of the lowest five closing bid prices of our common stock during the ten trading days immediately prior to the date of any conversion; and (b) $0.00009, provided that the conversion price during major announcements (as described in the Vis Vires Convertible Note) is the lower of the conversion price on the announcement date of such major announcement and the conversion price on the date of conversion. In the event we fail to deliver the shares of common stock issuable upon conversion of the note within three business days of our receipt of a conversion notice, we are required to pay Vis Vires $2,000 per day for each day that we fail to deliver such shares. The Vis Vires Convertible Note conversion price also includes anti-dilution protection such that in the event we issue or are deemed to have issued common stock or convertible securities at a price equal to less than the conversion price of the Vis Vires Convertible Note in effect on the date of such issuance or deemed issuance, the conversion price of the Vis Vires Convertible Note is automatically reduced to such lower price, subject to certain exceptions in the note.
At no time may the Vis Vires Convertible Note be converted into shares of our common stock if such conversion would result in Vis Vires and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.
We may prepay in full the unpaid principal and interest on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date. Any prepayment is subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the Vis Vires Convertible Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.
The Vis Vires Convertible Note also contains customary positive and negative covenants.
We paid $3,000 of Vis Vires’s attorney’s fees in connection with the sale of the Vis Vires Convertible Note.
We hope to repay the Vis Vires Convertible Note prior to any conversion. In the event that the Vis Vires Convertible Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Vis Vires Convertible Note is converted into common stock.
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 arrangement or other contractually narrow or limited purposes. As of January 31, 2016, we are not involved in any material unconsolidated SPEs.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our most significant judgments and estimates used in preparation of our financial statements.
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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 term.
Revenue Recognition. All revenue is recognized when persuasive evidence of an arrangement exists, the service or sale is complete, the price is fixed or determinable and ability to collect is reasonably assured. Revenue is derived from the sale of coffee products and is recognized on a gross basis upon shipment. The Company utilizes a third party for the production and fulfillment of orders placed by customers. Customers order directly from the Company and accordingly, the Company acts as a principal, takes title to the products, and has the risks and rewards of ownership, such as the risk of loss for collection, delivery and returns.
Impairment of Long-Lived Assets. Long-lived assets include a license agreement that was recorded at the estimated cost to acquire the asset (See Note 4 to the financial statements included in this annual 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 January 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.
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Derivative Liabilities. A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities. As a matter of policy, we do not invest in separable financial derivatives or engage in hedging transactions. However, we have entered into certain convertible debt financing transactions in fiscal 2016 containing certain embedded features that have resulted in the instruments being deemed derivatives. We may engage in other similar complex financing transactions in the future, but not with the intention to enter into derivative instruments. Derivatives are measured at fair value using the Monte Carlo simulation pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions. Changes in these subjective assumptions can materially affect the estimate of the fair value of the derivative liabilities and, consequently, the related amount recognized as a change in fair value of derivative liabilities on the consolidated statement of operations. Furthermore, depending on the terms of a derivative, the valuation of derivatives may be removed from the financial statements upon exercise or conversion of the underlying instrument into some other security or if the contract is modified.
Significant Recent Accounting Pronouncements
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 following:
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.
FASB 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 February 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and supplementary data, along with reports of independent registered public accounting firms thereon, are presented beginning on page F-1 of this annual report on Form 10-K and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow for timely decisions regarding required disclosure. As required by Rule 15d-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on the foregoing, our principal executive and principal financial officer concluded that our disclosure controls and procedures are not effective to ensure the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (US GAAP) and includes those policies and procedures that:
| · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| · | provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements; |
| · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| · | provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
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Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, management has concluded that our internal control over financial reporting was not effective as of January 31, 2016.
A material weakness is a deficiency, or combination of deficiencies, that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses at January 31, 2016:
(1) lack of a functioning audit committee and lack of a majority of outside directors on the Company’s Board of Directors capable to oversee the audit function; and
(2) ineffective controls over period end financial disclosure and reporting processes.
We are committed to improving our financial organization. As part of this commitment, moving forward, at such time as we are able to raise additional funding, we plan to hire additional outside accounting personnel and take action to consolidate check writing and financial controls. Additionally, as soon as funds are available, we plan to make a determination as to whether it is in the Company’s best interest to (1) appoint one or more outside directors to our Board of Directors to be appointed to the audit committee of the Company resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures; (2) create a position to segregate duties consistent with control objectives and will increase our personnel resources; (3) hire independent third parties to provide expert advice; and (4) prepare and implement sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements.
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We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
During fiscal year 2016, we have remediated the following prior year material weaknesses:
(a) inadequate segregation of duties due to limited number of personnel, which makes the reporting process susceptible to management override; and
(b) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements.
Specifically, we added sufficient personnel in our finance/accounting department with specific responsibilities to provide checks and balances to achieve proper segregation of duties. We also improved the completeness and quality of documentation for our internal control processes over financial reporting.
There were no additional changes in internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table and accompanying descriptions indicate the name of each officer and director of the Company.
| Name | Position | Date First Appointed as Director |
Age |
| Rohan Marley | Chairman of Board | March 2008 | 43 |
| Brent Toevs | Chief Executive Officer and Director | August 2011 | 50 |
| Anh Tran | President, Chief Operating Officer, Secretary, Treasurer and Director | May 2010 | 39 |
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. We have historically compensated our directors for service on the Board through the issuance of shares of common stock, stock options and cash compensation for meeting fees. Additionally, we reimburse directors for expenses incurred by them in connection with the attendance at meetings of the Board. The Board appoints the executive officers of the Company and the executive officers serve at the discretion of the Board.
| Rohan Marley, Chairman |
Rohan Marley has served as Chairman of the Board of Directors of the Company since March 2008. Mr. Marley is the son of late reggae artist Bob Marley and is heavily involved in all of the family businesses including Fifty-Six Hope Road Music, Bob Marley Music, Zion Rootswear as well as various land and resort holdings across the globe. Mr. Marley is also a part owner of and Director of Fifty-Six Hope Road.
From July 2010 to the present, Mr. Marley has served as Chairman of Marley Coffee, Ltd., a limited company formed under the laws of Jamaica in July 2010 with a principal place of business in Kingston, Jamaica. Marley Coffee is in the business of producing coffee and selling it through various distribution outlets including through Marley Coffee, LLC (MCL). Since February 2009, Mr. Marley has served as Co-Manager of MCL, which is in the business of producing coffee and selling it through various distribution outlets. From January 2006 to February 2009, Mr. Marley was an entrepreneur principally engaged in planning and developing the business plan for MCL and the Marley Coffee brand. Mr. Marley has been in the coffee business since 1999 when he bought a farm in the Blue Mountain region of Jamaica and began his career in the business of organic coffee farming. In addition, during the past over 15 years, Mr. Marley has been deeply involved in Marley family businesses which seek to spread the message of his father, music icon, Bob Marley, through numerous product distribution and co-branding arrangements and other strategic alliances. In 2004, Mr. Marley founded Tuff Gong Clothing, a privately held clothing designer. Mr. Marley believes strongly in giving back to human causes and communities in need. To help promote happiness and prosperity, Marley Coffee partnered with Waterwise Coffee to help provide clean water in the coffee growing regions where the Company sources coffee. Mr. Marley’s leadership in creating the vision for the Company and his experience helping run his family’s businesses are of great value to the board.
| Brent Toevs, Chief Executive Officer and Director |
Brent Toevs has served as Chief Executive Officer and director of the Company since August 2011. From 2001 to 2011, Mr. Toevs was co-founder and partner of National Coffee Service & Vending (NCSV), a consulting firm providing sales agents and consultants in the office coffee and foodservice industries. NCSV represents and directs sales nationally and regionally for numerous coffee brands. From 1999 to 2001, Mr. Toevs served as the Vice President of Sales for USRefresh Coffee & Vending where he was responsible for OCS sales and marketing in the United States and Canada. From 1996 to 1999, Mr. Toevs held senior positions of increasing responsibility at USRefresh at its headquarters in Ottawa, Ontario. While at USRefresh, Mr. Toevs served as the Vice President of Sales where he oversaw sales, marketing and customer service and established the Canadian division for the parent company and in sales management where he expanded sales and increased sales revenue. As our Chief Executive Officer, Mr. Toevs is directly involved in all aspects of our operations. Mr. Toevs’ extensive experience in corporate business development within the coffee foodservice industry, in addition to executive leadership and management experience, provides valuable insight to the Board of Directors.
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| Anh Tran, President, Chief Operating Officer, Secretary, Treasurer and Director |
Anh Tran began working for the Company in February 2010, and has served as President, Chief Operating Officer, Secretary, Treasurer and director of the Company since May 2010. Mr. Tran also served as Chief Executive Officer of the Company from May 2010 to August 2011. From January 2005 to February 2010, Mr. Tran served as the chief executive officer of Greencine.com, an online independent movie distribution service. During his tenure with Greencine.com, Mr. Tran led the company to numerous awards and was one of the first in its field to distribute paid content online. Prior to that, he was a technology strategy consultant for Arthur Andersen. Mr. Tran was involved with business process reengineering for Fortune 500 technology companies and worked closely with corporate executives to strategically plan for the future. As a consultant for Arthur Andersen, Mr. Tran worked on Siebel Systems’ customer relationship management implementations. Mr. Tran received a fellowship at the prestigious Coro Fellowship Program in San Francisco and holds a B.A. from the University of California at Los Angeles. As our President, Chief Financial Officer, Secretary and Treasurer, Mr. Tran has extensive experience leading start-up companies. He also has a history of working with consumer products and international markets and utilizes those experiences to run the day to day operation of the Company as well as to work to grow the Company on an international level. Mr. Tran’s experience with the Company’s operations and his ability to provide operational insight led the board to conclude that Mr. Tran should serve as a director.
CORPORATE GOVERNANCE
The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the SEC and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations.
Board Leadership Structure
The roles of Chairman and Chief Executive Officer of the Company are currently held separately. Mr. Marley serves as Chairman and Mr. Toevs serves as Chief Executive Officer. The Board of Directors does not have a policy as to whether the Chairman should be an independent director, an affiliated director, or a member of management. Our Board believes that the Company’s current leadership structure is appropriate because it effectively allocates authority, responsibility, and oversight between management (the Company’s Chief Executive Officer, Mr. Toevs) and the members of our Board (currently Mr. Marley as Chairman). It does this by giving primary responsibility for the operational leadership and strategic direction of the Company to its Chief Executive Officer, while enabling our Chairman to facilitate our Board’s oversight of management, promote communication between management and our Board, and support our Board’s consideration of key governance matters. The Board believes that its programs for overseeing risk, as described below, would be effective under a variety of leadership frameworks and therefore do not materially affect its choice of structure.
Risk Oversight
Effective risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risk throughout the year generally or in connection with specific proposed actions. The Board of Directors’ approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight, and fostering an appropriate culture of integrity and compliance with legal responsibilities. The directors exercise direct oversight of strategic risks to the Company.
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Family Relationships
None of our directors are related by blood, marriage, or adoption to any other director, executive officer, or other key employees.
Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant to which the officer was selected to serve as an officer.
Other Directorships
No directors of the Company are also directors of issuers with a class of securities registered under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the Exchange Act).
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of our directors or executive officers were involved in any of the following: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, (5) being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Board of Directors Meetings
During the fiscal year that ended on January 31, 2016, the Board held no official meetings and took all other actions via the unanimous written consent of the Board of Directors; provided that the Board did confer on a regular, frequent and informal basis throughout the year. All directors attended at least 75% of the Board of Directors during fiscal year 2016. The Company encourages, but does not require all directors to be present at annual meetings of stockholders.
COMMITTEES OF THE BOARD
Our Company currently does not have nominating, compensation or audit committees or committees performing similar functions, nor does our Company have a written nominating, compensation or audit committee charter. Our directors believe that it is not necessary to have such committees, at this time, because the functions of such committees can be adequately performed by our Board of Directors.
Our Company has defined policy and procedural requirements for stockholders to submit recommendations or nominations for directors as set forth in the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on May 30, 2014 under “Stockholders Proposals” – “Nominations for the Board of Directors”. Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such nominees. The directors will assess all candidates, whether submitted by management or stockholders, and make recommendations for election or appointment.
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The Board of Directors will consider candidates recommended by stockholders, provided the names of such persons, accompanied by relevant biographical information, are properly submitted in writing to the Secretary of the Company in accordance with the manner described for stockholder proposals in the Company’s Definitive Proxy Statement described above. The Secretary will send properly submitted stockholder recommendations to the Board of Directors. Individuals recommended by stockholders in accordance with these procedures will receive the same consideration received by individuals identified to the Board of Directors through other means. The Board of Directors also may, in its discretion, consider candidates otherwise recommended by stockholders without accompanying biographical information, if submitted in writing to the Secretary.
Stockholder Communications with the Board
In connection with all other matters other than the nomination of members of our Board of Directors (as described above), our stockholders and other interested parties may communicate with members of the Board of Directors by submitting such communications in writing to our Secretary, 730 Tejon St., Denver, Colorado 80211, who, upon receipt of any communication other than one that is clearly marked “Confidential,” will note the date the communication was received, open the communication, make a copy of it for our files and promptly forward the communication to the director(s) to whom it is addressed. Upon receipt of any communication that is clearly marked “Confidential,” our Secretary will not open the communication, but will note the date the communication was received and promptly forward the communication to the director(s) to whom it is addressed. If the correspondence is not addressed to any particular member of the Board of Directors, the communication will be forwarded to a Board member to bring to the attention of the Board.
Corporate Governance
The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the SEC and in other public communications made by the Company and strives to be compliant with applicable governmental laws, rules and regulations.
In lieu of an Audit Committee, the Company’s Board of Directors is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company’s financial statements and other services provided by the Company’s independent public accountants. The Board of Directors reviews the Company’s internal accounting controls, practices and policies.
Director Independence
Our common stock is quoted for trading on the OTCQB and we are not required to have independent members of our Board of Directors. We do not identify any of our directors as being independent.
As described above, we do not currently have a separately designated audit, nominating or compensation committee.
Code of Ethics
The Company has adopted a Code of Ethical Business Conduct (the “Code of Ethics”) that applies to all of its directors, officers, employees, consultants, contractors and agents of the Company. The Code of Ethics has been reviewed and approved by the Board of Directors.
You can access our Code of Ethics on our website at http://investor.marleycoffee.com – “Corporate Governance”, and any stockholder who so requests may obtain a free copy of our Code of Ethics by submitting a written request to our Corporate Secretary. Additionally, the Company’s Code of Ethics was filed as an exhibit to the Company’s Form 8-K filed with the SEC on April 1, 2014, as Exhibit 14.1.
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We intend to disclose any amendments to our Code of Ethics and any waivers with respect to our Code of Ethics granted to our principal executive officer, our principal financial officer, or any of our other employees performing similar functions on our website at www.marleycoffee.com within four business days after the amendment or waiver. In such case, the disclosure regarding the amendment or waiver will remain available on our website for at least 12 months after the initial disclosure. There have been no waivers granted with respect to our Code of Ethics to any such officers or employees to date.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who beneficially own more than 10% of our common stock to file reports of their ownership of, and transactions in, our common stock with the SEC and to furnish us with copies of the reports they file. Based solely upon our review of the Section 16(a) filings that have been furnished to us and representations by our directors and executive officers, we believe that all filings required to be made under Section 16(a) during fiscal 2015 were timely made, except that Brent Toevs, our Chief Executive Officer and director, inadvertently failed to timely report three (3) transactions on Form 4; Anh Tran, our President and director, inadvertently failed to timely report three (3) transactions on Form 4; and Rohan Marley, our Chairman, inadvertently failed to timely report three (3) transactions on Form 4. Similarly, from February 1, 2016 through the date of this filing, we believe that all filings required to be made under Section 16(a) were timely made, except that Brent Toevs, our Chief Executive Officer and director, inadvertently failed to timely report three (3) transactions on Form 4; Anh Tran, our President and director, inadvertently failed to timely report three (3) transactions on Form 4; and Rohan Marley, our Chairman, inadvertently failed to timely report three (3) transactions on Form 4. Additionally, the Form 4 relating to the six (6) transactions inadvertently not timely filed by Mr. Marley remains outstanding as of the date of this report, provided that Mr. Marley plans to file such Form 4 shortly after the date hereof.
In making these statements, we have relied upon examination of the copies of Forms 3, 4, and 5, and amendments to these forms, provided to us and/or the written representations of our directors, executive officers, and 10% stockholders.
Pursuant to SEC rules, we are not required to disclose in this report any failure to timely file a Section 16(a) report that has been disclosed by us in a prior proxy statement or annual report.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning compensation earned by or paid to certain persons who we refer to as our “Named Executive Officers” for services provided for the fiscal years ended January 31, 2016 and 2015 (Fiscal 2016 and Fiscal 2015, respectively). Our Named Executive Officers include persons who (i) served as our principal executive officer or acted in a similar capacity during Fiscal 2016 and 2015, (ii) were serving at fiscal year-end as our two most highly compensated executive officers, other than the principal executive officer, whose total compensation exceeded $100,000, and (iii) if applicable, up to two additional individuals for whom disclosure would have been provided as a most highly compensated executive officer, but for the fact that the individual was not serving as an executive officer at fiscal year-end.
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Summary Compensation Table
Name & Principal | Year | Salary | Bonus | Option Awards (1) | Stock Awards (1) | All Other Compensation | Total | |||||||||||||||||||||
| Brent R. Toevs | 2016 | $ | 196,948 | (2) | $ | — | $ | 413,600 | (3) | $ | 33,082 | (2) | $ | 14,146 | (4) | $ | 657,776 | |||||||||||
| Chief Executive Officer (Principal Executive Officer) | 2015 | $ | 186,992 | (2) | $ | 50,000 | (5) | $ | 356,356 | (6) | $ | 32,065 | (2) | $ | 30,332 | (4) | $ | 655,745 | ||||||||||
| Anh T. Tran | 2016 | $ | 154,340 | (7) | $ | — | $ | 413,600 | (8) | $ | 26,012 | (7) | $ | 12,150 | (9) | $ | 606,102 | |||||||||||
| President, Chief Operating Officer, Secretary and Treasurer) | 2015 | $ | 157,667 | (7) | $ | 50,000 | (10) | $ | 420,523 | (11) | $ | 24,200 | (7) | $ | 20,203 | (9) | $ | 672,593 | ||||||||||
| (Principal Financial Officer and Principal Accounting Officer | ||||||||||||||||||||||||||||
Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000. None of our named executive officers received any Non-Equity Incentive Plan Compensation or Nonqualified Deferred Compensation Earnings during the periods presented.
* Represents the only consideration paid to Mr. Toevs or Mr. Tran in cash during the periods presented (other than expenses reimbursed in cash). The remainder of the consideration set forth above was paid in shares of common stock or options to purchase shares of common stock. Mr. Toevs and Mr. Tran have not exercised any of the stock options and have only sold a limited number of the shares of common stock that they were awarded.
(1) Represents the aggregate grant/issuance date fair value of awards computed in accordance with FASB ASC Topic 718. See Note 1 to our financial statements included in this Annual Report for assumptions underlying the valuation of equity awards. These amounts do not represent the actual amounts paid to or realized by any of the Named Executive Officers during the respective periods.
(2) A total of $33,082 of the compensation due to Mr. Toevs for the year ended January 31, 2016, was paid to Mr. Toevs by way of the issuance to Mr. Toevs of 300,749 shares of common stock, which were valued at $0.11 per share. These shares were issued after the year ended January 31, 2016. A total of $32,065 of the compensation due to Mr. Toevs for the year ending January 31, 2015, was paid to Mr. Toevs by way of the issuance to Mr. Toevs of 94,309 shares of common stock, which were valued at $0.34 per share.
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(3) On June 30, 2015, Mr. Toevs was granted stock options to purchase 2 million shares of common stock under the 2013 Stock Incentive Plan vesting over 4 years with an exercise price of $0.195 per share. In addition, on June 30, 2015, options to purchase 1,333,334 shares of common stock held by Mr. Toevs which originally had an exercise price of $0.40 per share, were re-priced to have an exercise price of $0.195 per share.
(4) This amount represents the reimbursement of personal expenses incurred on behalf of the business as outlined in Mr. Toev’s employment agreement such as allowances for retirement funding, car, phone and home office expenses.
(5) On December 4, 2014, the Company’s Board of Directors awarded a bonus of $50,000 to Mr. Toevs for services rendered during the 2015 fiscal year as an officer and director of the Company. The bonus was paid via the issuance of 263,157 shares of common stock issued pursuant to the Company’s 2012 Stock Incentive Plan and registered with the Commission pursuant to the Company’s Form S-8 Registration Statement, filed with the Commission on November 13, 2012 and amended on October 17, 2013. The 263,157 shares were valued at $50,000, based on the $0.19 per share closing price of the Company’s common stock on the date of grant.
(6) On January 17, 2013, Mr. Toevs was granted stock options to purchase 1 million shares of common stock under the 2012 Stock Incentive Plan vesting over 4 years with an exercise price of $0.16 per share. In addition, on September 10, 2013, Mr. Toevs was granted stock options to purchase 2 million shares of common stock under the 2013 Stock Incentive Plan vesting over 4 years with an exercise price of $0.46 per share. The amount set forth in the table above represents the cost to the Company over the vesting life of the options.
(7) A total of $26,012 of the compensation due to Mr. Tran for the year ending January 31, 2016, was paid to Mr. Tran by way of the issuance of 236,468 shares of common stock, which were valued at $0.11 per share. A total of $24,200 of the compensation due to Mr. Tran for the year ending January 31, 2015, was paid to Mr. Tran by way of the issuance of 71,176 shares of common stock, which were valued at $0.34 per share.
(8) On June 30, 2015, Mr. Tran was granted stock options to purchase 2 million shares of common stock under the 2013 Stock Incentive Plan vesting over 4 years with an exercise price of $0.195 per share. In addition, on June 30, 2015, options to purchase 1,333,334 shares of common stock held by Mr. Tran which originally had an exercise price of $0.40 per share, were re-priced to have an exercise price of $0.195 per share.
(9) This amount represents the reimbursement of personal expenses incurred on behalf of the business as outlined in Mr. Tran’s employment agreement, such as allowances for retirement funding, auto and home office expenses.
(10) On December 4, 2014, the Company’s Board of Directors awarded a bonus of $50,000 to Mr. Tran for services rendered during the 2015 fiscal year as an officer and director of the Company. The bonus was paid via the issuance of 263,157 shares of common stock issued pursuant to the Company’s 2012 Stock Incentive Plan and registered with the Commission pursuant to the Company’s Form S-8 Registration Statement, filed with the Commission on November 13, 2012 and amended on October 17, 2013. The 263,157 shares were valued at $50,000, based on the $0.19 per share closing price of the Company’s common stock on the date of grant.
(11) On January 17, 2013, Mr. Tran was granted stock options to purchase 2 million shares of common stock under the 2012 Stock Incentive Plan vesting over 4 years with an exercise price of $0.16 per share. In addition, on September 10, 2013, Mr. Tran was granted stock options to purchase 2 million shares of common stock under the 2013 Stock Incentive Plan vesting over 4 years at a price of $0.46 per share. The amount set forth in the table above represents the cost to the Company over the vesting life of the options.
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DIRECTOR COMPENSATION
The following table presents summary information regarding compensation of the non-executive members of our Board of Directors who served during any part of the fiscal year ended January 31, 2016.
| Fees Earned | Stock | All Other | ||||||||||||||||||||||
| Fiscal | Or Paid In | Option | Awards | Compensation | ||||||||||||||||||||
| Name (1) | Year | Cash ($) | Awards ($)(1) | ($)(2) | ($) | Total ($) | ||||||||||||||||||
| Rohan A. Marley | 2016 | $ | 145,997 | $ | 413,600 | (3) | $ | 14,476 | (4) | $ | 18,402 | (5) | $ | 592,475 | ||||||||||
| 2015 | $ | 161,454 | $ | 420,523 | (6) | $ | 50,000 | (7) | $ | — | $ | 631,977 | ||||||||||||
* Accrued and unpaid.
No member of our Board of Directors received any Non-Equity Incentive Plan Compensation or Nonqualified Deferred Compensation Earnings during the periods presented. Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000.
(1) Amounts in this column represent the aggregate grant date fair value of awards computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. See Note 1 to our financial statements included in this Annual Report on Form 10-K for assumptions underlying the valuation of equity awards.
(2) Amounts in this column represent the aggregate issuance date fair value of stock awards computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718.
(3) On June 30, 2015, Mr. Marley was granted stock options to purchase 2 million shares of common stock under the 2013 Stock Incentive Plan vesting over 4 years with an exercise price of $0.195 per share. In addition, on June 30, 2015, options to purchase 1,333,334 shares of common stock held by Mr. Marley which originally had an exercise price of $0.40 per share, were re-priced to have an exercise price of $0.195 per share.
(4) Represents the value of 131,600 shares of common stock approved for issuance to Mr. Marley by the Board of Directors in consideration for services rendered during the year ended January 31, 2016.
(5) Represents reimbursements for various expenses and benefits.
(6) On January 17, 2013, Mr. Marley was granted stock options to purchase 2 million shares of common stock under the 2012 Stock Incentive Plan vesting over 4 years with an exercise price of $0.16 per share. In addition, on September 10, 2013, Mr. Marley was granted stock options to purchase 2 million shares of common stock under the 2013 Stock Incentive Plan vesting over 4 years with an exercise price of $0.46 per share. The amount shown in the table above represents the cost to the Company over the vesting life of the options. See also footnote 2 for information regarding the repricing of certain of these options.
(7) On December 4, 2014, the Company’s Board of Directors awarded a bonus of $50,000 to Mr. Marley for services rendered during the 2015 fiscal year as Chairman of the Company. The bonus was paid via the issuance of 263,157 shares of common stock issued pursuant to the Company’s 2012 Stock Incentive Plan and registered with the Commission pursuant to the Company’s Form S-8 Registration Statement, filed with the Commission on November 13, 2012 and amended on October 17, 2013. The 263,157 shares were valued at $50,000, based on the $0.19 per share closing price of the Company’s common stock on the date of grant.
Mr. Rohan Marley serves as Chairman of the Board of the Company. For his guidance and direction as Chairman of the Board of the Company, he is compensated a fee of $14,476 per month in addition to the occasional grant of the options and issuance of shares of our common stock in the discretion of the Board.
Our directors, Mr. Anh Tran and Mr. Brent Toevs, are not compensated for serving on the Board of Directors, other than through the compensation they receive as officers of the Company (described above).
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On June 30, 2015, our Board of Directors repriced all unvested options to purchase shares of the Company’s common stock granted to Mr. Toevs and Mr. Tran in August 2013 under and pursuant to our 2013 Equity Incentive Plan, which originally had an exercise price of $0.46 per share, to an exercise price of $0.195 per share, provided no other terms of the options were changed except for the re-pricing of 1,333,334 of the 2 million options previously granted; and granted to each of Mr. Toevs and Mr. Tran options to purchase 2 million shares of the Company’s common stock at an exercise price of $0.195 per share, with 666,666 options vesting on June 30, 2016 and 666,667 options vesting on June 30, 2017 and 2018, respectively. The Board of Directors also re-confirmed the $10,000 per month compensation payable to our Chairman, Rohan Marley, re-priced Mr. Marley’s 1,333,334 unvested stock options granted to Mr. Marley in August 2013, under and pursuant to our 2013 Equity Incentive Plan, to have identical terms as the options held by Mr. Toevs and Mr. Tran which were re-priced as described above, and granted Mr. Marley new stock options to purchase 2 million shares of common stock which have identical terms as the stock options granted to Mr. Toevs and Mr. Tran (described above).
On March 10, 2016, the Board of Directors approved the repricing of options to purchase 6 million shares of the Company’s common stock originally issued to the Company’s executive officers and directors in June 2015. Specifically, the Board of Directors approved a change in the exercise price of such options from $0.195 per share to $0.12 per share, provided no other terms of the options were changed except for the re-pricing. As a result of the repricing, our executive officers and directors, Brent Toevs, Anh Tran and Rohan Marley, each hold options to purchase 2 million shares of the Company’s common stock at an exercise price of $0.12 per share, with 666,666 options vesting on June 30, 2016 and 666,667 options vesting on June 30, 2017 and 2018, respectively.
Additionally, on March 29, 2016, the Company’s Board of Directors awarded a bonus of $50,000 to each of Mr. Toevs, Mr. Tran and Mr. Marley for services rendered during the 2017 fiscal year as officers and directors (as applicable) of the Company. The bonus was paid via the issuance of 500,000 shares of common stock issued to each officer and director pursuant to the Company’s 2015 Amended and Restated Stock Incentive Plan and registered with the Commission pursuant to the Company’s Form S-8 Registration. The 500,000 shares were valued at $50,000, based on the $0.10 per share closing price of the Company’s common stock on the date of grant.
2015 Say-on-pay Voting Outcome
As part of the process for determining compensation for the Named Executive Officers for 2015, the Board of Directors considered the most recent “say on pay” non-binding stockholder advisory vote held in July 2014 regarding the Named Executive Officers’ 2014 compensation. The resolution approving 2014 executive compensation received approval of 34.2% of the total stockholder vote, including 97.37% of the total number of stockholders voting at the meeting. The Board of Directors considers the strong stockholder support of our 2014 compensation policies when making decisions regarding executive compensation.
Executive Employment Agreements
Brent Toevs
On September 10, 2013, the Company entered into an Amended and Restated Employment Agreement with its Chief Executive Officer, Brent Toevs. The Amended and Restated Employment Agreement amended, restated and replaced the prior employment agreement of Mr. Toevs effective August 8, 2011. The Amended and Restated Employment Agreement has a term extending until August 1, 2016.
Mr. Toevs’ Amended and Restated Employment Agreement provides for him to receive a yearly salary of $192,390, with ten percent (10%) annual increases; annual bonuses in the discretion of the Board of Directors; and up to $10,000 per year for contribution, up to the maximum U.S. Federal amount, to his Individual Retirement Account. Mr. Toevs may also receive a cash bonus following the end of each fiscal year upon the satisfaction, as determined by the Board at its sole discretion, of performance objectives as established by the Board on an annual basis. Mr. Toevs is also entitled to receive up to $10,000 per year for contribution, up to the maximum U.S. Federal amount, to his Individual Retirement Account. Further, in addition to standard benefits, the Company agreed to compensate Mr. Toevs for annual home office costs (equipment, supplies, telecommunication costs) in the amount of USD$3,600, fees for fiscal year-end tax preparation and personal financial planning/investment advice in the amount of USD$1,000, annual mobile phone and plan expenses in the amount of USD$2,400, and vehicle expenses (combined lease expense, gas and maintenance) in the annual amount of USD$24,000. Mr. Toevs was issued 100,000 shares of the Company’s common stock in consideration for agreeing to the terms of the amended agreement and was granted five year options to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.46 per share, with options to purchase 666,666 shares vesting on August 1, 2014 and options to purchase 666,667 shares vesting on August 1, 2015 and 2016, respectively, subject to the terms of the Company’s equity incentive plans.
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In the event of termination of Mr. Toevs’ employment by the Company without cause or by Mr. Toevs for good reason (each as described in the agreement), the Company agreed to pay Mr. Toevs, in addition to all other compensation which he would be due, twelve months of salary under the agreement as severance pay (or such lesser amount of months then left on the term), and that all unvested options would vest to Mr. Toevs immediately. In the event of the termination of the agreement by the Company without cause or by Mr. Toevs for good reason, the non-compete and non-solicitation provisions (described below) of the agreement terminate and are of no force or effect. In the event of the termination of Mr. Toevs’ employment due to his death or by the Company with cause (as described in the agreement), the Company agreed to pay Mr. Toevs, in addition to all other compensation which he would be due, six months of salary under the agreement as severance pay (or such lesser amount of months then left on the term), and that any unvested options would be forfeited upon such termination date. In the event of the termination of Mr. Toevs’ employment either six months prior to or six months after a change of control (as defined and described in the agreement), Mr. Toevs is to receive all consideration due to him as of the date of termination of the employment agreement plus, as a severance payment, all salary due to him had the employment agreement extended until the end of the stated term, any unvested options shall vest immediately, Mr. Toevs is to receive a cash payment equal to the value of any previously expired options, and the non-compete and non-solicitation provisions of the agreement terminate and are of no force or effect. In the event the agreement is terminated due to Mr. Toevs’ disability, Mr. Toevs is to receive compensation due to him through the date of termination.
Pursuant to the agreement, Mr. Toevs agreed to not compete against the Company for a period of one year following the termination of the agreement and to not solicit employees of the Company for two years following the termination of the agreement.
Anh T. Tran
On September 10, 2013, the Company entered into an Amended and Restated Employment Agreement with its President and Chief Operating Officer, Anh Tran. The Amended and Restated Employment Agreement amended, restated and replaced the prior employment agreement of Mr. Tran effective August 5, 2011. The Amended and Restated Employment Agreement has a term extending until August 1, 2016.
The agreement provides for Mr. Tran to receive an annual salary of $120,000, less ordinary withholdings, with a ten percent (10%) annual incremental increase, subject to change from time to time as the Board or a compensation committee of the Board may determine and approve. Mr. Tran may also receive a cash bonus following the end of each fiscal year upon the satisfaction, as determined by the Board at its sole discretion, of performance objectives as established by the Board on an annual basis. Mr. Tran is also entitled to receive up to $10,000 per year for contribution, up to the maximum U.S. Federal amount, to his Individual Retirement Account. In addition to standard benefits, the Company agreed to pay Mr. Tran for the costs of maintaining a home office (equipment, supplies, and telecommunication costs) and for a mobile phone and plan. In the event of termination of Mr. Tran’s employment by the Company without cause or Mr. Tran for good reason (as described in the agreement), the Company agreed to pay Mr. Tran, in addition to all other compensation which he would be due, two months of salary under the agreement as severance pay (or such lesser amount of months then left on the term).
Mr. Tran was issued 100,000 shares of the Company’s common stock in consideration for agreeing to the terms of the amended agreement and was granted five year options to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.46 per share, with options to purchase 666,666 shares vesting on August 1, 2014 and options to purchase 666,667 shares vesting on August 1, 2015 and 2016, respectively, subject to the terms of the Company’s equity incentive plans.
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In the event of termination of Mr. Tran’s employment by the Company without cause or by Mr. Tran for good reason (each as described in the agreement), the Company agreed to pay Mr. Tran, in addition to all other compensation which he would be due, twelve months of salary under the agreement as severance pay (or such lesser amount of months then left on the term), and that all unvested options would vest to Mr. Tran immediately. In the event of the termination of the agreement by the Company without cause or by Mr. Tran for good reason, the non-compete and non-solicitation provisions of the agreement (described below) terminate and are of no force or effect. In the event of the termination of Mr. Tran’s employment due to his death or by the Company with cause (as described in the agreement), the Company agreed to pay Mr. Tran, in addition to all other compensation which he would be due, six months of salary under the agreement as severance pay (or such lesser amount of months then left on the term), and that any unvested options would be forfeited upon such termination date. In the event of the termination of Mr. Tran’s employment either six months prior to or six months after a change of control (as defined and described in the agreement), Mr. Tran is to receive all consideration due to him as of the date of termination of the employment agreement plus, as a severance payment, all salary due to him had the employment agreement extended until the end of the stated term, any unvested options vest immediately to Mr. Tran, Mr. Tran is to receive a cash payment equal to the value of any previously expired options, and the non-compete and non-solicitation provisions of the agreement terminate and are of no force or effect. In the event the agreement is terminated due to Mr. Tran’s disability, Mr. Tran is to receive compensation due to him through the date of termination.
Pursuant to the agreement, Mr. Tran agreed to not compete against the Company for a period of one year following the termination of the agreement and to not solicit employees of the Company for two years following the termination of the agreement.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table summarizes certain information regarding unexercised stock options outstanding as of January 31, 2016 for each of the Named Officers.
| Option Awards | ||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price | Option Experation Date | ||||||||||||
| Brent R. Toevs | 333,333 | — | $ | 0.4 | 8/10/2017 | |||||||||||
| 1,000,000 | — | $ | 0.16 | 1/17/2018 | ||||||||||||
| 666,666 | — | $ | 0.46 | 9/10/18 | ||||||||||||
| 666,667 | 666,667 | (1) | $ | 0.195 | 9/10/18 | |||||||||||
| — | 2,000,000 | (2) | $ | 0.195 | 6/30/20 | |||||||||||
| Anh T. Tran | 666,667 | — | $ | 0.4 | 8/5/2017 | |||||||||||
| 2,000,000 | — | $ | 0.16 | 1/17/2018 | ||||||||||||
| 666,666 | — | $ | 0.46 | 9/10/18 | ||||||||||||
| 666,667 | 666,667 | (1) | $ | 0.195 | 9/10/18 | |||||||||||
| — | 2,000,000 | (2) | $ | 0.195 | 6/30/20 | |||||||||||
| (1) |
The options vest on August 1, 2016. | |
|
(2) |
The options vest at the rate of one-third of such options per year on June 30th of each year. |
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COMPENSATION DISCUSSION AND ANALYSIS
Executive Compensation Philosophy
Our Board of Directors determines the compensation given to our executive officers in its sole determination. Our Board of Directors also reserves the right to pay our executives a salary, and/or issue them shares of common stock in consideration for services rendered and/or to award incentive bonuses which are linked to our performance, as well as to the individual executive officer’s performance. This package may also include long-term stock based compensation to certain executives which is intended to align the performance of our executives with our long-term business strategies.
Incentive Bonus
The Board of Directors may grant incentive bonuses to our executive officers in its sole discretion, if the Board of Directors believes such bonuses are in the Company’s best interest, after analyzing our current business objectives and growth, if any, and the amount of revenue we are able to generate each month, which revenue is a direct result of the actions and ability of such executives.
Long-term, Stock Based Compensation
In order to attract, retain and motivate executive talent necessary to support the Company’s long-term business strategy we may award certain executives with long-term, stock-based compensation in the future, in the sole discretion of our Board of Directors.
Criteria for Compensation Levels
The Company seeks to attract and retain qualified executives and employees to positively contribute to the success of the Company for the benefit of its various stakeholders, the most important of which is its stockholders, but also including its officers, employees, and the communities in which the Company operates.
The Board of Directors (in establishing compensation levels for the Company’s Chief Executive Officer and President) and the Company (in establishing compensation levels for other executives) may consider many factors, including, but not limited to, the individual’s abilities and performance that results in: the advancement of corporate goals of the Company, execution of the Company’s business strategies, contributions to positive financial results, and contributions to the development of the management team and other employees. In determining compensation levels, the Board of Directors may also consider the experience level of each particular individual and/or the compensation level of executives in similarly situated companies in our industry.
Compensation levels for executive officers are generally reviewed annually, but may be reviewed more often as deemed appropriate.
Compensation Philosophy and Strategy
In addition to the “Criteria for Compensation Levels” set forth above, the Company has a “Compensation Philosophy” for all employees of the Company (set forth below).
Compensation Philosophy
The Company’s compensation philosophy is as follows:
| · | The Company believes that compensation is an integral component of its overall business and human resource strategies. The Company’s compensation plans will strive to promote the hiring and retention of personnel necessary to execute the Company’s business strategies and achieve its business objectives. |
| · | The Company’s compensation plans will be strategy-focused, competitive, and recognize and reward individual and group contributions and results. The Company’s compensation plans will strive to promote an alignment of the interests of employees with the interests of the stockholders by having a portion of compensation based on financial results and actions that will generate future stockholder value. |
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| · | In order to reward financial performance over time, the Company’s compensation programs generally will consist of base compensation, and may also consist of short-term variable incentives and long-term variable incentives, as appropriate. |
| · | The Company’s compensation plans will be administered consistently and fairly to promote equal opportunities for the Company’s employees. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the beneficial ownership of our common stock by (i) each person who is known by the Company to own beneficially more than five percent (5%) of our outstanding voting stock; (ii) each of our directors; (iii) each of our executive officers; and (iv) all of our current executive officers and directors as a group, as of May 3, 2016.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and/or investing power with respect to securities. These rules generally provide that shares of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable or convertible within 60 days of May 3, 2016, are deemed to be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.
To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, (a) the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to applicable community property laws; and (b) no person owns more than 5% of our common stock. Unless otherwise indicated, the address for each of the officers or directors listed in the table below is 4730 Tejon St., Denver, Colorado 80211.
| Title of Class | Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class (a) | |||||||
| Executive Officers and Directors | ||||||||||
| Common Stock | Rohan A. Marley (1) | 19,498,632 | 14.5 | % | ||||||
| Common Stock | Anh T. Tran (2) | 7,890,256 | 5.9 | % | ||||||
| Common Stock | Brent Toevs (3) | 5,687,274 | 4.3 | % | ||||||
| All Executive Officers and Directors as a Group (Three Persons) | 33,076,162 | 23.2 | % | |||||||
| 5% Stockholders | ||||||||||
| Common Stock | Mother Parkers Tea & Coffee Inc. (4) | 14,296,225 | (5) | 9.99 | % (5) | |||||
(a) Calculated based on 130,134,439 shares outstanding as of May 3, 2016, which number does not include the 250,000 shares agreed to be issued to Duck Duck which had not been issued as of May 3, 2016.
* Indicates beneficial ownership of less than 1% of the total outstanding common stock.
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(1) Includes 2,000,000 shares held by Marley Coffee, LLC, which shares Mr. Marley is deemed to beneficially own. Includes options to purchase 4,516,666 shares of common stock which have vested to Mr. Marley to date, including options to purchase (a) 666,667 shares of common stock at an exercise price of $0.40 per share, which expire if unexercised on August 5, 2017; (b) 666,667 shares of common stock at an exercise price of $0.195 per share, which expire if unexercised on September 10, 2018; (c) options to purchase 1,850,000 shares of common stock at an exercise price of $0.16 per share, which expire if unexercised on January 17, 2018; (d) options to purchase 666,666 shares of common stock at an exercise price of $0.46 per share, which expire if unexercised on September 10, 2018; and (e) options to purchase 666,666 shares of common stock at an exercise price of $0.12 per share, which expire if unexercised on June 30, 2020. Does not include various other options which have not vested as of the date of this report and will not vest within the next 60 days.
(2) Includes options to purchase 4,666,666 shares of common stock which have vested to Mr. Tran to date, including options to purchase (a) 666,667 shares of common stock at an exercise price of $0.40 per share, which expire if unexercised on August 5, 2017; (b) 666,667 shares of common stock at an exercise price of $0.195 per share, which expire if unexercised on September 10, 2018; (c) options to purchase 2,000,000 shares of common stock at an exercise price of $0.16 per share, which expire if unexercised on January 17, 2018; (d) options to purchase 666,666 shares of common stock at an exercise price of $0.46 per share, which expire if unexercised on September 10, 2018; and (e) options to purchase 666,666 shares of common stock at an exercise price of $0.12 per share, which expire if unexercised on June 30, 2020. Does not include various other options which have not vested as of the date of this report and will not vest within the next 60 days.
(3) Includes options to purchase 3,333,332 shares of common stock which have vested to Mr. Toevs to date, including options to purchase (a) 333,333 shares of common stock at an exercise price of $0.40 per share, which expire if unexercised on August 10, 2017; (b) 666,667 shares of common stock at an exercise price of $0.195 per share, which expire if unexercised on September 10, 2018; (c) options to purchase 1,000,000 shares of common stock at an exercise price of $0.16 per share, which expire if unexercised on January 17, 2018; (d) options to purchase 666,666 shares of common stock at an exercise price of $0.46 per share, which expire if unexercised on September 10, 2018; and (e) options to purchase 666,666 shares of common stock at an exercise price of $0.12 per share, which expire if unexercised on June 30, 2020. Does not include various other options which have not vested as of the date of this report and will not vest within the next 60 days.
(4) The beneficial owners of the shares of common stock held by Mother Parkers Tea & Coffee Inc. are Paul Higgins, Jr. and Michael Higgins, its Co-Chief Executive Officers. The address of Mother Parkers Tea & Coffee Inc. is 2531 Stanfield Road, Mississauga, Ontario L4Y 1S4.
(5) Mother Parkers Tea & Coffee Inc. holds 7,333,529 shares of our common stock and warrants to purchase 7,333,529 shares of our common stock, the warrants have an exercise price of $0.51135 per share, a term of three years and prohibit Mother Parkers Tea & Coffee Inc. from exercising such warrants to the extent such exercise would result in the beneficial ownership of more than 9.99% of the Company’s common stock, subject to Mother Parkers’ right to waive such limitation with 61 days prior written notice (the “Mother Parker’s Ownership Limitation”). The number of shares listed as beneficially owned by Mother Parkers Tea & Coffee Inc. in the table above takes into account the Mother Parker’s Ownership Limitation, and does not include 1,683,529 shares of common stock issuable upon exercise of the warrants, which if exercised by Mother Parkers Tea & Coffee Inc. would exceed the Mother Parker’s Ownership Limitation.
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Changes in Control
The Company is not aware of any arrangements which may at a subsequent date result in a change of control of the Company.
EQUITY COMPENSATION PLAN INFORMATION
| Plan Category |
Number of securities to be issued upon exercise of
warrants and rights (A) |
Weighted-average exercise price of
warrants and rights (B) |
Number of securities available for future issuance under equity compensation plans (excluding securities reflected in column A) (C) |
|||||||||
| Equity compensation plans approved by stockholders | 19,440,000 | $ | 0.19 | 10,231,741 | ||||||||
| Equity compensation plans not approved by stockholders | 4,000,000 | 0.40 | 16,333,333 | |||||||||
| Total | 23,440,000 | $ | 26,565,074 | |||||||||
EQUITY COMPENSATION PLAN INFORMATION
2011 Equity Compensation Plan
On August 5, 2011, the Board of Directors approved the Company’s 2011 Equity Compensation Plan (the “2011 Plan”). The 2011 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, performance shares and other securities as described in greater detail in the 2011 Plan, to the Company’s employees, officers, directors and consultants. A total of 20,000,000 shares are authorized for issuance under the 2011 Plan, which has not been approved by the stockholders of the Company to date, and as of the date of this filing, a total of 16,333,333 shares are available for issuance under the 2011 Plan.
2012 Equity Incentive Plan
On October 14, 2012, the Board of Directors approved the Company’s 2012 Equity Incentive Plan, which was amended and restated on September 19, 2013 (as amended and restated, the “2012 Plan”). The 2012 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, restricted units, stock appreciation rights, performance shares and other securities as described in greater detail in the 2012 Plan, to the Company’s employees, officers, directors and consultants. A total of 12,000,000 shares are authorized for issuance under the 2012 Plan, which has been approved by the stockholders of the Company, and as of the date of this filing, a total of 436,907 shares are available for issuance under the 2012 Plan.
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2013 Equity Incentive Plan
On September 10, 2013, the Board of Directors approved the Company’s 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, restricted units, stock appreciation rights, performance shares and other securities as described in greater detail in the 2013 Plan, to the Company’s employees, officers, directors and consultants. A total of 12,000,000 shares are authorized for issuance under the 2013 Plan, which has been approved by the stockholders of the Company to date, and as of the date of this filing, a total of 1,717,652 shares are available for issuance under the 2013 Plan.
2015 Amended and Restated Equity Incentive Plan
On June 30, 2015, our Board of Directors approved and adopted the Company’s 2015 Equity Incentive Plan, which was amended and restated by the Board of Directors on March 10, 2016 (the Amended and Restated 2015 Equity Incentive Plan, the “2015 Plan”). The sole amendment to the 2015 Plan which was affected by the entry into the amended and restated plan was to clarify and confirm that no awards under the 2015 Plan can be issued or granted to any person under the 2015 Plan in connection with, or in consideration for, the offer or sale of securities in a capital-raising transaction, or where such services directly or indirectly promote or maintain a market for the Company’s securities. The 2015 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, restricted units, stock appreciation rights, performance shares and other securities as described in greater detail in the 2015 Plan, to the Company’s employees, officers, directors and consultants. Subject to adjustment in connection with the payment of a stock dividend, a stock split or subdivision or combination of the shares of common stock, or a reorganization or reclassification of the Company’s common stock, the maximum aggregate number of shares of common stock which may be issued pursuant to awards under the 2015 Plan is 17,500,000 shares, and as of the date of this filing, a total of 8,927,182 shares are available for issuance under the 2015 Plan.
* * * * *
The Plans are administered by the Board of Directors in its discretion. The Board of Directors interprets the Plans and has broad discretion to select the eligible persons to whom awards will be granted, as well as the type, size and terms and conditions of each award, including the exercise price of stock options, the number of shares subject to awards, the expiration date of awards, and the vesting schedule or other restrictions applicable to awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Except as discussed below or otherwise disclosed above under “Item 11. Executive Compensation”, the following sets forth a summary of all transactions since the beginning of the fiscal year of 2015, or any currently proposed transaction, in which the Company was to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at the fiscal year-end for 2016 and 2015, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Item 11. Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
Marley Coffee, Ltd.; Other Related Parties
During the years ended January 31, 2016 and 2015, respectively there are licensing fees accrued and payable of $260,496 and $265,960 to Fifty-Six Hope Road, for the license to use of the name “Marley Coffee”. From inception to January 31, 2016, the Company has incurred royalties of $689,194 to Fifty-Six Hope Road.
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During the years ended January 31, 2016 and 2015, the Company made purchases of $602,191 and $764,598, respectively, from Marley Coffee Ltd. (“MC”) a producer of Jamaican Blue Mountain coffee that the Company purchases in the normal course of its business. The Company’s Chairman, Rohan Marley, is an owner of approximately 25% of the equity of MC.
The Company also received $97,796 and $34,348 in rebates from MC during the years ended January 31, 2016 and 2015, respectively, on the Jamaican green coffee purchased. There were no rebates in the prior year. From our inception in 2011 to January 31, 2016, the Company has made purchases of $2,938,886 after credits and rebates from MC. The Company directs these purchases to third-party roasters for fulfillment of sales orders. MC was created in order to have a license to buy and sell Jamaican Blue Mountain (JBM) Coffee. We buy JBM coffee at the most favorable market rate in the market. For the majority of transactions, we buy raw unroasted beans from MC and then resell them to customers around the world. From time to time, it is more economically favorable for the Company to allow MC to sell to our customers directly and then receive a rebate. The Company directs these purchases to third-party roasters for fulfillment of sales orders.
The following describe transactions with entities which are licensees of Hope Road Merchandising, LLC a company in which Rohan Marley is a beneficiary. During the years ended January 31, 2016 and 2015, the Company made purchases of $11,833 and $40,798, respectively, from House of Marley. House of Marley produces headphones and speakers that the Company uses for promotions and trade shows. During the years ended January 31, 2016 and 2015, the Company made purchases of $6,411 and $47, respectively from Zion Rootswear. For the years ended January 31, 2016 and 2015, the Company has made purchases of $0 and $278 from Tuff Gong International. The purchases from Tuff Gong International and Zion Rootswear were for Bob Marley apparel and gifts that were used for marketing and promotions purposes.
The Company has made sales to related parties for the period ending January 31, 2016 of $1,408 to Island Records, $860 to Delivery Agent (for product that is sold on the Bob Marley Website) and $539 to Zion Rootswear. For the year ending January 31, 2015 the Company has made sales to the following related parties $3,780 to Homemedics, $1,980 to Zion Rootswear, and $646 to Bravado International. All of the companies above are licensees of Hope Road Merchandising, LLC, a company in which Rohan Marley is a beneficiary.
During the years ended January 31, 2016 and 2015, the Company paid Rohan Marley Enterprises and Rohan Marley $178,875 and $211,454, respectively, for directors consulting fees, stock salary and bonus and expense reimbursements. The January 31, 2016 total included $164,399 in cash payments and $14,476 in accrued director’s fees paid in February 2016. The January 31, 2015 total included $161,454 in cash payments and $50,000 in stock bonus paid. The Company has paid Rohan Marley Enterprises $385,439 and Rohan Marley $106,335 for a total of $491,774 from inception to January 31, 2016, for director’s fees and expense reimbursements. Rohan Marley Enterprises is the personal S-Corporation of Rohan Marley which he uses to record all of his business transactions.
The total paid to Marley and Plant in prior years was $7,500 in December 2013 for improvements on the Marley Farm.
The total owed to Mother Parkers at January 31, 2016 is $2,053,298 and at January 31, 2015 $1,675,102 was due to Mother Parkers for coffee purchases. The total accounts receivable due from Mother Parkers for the fiscal year ended January 31, 2016 and 2015 is $318,934 and $323,326, respectively.
During the years ended January 31, 2016 and 2015, the Company paid Sondra Toevs $7,242 and $18,416, respectively, and Ellie Toevs $4,431 and $6,231, respectively, for part-time employment. Sondra Toevs is the wife of the CEO, Brent Toevs, and Ellie Toevs is the daughter of Mr. Toevs.
Mother Parkers Tea & Coffee Inc. Transactions
On April 24, 2014, we 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 $0.34 (the “Per Unit Price”). The total purchase price paid for the Units was $2,500,000. As a result of the Subscription, Mother Parkers became a greater than 5% stockholder of the Company.
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Pursuant to the Subscription, we provided Mother Parkers a right of first refusal for a period of two (2) years following the Subscription, 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 to 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 right of first refusal is not assignable and expires upon the first to occur of two (2) years following the date of the Subscription and the date Mother Parkers enters into or takes certain bankruptcy related actions.
The Warrants have an exercise price equal to 150% of the Per Unit Price ($0.51135 per share), a term of three years and prohibit Mother Parkers from exercising such Warrants to the extent such exercise would result in the beneficial ownership of more than 9.99% of the Company’s common stock, subject to Mother Parkers’ right to waive such limitation with 61 days’ prior written notice.
Mother Parkers is one of the Company’s two main suppliers of coffee products and the Company is currently subject to a license agreement with Mother Parkers (described below). Purchases from Mother Parkers accounted for approximately 60% of total coffee vendor purchases of the Company for the fiscal year ended January 31, 2016 and approximately 60% of total purchases for the fiscal year ended January 31, 2015. Additionally, during the fiscal years ended January 31, 2016 and 2015, Mother Parkers coffee purchases accounted for approximately 17% and 16% of our revenues, respectively.
Effective May 20, 2014, we entered into an Amended and Restated License Agreement with Mother Parkers (the “MP Agreement”), which amended and restated a prior license agreement entered into between the parties in October 2011. 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 FSHR License Agreement (defined and described below under “Fifty-Six Hope Road Music Limited”, pursuant to which we have a worldwide, exclusive, non-transferable license to utilize certain of the “Marley Coffee” trademarks (the “Trademarks”).
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 under the agreement, which payments are due in monthly installments.
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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. Notwithstanding the requirements above, either party may terminate the agreement at any time (a) upon the default of the agreement by the other party, if such default is not cured within 30 days (45 days if the default is not capable of being cured within 30 days and 10 days in the event the default relates to non-payment of fees due) after written notice thereof is provided by the non-defaulting party; or (b) upon the bankruptcy or similar proceeding involving the other party, the dissolution or liquidation of the other party, a seizure or attachment of the other party’s property or assets, or the commencement of litigation proceedings involving Mother Parkers’ use of the Trademarks (which right to termination is in favor of Mother Parkers only). Additionally, Mother Parkers has the right to terminate the agreement at any time for any reason with 90 days’ prior written notice. In the event of the termination of the agreement for any reason, we are required to purchase any and all unsold Products (including raw or packaged materials) from Mother Parkers.
In the event of a product recall resulting from the Company’s act or omission, we are required to pay all costs and expenses associated with such recall. The MP Agreement requires that the parties review the terms and conditions of the agreement on a yearly basis. Additionally, the agreement requires that Mother Parkers allocate $100,000 annually to be used for marketing activities mutually agreed to by Mother Parkers and the Company.
The MP Agreement contains customary confidentiality and indemnification requirements and covenants typical of agreements similar to the MP Agreement.
The total owed to Mother Parkers for accounts payable is $2.05 million as of January 31, 2016, and the total due from Mother Parkers is $318,934 as of January 31, 2016.
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 (“Fifty-Six Hope Road” and the “FSHR License Agreement”). Rohan Marley, our Chairman, owns an interest in and serves as a director of Fifty-Six Hope Road. Pursuant to the FSHR License Agreement, Fifty-Six 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. Fifty-Six 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, Fifty-Six 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 FSHR 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 Fifty-Six Hope Road. Additionally, FSHR has the right to approve all Licensed Products, all advertisements in connection therewith and all product designs and packaging. The agreement also provides that FSHR 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 Fifty-Six 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 FSHR License Agreement, and such deferred payments shall be paid on a quarterly-basis thereafter until paid in full. At January 31, 2016, $264,670 is owed in connection with such royalty fees.
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The FSHR License Agreement superseded and replaced the trademark license agreement dated March 31, 2010, as amended on August 5, 2011, between the Company and MCL, pursuant to which MCL granted the Company an exclusive, terminable sub-license to use the Trademarks (the “MCL License Agreement”). Previously, in connection with the MCL License Agreement, Fifty-Six Hope Road had granted a worldwide, exclusive, terminable oral license to MCL to utilize the Trademarks and further granted the right for MCL to grant to the Company an exclusive, terminable sub-license to use the Trademarks. As part of the consideration provided by the Company to MCL pursuant to the terms of the MCL License Agreement, effective March 31, 2010, the Company agreed to issue to MCL 10,000,000 shares of common stock of the Company as follows: 1,000,000 shares of the Company’s common stock upon execution of such Agreement, and an additional 1,000,000 shares of common stock on each anniversary of the execution of the Trademark License Agreement for the following nine years, through March 31, 2019. As of December 2012, the Company had issued a total of 2,000,000 shares of the Company’s common stock to MCL.
In connection with the execution of the FSHR License Agreement, the Company and MCL entered into a letter agreement dated as of September 13, 2012 (the “MCL Termination Agreement”) terminating the MCL License Agreement. Pursuant to the MCL Termination Agreement; MCL waived the 30-day notice requirement for termination thereunder. The MCL Termination Agreement stated that all of the Company’s obligations under the MCL Trademarks License Agreement were terminated except that the Company remained obligated to: (i) issue to MCL the 1 million shares of its common stock which were due to MCL on the March 31, 2012 anniversary of the MCL License Agreement, provided that subsequent to the date of the MCL Termination Agreement, MCL verbally agreed to forego and release the Company from its obligation to issue the 1 million additional shares which were never issued, and (ii) repay the remaining outstanding debt obligation of $19,715 in monthly installments with the final installment to be paid in February 2013, which has been paid to date.
Promoters and Certain Control Persons
Brent Toevs
From 2001 to 2011, Mr. Toevs was co-founder and partner of National Coffee Service & Vending (“NCS&V”). On April 25, 2011, the Company entered into an Exclusive Sales and Marketing Agreement (the “NCSV Agreement”) with NCSV. Pursuant to the NCSV Agreement, we agreed to appoint NCSV as our exclusive agent and distributor of “Jammin Java Coffee” brand roasted coffee within the U.S. (the “Products”) in the office coffee vending, office products, water, and other industries featuring a “break room,” and divisions and offshoots thereof. Pursuant to the NCSV Agreement, we share net profits generated by this agreement with NCSV on a 60/40 basis (with 60% of such net profits being provided to the Company).
Pursuant to the NCSV Agreement, NCSV is responsible for marketing and distributing Products and we agreed to refer all inquiries for purchase of the Products to NCSV (subject to small quantities of Products being referred to separate sub-agents). We also agreed not to compete with NCSV for sales and to refer to NCSV any sales relating to the Products and channels covered by the NCSV Agreement.
The NCSV Agreement remained in effect until April 25, 2014, and automatically renewed for an additional two-year period and will continue to do so thereafter on a rolling basis, unless terminated by either party at least 30 days prior to the end of such applicable renewal term. The NCSV Agreement can be terminated in the event of a breach of the NCSV Agreement (by the non-breaching party) or if the terminating party pays the non-terminating party a lump sum equal to the estimated net profit which would have been due to the non-terminating party if the NCSV Agreement had remained in effect for an additional 24 months from the termination date of the NCSV Agreement (based on the prior 12 months’ net profit).
Review, Approval and Ratification of Related Party Transactions
Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officers, directors and significant stockholders. However, all of the transactions described above were approved and ratified by the Board of Directors and one or more officers of the Company. In connection with the approval of the transactions described above, the Board of Directors took into account several factors, including its fiduciary duty to the Company; the relationships of the related parties described above to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; whether comparable products or services were available; and the terms the Company could receive from an unrelated third party.
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Director Independence
Our common stock is quoted for trading on the OTCQB and we are not required to have independent members of our Board of Directors. We do not identify any of our directors as being independent.
As described above, we do not currently have a separately designated audit, nominating or compensation committee.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
Our Board of Directors approves in advance the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services.
Audit Fees
The following table presents the estimated aggregate fees incurred for services performed during our last two fiscal years, all of which were approved by our Board of Directors.
| Fiscal Year Ended January 31, | ||||||
| 2016 | 2015 | |||||
| Audit fees(1) | $ | 81,000 | $ | 98,954 | ||
| Audit-related fees(2) | 2,500 | — | ||||
| Tax fees(3) | — | — | ||||
| All other fees | — | — | ||||
| Total fees | $ | 83,500 | $ | 98,954 | ||
| (1) | Audit fees include professional services rendered for the audit and/or reviews of our financial statements and in connection with statutory and regulatory filings or engagements. | |
| (2) | Audit-related fees include assurance and related services that were reasonably related to the performance of the audit or review of our financial statements that are not included under footnote (1) above. | |
| (3) | Tax fees include professional services relating to preparation of the annual tax return. |
All Other Fees: None.
We do not use the auditors for financial information system design and implementation. Such services, which include designing or implementing a system that aggregates source data underlying the financial statements or that generates information that is significant to our financial statements, are provided internally or by other service providers. We do not engage the auditors to provide compliance outsourcing services.
The Board of Directors has considered the nature and amount of fees billed by Squar and believes that the provision of services for activities unrelated to the audit is compatible with maintaining Squar’s independence.
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Pre-Approval Policies
It is the policy of our Board of Directors that all services to be provided by our independent registered public accounting firm, including audit services and permitted audit-related and non-audit services, must be pre-approved by our Board of Directors. Our Board of Directors pre-approved all services, audit and non-audit related, provided to us by our independent auditors for fiscal 2016 and 2015.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Documents filed as part of this report
| (1) | All financial statements |
| Index to Financial Statements | Page | |
| Report of Independent Registered Public Accounting Firm | F-2 | |
| Balance Sheets as of January 31, 2016 and 2015 | F-3 | |
| Statements of Operations for the years ended January 31, 2016 and 2015 | F-4 | |
| Statements of Stockholders’ Deficit for the years ended January 31, 2016 and 2015 | F-5 | |
| Statements of Cash Flows for the years ended January 31, 2016 and 2015 | F-6 | |
| Notes to Financial Statements | F-7 |
| (2) | Financial Statement Schedules |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto included in this Form 10-K.
| (3) | Exhibits required by Item 601 of Regulation S-K |
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of this Form 10-K.
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INDEX TO FINANCIAL STATEMENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying balance sheets of Jammin Java Corp. (the “Company”) as of January 31, 2016 and 2015, and the related statements of operations, stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jammin Java Corp. as of January 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 under “Basis of Presentation,” the Company has incurred operating losses from inception, has an accumulated deficit approximating $29,246,000 at January 31, 2016, and has not sufficiently increased its revenues to offset its operating expenses. In addition, as more fully discussed in Notes 1 and 13, the Company is a co-defendant in a complaint from the Securities and Exchange Commission. Whereas the ultimate outcome of such matter is not presently known, an adverse outcome, if any, could have a detrimental material impact in the Company’s financial condition and operations, including the Company’s ability to retain its Marley license. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Squar Milner LLP (formerly SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP)
Newport Beach, California
May 6, 2016
| F-2 |
JAMMIN
JAVA CORP.
BALANCE SHEETS
| January 31, 2016 | January 31, 2015 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 231,021 | $ | 443,189 | ||||
| Accounts receivable, net | 1,415,559 | 1,154,252 | ||||||
| Inventory | — | 197,581 | ||||||
| Prepaid expenses | 30,171 | 18,986 | ||||||
| Other current assets | 8,000 | 3,784 | ||||||
| Total Current Assets | 1,684,751 | 1,817,792 | ||||||
| Property and equipment, net | 187,838 | 381,248 | ||||||
| Intangible assets, net | 593,325 | 734,753 | ||||||
| Other assets | 23,567 | 23,567 | ||||||
| Total Assets | $ | 2,489,481 | $ | 2,957,360 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 3,527,083 | $ | 2,492,900 | ||||
| Accrued expenses | 497,431 | 477,229 | ||||||
| Accrued royalty and other expenses - related party | 84,174 | 81,078 | ||||||
| Convertible notes payable, net of discounts | 1,029,558 | — | ||||||
| Conversion feature - derivative liability | 778,951 | — | ||||||
| Total Current Liabilities | 5,917,197 | 3,051,207 | ||||||
| Total Liabilities | 5,917,197 | 3,051,207 | ||||||
| Commitments & Contingencies | ||||||||
| Stockholders’ Deficit | ||||||||
| Common stock, $.001 par value, 5,112,861,525 shares authorized; 126,455,312 and 124,691,748 shares issued and outstanding, as of January 31, 2016 and January 31, 2015, respectively | 126,455 | 124,692 | ||||||
| Additional paid-in-capital | 25,691,579 | 23,825,294 | ||||||
| Accumulated deficit | (29,245,750 | ) | (24,043,833 | ) | ||||
| Total Stockholders’ Deficit | (3,427,716 | ) | (93,847 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 2,489,481 | $ | 2,957,360 | ||||
See accompanying notes to financial statements
| F-3 |
JAMMIN
JAVA CORP.
STATEMENTS OF OPERATIONS
| Years Ended January 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenue: | $ | 12,312,620 | $ | 9,569,791 | ||||
| Discounts and allowances | (1,114,015 | ) | (668,424 | ) | ||||
| Net revenue | 11,198,605 | 8,901,367 | ||||||
| Cost of sales: | ||||||||
| Cost of sales products | 8,025,368 | 6,955,321 | ||||||
| Total cost of sales | 8,025,368 | 6,955,321 | ||||||
| Gross Profit | 3,173,237 | 1,946,046 | ||||||
| Operating Expenses: | ||||||||
| Compensation and benefits | 3,708,352 | 4,465,889 | ||||||
| Selling and marketing | 2,688,117 | 3,150,274 | ||||||
| General and administrative | 1,594,808 | 2,807,296 | ||||||
| Total operating expenses | 7,991,277 | 10,423,459 | ||||||
| Other expense: | ||||||||
| Other expense | (225,783 | ) | — | |||||
| Loss on extinguishment of debt | — | (1,799,543 | ) | |||||
| Changes in fair value of derivative liability | (7,796 | ) | — | |||||
| Interest expense | (150,298 | ) | (4,029 | ) | ||||
| Total other expense | (383,877 | ) | (1,803,572 | ) | ||||
| Net Loss | $ | (5,201,917 | ) | $ | (10,280,985 | ) | ||
| Net loss per share: | ||||||||
| Basic and diluted loss per share | $ | (0.04 | ) | $ | (0.09 | ) | ||
| Weighted average common shares outstanding - basic and diluted | 125,504,494 | 120,201,082 | ||||||
See accompanying notes to financial statements
| F-4 |
JAMMIN
JAVA CORP.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Common Stock | Common Stock | |||||||||||||||||||||||
| Shares | Amount | Shares To Be Issued | Paid-In Capital | Accumulated Deficit | Totals | |||||||||||||||||||
| Balance, January 31, 2014 | 104,085,210 | $ | 103,166 | 208,039 | $ | 16,514,630 | $ | (13,762,848 | ) | $ | 2,854,948 | |||||||||||||
| Issuance of common stock for services | 1,764,356 | 1,764 | — | 425,678 | — | 427,442 | ||||||||||||||||||
| Issuance of common stock for cash | 7,333,529 | 7,334 | — | 2,492,666 | — | 2,500,000 | ||||||||||||||||||
| Shares issued to Ironridge | 12,219,871 | 12,220 | — | 2,527,533 | — | 2,539,753 | ||||||||||||||||||
| Shares to be issued to Black Rock Beverage | 158,039 | 158 | (158,039 | ) | (158 | ) | — | — | ||||||||||||||||
| Exercise of stock options | 50,000 | 50 | (50,000 | ) | (50 | ) | — | — | ||||||||||||||||
| Share based compensation expense | — | — | — | 1,864,995 | — | 1,864,995 | ||||||||||||||||||
| Shares issed subsequently rescinded (1) | (919,257 | ) | — | — | — | — | — | |||||||||||||||||
| Net loss | — | — | — | — | (10,280,985 | ) | (10,280,985 | ) | ||||||||||||||||
| Balance January 31, 2015 | 124,691,748 | 124,692 | — | 23,825,294 | (24,043,833 | ) | (93,847 | ) | ||||||||||||||||
| Retirement of common stock for accounts receivable | (130,480 | ) | (131 | ) | — | (49,869 | ) | — | (50,000 | ) | ||||||||||||||
| Issuance of common stock for services | 1,894,044 | 1,894 | — | 202,390 | — | 204,284 | ||||||||||||||||||
| Share based compensation expense | — | — | — | 1,713,764 | — | 1,713,764 | ||||||||||||||||||
| Net loss | — | — | — | — | (5,201,917 | ) | (5,201,917 | ) | ||||||||||||||||
| Balance January 31, 2016 | 126,455,312 | $ | 126,455 | — | $ | 25,691,579 | $ | (29,245,750 | ) | $ | (3,427,716 | ) | ||||||||||||
(1) Shares were issued as consideration for a consulting agreement that was subsequently rescinded and the shares were returned in March 2014. No amount has been recorded to common stock or additional paid-in capital for these shares due to the rescission been recorded related to common stock or additional paid-in capital for these shares due to the rescission.
See accompanying notes to financial statements
| F-5 |
JAMMIN
JAVA CORP.
STATEMENTS OF CASH FLOWS
| Years Ended January 31, | ||||||||
| 2016 | 2015 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (5,201,917 | ) | $ | (10,280,985 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Common stock issued for services | 204,284 | 427,442 | ||||||
| Shared-based employee compensation | 1,713,764 | 1,864,995 | ||||||
| Depreciation | 176,884 | 115,372 | ||||||
| Provision for bad debts | — | 100,000 | ||||||
| Amortization of intangible assets | 111,773 | 57,935 | ||||||
| Gain on sale of business | (37,463 | ) | — | |||||
| Changes in fair value of derivitative liability | 7,796 | — | ||||||
| Loss on settlement of liabilities | — | 1,957,312 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (311,307 | ) | (68,305 | ) | ||||
| Notes receivable - related party | 2,724 | |||||||
| Inventory | 197,581 | 157,351 | ||||||
| Prepaid expenses and other current assets | (15,401 | ) | 1,182,574 | |||||
| Other assets - long term | — | (7,851 | ) | |||||
| Accounts payable | 1,034,183 | 1,311,390 | ||||||
| Accrued expenses | 20,202 | 353,373 | ||||||
| Accrued royalty and other expenses - related party | 3,096 | (138,721 | ) | |||||
| Net cash used in operating activities | (2,096,525 | ) | (2,965,394 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Purchases of property and equipment | (46,181 | ) | — | |||||
| Sales of property and equipment | 129,825 | 56,426 | ||||||
| Net cash provided by (used in) investing activities | 83,644 | 56,426 | ||||||
| Cash Flows From Financing Activities: | ||||||||
| Common stock issued for cash | — | 2,500,000 | ||||||
| Borrowings on short term debt | 1,800,713 | (4,965 | ) | |||||
| Net cash provided by financing activities | 1,800,713 | 2,495,035 | ||||||
| Net change in cash and cash equivalents | (212,168 | ) | (413,933 | ) | ||||
| Cash and cash equivalents at beginning of period | 443,189 | 857,122 | ||||||
| Cash and cash equivalents at end of period | $ | 231,021 | $ | 443,189 | ||||
| Non-Cash Transactions: | ||||||||
| Extinguishment of debt for stock | $ | — | $ | 2,539,753 | ||||
| Interest expense | $ | 4,400 | $ | — | ||||
See accompanying notes to financial statements
| F-6 |
NOTE 1—NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jammin Java Corp. (the “Company” or “Jammin Java”), operates as a United States (U.S.) based company providing premium roasted coffee on a wholesale level to the grocery, retail, online, service, hospitality, office coffee service and big box store industry. Through the use of our roaster distributor relationships, we have the exclusive right to manufacture and market our coffee lines to gourmet, natural and independent grocery markets in the U.S., Canada, Mexico and the Caribbean and the non-exclusive right worldwide.
As used herein, the terms “we,” “us,” “our,” “Jammin Java” and “Company” mean Jammin Java Corp., unless otherwise indicated. All dollar amounts in these financial statements are in U.S. dollars unless otherwise stated.
Summary of Significant Accounting Policies. The summary of our significant accounting policies presented below is designed to assist the reader in understanding our financial statements. Such financial statements and related notes are the representations of our management, who are responsible for their integrity and objectivity. In the opinion of management, these accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying financial statements.
Basis of Presentation. These financial statements have been prepared by management assuming that the Company will be able to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business. However, certain conditions noted below currently exist which raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company has incurred net losses of $5,201,917 and $10,280,985 for the years ended January 31, 2016 and 2015, respectively and has an accumulated deficit of $29,245,750 at January 31, 2016. In addition to the Company’s recent history of losses, the Company has only recently begun to generate revenue as part of its principal operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Further, the operations of the Company have primarily been funded by the issuance of common stock and debt. In order for us to conduct our business for the next twelve months and to continue operations thereafter and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, reduce operating expenses, and potentially raise additional funds, through either debt and/or equity financing to meet our working capital needs. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may be required to curtail its operations.
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. Management intends to increase sales by increasing the Company’s product offerings, expanding its direct sales force and expanding its domestic and international distributor relationships. The Company has reached a settlement in principle with the Commission to settle the claims made by the Commission, which has not yet been formally approved or accepted by the Commission to date, and may not be approved or accepted. In the event the Company were to have to pay significant legal fees to defend itself against the allegations made in the complaint or pay significant fines or disgorgement in the matter, and the Company was unable to raise sufficient funding to pay such fines or disgorgement, the Company could be forced to suspend its activities, terminate its operations or seek bankruptcy protection, all of which could lead to the value of the Company’s common stock declining in value or becoming worthless.
Pursuant to the terms and conditions of the FSHR License Agreement, FSHR can terminate that agreement under certain circumstances, subject where applicable and as described in the agreement, our right to cure such breaches and other events, including: in the event the Securities and Exchange Commission or any similar government agency in any country, territory or possession makes any negative or unlawful finding regarding our activities. Notwithstanding our categorical denial of the allegations made in the SEC’s November 2015 complaint, as discussed below under “Part I” - “Item 2. Legal Proceedings”, in the event the SEC’s complaint constitutes a “negative or unlawful finding regarding our activities” or we consent to any actions against us by the SEC in connection with the allegations made by the SEC in the November 2015 complaint which constitute a “negative or unlawful finding regarding our activities”, FSHR can terminate the FSHR License Agreement.
The termination of the FSHR License Agreement would have a material adverse effect on our results of operations and assets, could force us to scale back and/or abandon our business operations, or force us to seek bankruptcy protection and could cause the value of our common stock to decline in value or become worthless. As we’ve stated above, none of the officers in the Company have been named in the SEC suit and we believe that we will be found innocent of the charges alleged.
If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which our net assets 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 reflect any adjustments related to the outcome of this uncertainty.
Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation for comparative purposes.
| F-7 |
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the assessment of the impairment of long-lived assets, the allowance for doubtful accounts, valuation allowances for deferred tax assets, and valuation of our financial and equity instruments. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.
Fair Value Matters. The carrying amount of the Company’s cash, accounts receivables, accounts payables, approximates their estimated fair values due to the short-term maturities of those financial instruments.
The Company has adopted a single definition of fair value, a framework for measuring fair value, and providing expanded disclosures concerning fair value whereby estimated fair value is the price to be paid for an asset or the amount to settle a liability in an orderly transaction between market participants at the measurement date. Accordingly, fair value is a market-based measurement and not an entity-specific measurement.
The Company utilizes the following hierarchy in fair value measurements:
| · | Level 1 – Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. | |
| · | Level 2 – Inputs use other inputs that are observable, either directly or indirectly. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. | |
| · |
Level 3 – Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
Other than derivative instruments, the Company had no assets or liabilities carried at fair value on a non-recurring basis as of and for the years ended January 31, 2016 and 2015. |
Cash and Cash Equivalents. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At January 31, 2016 and 2015, the Company has no cash equivalents. No funds were invested in money market accounts during the year ended January 31, 2016.
Concentrations of Credit Risk. Our cash and cash equivalents are principally on deposit in a non-insured short-term asset management account at a large financial institution. Accounts receivable potentially subject us to concentrations of credit risk. Currently, our customer base is comprised of only a limited number of customers (see Note 14).
Revenue Recognition. Revenue is derived from the sale of coffee products and is recognized on a gross basis upon shipment to the customer. All revenue is recognized when (i) persuasive evidence of an arrangement exists; (ii) the service or sale is completed; (iii) the price is fixed or determinable; and (iv) the ability to collect is reasonably assured. Revenue is recognized as the net amount estimated to be received after deducting estimated amounts for discounts, trade allowances and product terms. We record promotional and return allowances based on recent and historical trends. Promotional allowances, including customer incentive and trade promotion activities, are recorded as a reduction to sales based on amounts estimated being due to customers, based primarily on historical utilization and redemption rates. Discounts and promotional allowances deducted from sales for fiscal years 2016 and 2015 were $1,114,015 and $668,424, respectively.
The Company utilizes third parties for the production and fulfillment of orders placed by customers. The Company, acting as principal, takes title to the product and assumes the risks of ownership; namely, the risks of loss for collection, delivery and returns.
| F-8 |
Allowance for Doubtful Accounts. The Company does not require collateral from its customers with respect to accounts receivable. The Company determines any required allowance by considering a number of factors, including the terms for each customer, and the length of time accounts receivable are outstanding. Management provides an allowance for accounts receivable whenever it is evident that they become uncollectible. The Company has determined that a $71,168 allowance for doubtful accounts was required at January 31, 2016 and $100,000 for January 31, 2015. Because our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.
Inventories. Inventories are stated at the lower of cost or market. Cost is computed using weighted average cost, which approximates actual cost, on a first-in, first-out basis. Inventories on hand are evaluated on an on-going basis to determine if any items are obsolete or in excess of future needs. Items determined to be obsolete are reserved for. From time to time the Company provides for the possible inability to sell its inventories by providing an excess inventory reserve. As of January 31, 2016 and 2015, the Company determined that no reserve was required.
Acquisition of BlackRock Beverage Services, Inc. and Bike Caffe Franchising Inc. On August 16, 2013, the Company purchased certain assets including inventory, fixed assets, and IP owned by BlackRock Beverage Services Inc. for $81,118 in total consideration consisting of $10,000 in cash and 158,039 common shares of the Company valued at $71,118. In addition, on December 4, 2013, the Company purchased certain assets including fixed assets, inventory, IP and trademarks owned by Bike Caffe Franchising, Inc. for total consideration of $140,000 consisting of $40,000 in cash and 250,000 common shares of the Company valued at $100,000. No liabilities were assumed as part of the acquisitions. The acquisitions were accounted for by the Company using the purchase method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, at the date of acquisition, the net assets of BlackRock and BikeCaffe were recorded at their respective fair values and represents management’s estimates based on a third party valuation report. The Company incurred $5,000 of acquisition-related costs, which were expensed as incurred in the accompanying Statement of Operations included within Other Operating Expenses.
The results of BikeCaffe operations are included in the accompanying statements of operations from the date of acquisition. The net assets acquired were recorded at their fair values at the date of acquisition, as summarized in the following table:
Bike Caffe Franchising, Inc.
| Tangible Assets Acquired | ||||
| Current Assets | ||||
| WIP & Inventory | $ | 75,656 | ||
| Fixed Assets - Property and Equipment, net | 7,400 | |||
| Total Tangible Assets | $ | 83,056 | ||
| Intangible Assets Acquired | ||||
| Customer Base | 15,000 | |||
| Trade-Name/Marks | 20,800 | |||
| Non-Compete | 14,100 | |||
| Total Intangible Assets Acquired | $ | 49,900 | ||
| Goodwill | 7,044 | |||
| Total Consideration Paid | $ | 140,000 |
The Company sold Black Rock Beverages, LLC (“BRB”) in July 2015 and there are no longer any intangibles or fixed assets related to this company. See Note 5 for more details.
Property and Equipment. Equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs, as incurred, are charged to expense. Renewals and enhancements which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are three years.
| F-9 |
Our property and equipment is summarized as follows:
| January 31, 2016 | January 31, 2015 | |||||||
| Equipment | $ | 205,548 | $ | 242,385 | ||||
| Computers | 67,545 | 67,545 | ||||||
| Furniture | 66,507 | 75,851 | ||||||
| Leasehold improvements | 151,373 | 151,373 | ||||||
| 490,973 | 537,154 | |||||||
| Less Accumulated depreciation | 303,135 | 155,906 | ||||||
| $ | 187,838 | $ | 381,248 | |||||
Depreciation expense was $176,884 and $115,372 for the years ended January 31, 2016 and 2015, respectively.
Impairment of Long-Lived Assets. Long-lived assets consist primarily of a license agreement that was recorded at the estimated cost to acquire the asset. 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 January 31, 2016 or 2015.
Stock-Based Compensation. Pursuant to the provisions of Financial Accounting Standards Board (“FASB”) FASB ASC 718-10, “Compensation – Stock Compensation,” which establishes accounting for equity instruments exchanged for employee service, management utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock option awards 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.
Common stock issued for services to non-employees is recorded based on the value of the services or the value of the common stock whichever is more clearly determinable. Whenever the value of the services is not determinable, the measurement date occurs generally at the date of issuance of the stock. In more limited cases, it occurs when a commitment for performance has been reached with the counterparty and nonperformance is subject to significant disincentives. If the total value of stock issued exceeds the par value, the value in excess of the par value is added to the additional paid-in-capital.
We estimate volatility of our publicly-listed common stock by considering historical stock volatility.
Income Taxes. The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No 740, Income Taxes.
The Company records deferred tax assets and liabilities based on the differences between the financial statement and tax bases of assets and liabilities and on net operating loss carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
| F-10 |
Earnings or Loss Per Common Share. Basic earnings per common share equal net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share include the impact on dilution from all contingently issuable shares, including options, warrants and convertible securities. The common stock equivalents from contingent shares are determined by the treasury stock method. The Company incurred a net loss for the years ended January 31, 2016 and 2015, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be anti-dilutive. Anti-dilutive shares include -0- and 11,144,863 options for the years ended January 31, 2016 and 2015.
Derivative Liabilities. A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities. As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company entered into certain debt financing transactions in fiscal 2016, as disclosed in Note 8, containing certain embedded features that have resulted in the instruments being deemed derivatives. The Company may engage in other similar complex financing transactions in the future, but not with the intention to enter into derivative instruments. Derivatives are measured at fair value using the Monte Carlo simulation pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions. Changes in these subjective assumptions can materially affect the estimate of the fair value of derivative liabilities and, consequently, the related amount recognized as a change in fair value of derivative liabilities on the consolidated statement of operations. Furthermore, depending on the terms of a derivative, the valuation of derivatives may be removed from the financial statements upon exercise or conversion of the underlying instrument into some other security or if the contract is modified.
We evaluate derivative instruments to properly classify such instruments within stockholders' equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed at each balance sheet date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.
During fiscal 2016, we adopted the guidance, as codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, that requires us to apply a two-step model in determining whether a financial instrument or an embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. The embedded conversion option features did not qualify for equity classification as they had no conversion price floor and as such required treatment as derivative liabilities. Accordingly, $778,951 of conversion feature derivative liabilities are carried at January 31, 2016.
Fair Value Measurements.
We follow FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring basis for any period reported.
ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories. We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.
The hierarchy noted above requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. There were no transfers between Level 1, Level 2 and/or Level 3 during fiscal 2016. Our fair value measurements at the January 31, 2016 reporting date are classified based on the valuation technique level noted in the table below:
The following table presents the estimated fair value of financial liabilities measured at estimated fair value on a recurring basis included in the Company’s financial statements as of January 31, 2016:
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| Total carrying value | Quoted market prices in active markets | Internal Models with significant observable market parameters | Internal models with significant unobservable market parameters | |||||||||||||
| Derivative liabilities | $ | 778,951 | $ | $ | $ | 778,951 | ||||||||||
Significant Recently Issued Accounting Pronouncements. 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 following:
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.
| F-11 |
FASB 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.
Subsequent Events. Management has evaluated events subsequent to January 31, 2016 through the date the accompanying statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements.
NOTE 2 – INVENTORY
Inventories were comprised of:
| January 31, 2016 | January 31, 2015 | |||||||
| Finished Goods - Coffee | $ | — | $ | 197,581 | ||||
| $ | — | $ | 197,581 | |||||
NOTE 3 – RECEIVABLES
Receivables were comprised of:
| January 31, 2016 | January 31, 2015 | ||||||
| Grocery retail clients | $ | 1,159,120 | $ | 596,249 | ||||
| International | 220,131 | 172,705 | ||||||
| Online clients | 3,856 | 15,718 | ||||||
| Other foodservice clients | 19,681 | 96,135 | ||||||
| Licensing - related party | 83,939 | 373,445 | ||||||
| Allowance for doubtful accounts | (71,168 | ) | (100,000 | ) | ||||
| $ | 1,415,559 | $ | 1,154,252 | |||||
NOTE 4 – LICENSE AGREEMENTS
On March 31, 2010, the Company obtained a sub-license agreement (the “Agreement”) with Marley Coffee, LLC (“MCL”), a private limited liability company of which Rohan Marley, a Director of the Company, and his family have a combined controlling interest as more fully described below.
2010 MCL Trademark License Agreement
Fifty-Six Hope Road Music Limited, a Bahamas international business company (“Fifty-Six Hope Road”) owns and controls the intellectual property rights, including the “Marley Coffee” trademarks relating to the late reggae performer, Robert Nesta Marley, professionally known as Bob Marley (the “Trademarks”). On March 31, 2010, Fifty-Six Hope Road and MCL entered into an agreement which granted to MCL the exclusive, oral, terminable license to use the Trademarks and granted to the Company an exclusive, terminable, sublicense to use the Trademark.
On March 31, 2010, MCL entered into the Agreement with the Company, effective March 30, 2010, pursuant to which it sublicensed the use of the Trademarks to the Company (the “MCL Trademarks License Agreement”). Rohan Marley, a director of the Company, also serves as the managing member of MCL and is the beneficial owner of one-third of MCL’s membership interests.
The consideration for the MCL Trademarks License Agreement was as follows:
| (1) | The Company entered into an Asset Purchase Agreement to sell all its interests in its Branding Development and Business Plan Development to MCL; |
| (2) | The Company assigned the Farm Lease Agreement that it had previously entered into with Rohan Marley relating to farm land located in Jamaica and all of the related leasehold improvements to MCL; and |
| (3) | The Company agreed to issue to MCL 10 million shares of the Company’s common stock as follows: |
| · | 1 million shares upon the execution of the MCL Trademark License Agreement on March 31, 2010; and; |
| · | 1 million shares on each anniversary of the execution of the MCL Trademark License Agreement for the following nine years through March 31, 2019. |
In accordance with FASB ASC 505-25- “Share-Based payments to Non Employees,” management recorded the transaction based on the estimated fair value of the perpetual license at the measurement date of March 31, 2010 totaling $766,000, (the date when the Trademarks and its underlying rights were granted to the Company and when MCL’s performance was completed).
| F-12 |
On August 5, 2011, the parties expanded the scope of the MCL Trademarks License Agreement in favor of the Company by an amendment in consideration for the Company assuming $126,000 in additional obligations of MCL. As part of the Agreement, the Company had issued 2,000,000 shares of its common stock.
On September 13, 2012, the MCL Agreement was replaced and superseded with the 2012 Trademarks License Agreement with Fifty-Six Hope Road more fully described below. The MCL Termination Agreement provided that all of the Company’s obligations under the MCL Agreement were terminated except for the Company’s obligations to: (i) issue to MCL the 1 million shares of its common stock which were due to MCL on March 31, 2012 (which obligation has since been forgiven); and (ii) repay its remaining outstanding debt obligation of $19,715 in monthly installments, the final installment of which was paid in February 2013.
2012 Trademarks License Agreement
On September 13, 2012, the Company entered into a new trademark license agreement with Fifty-Six Hope Road which superseded and replaced the MCL Trademarks License Agreement (the “2012 Trademarks License Agreement”), with an effective date of August 7, 2012. Pursuant to the 2012 Trademarks License Agreement, Fifty-Six Hope Road granted to the Company a worldwide, exclusive, non-transferable license to utilize 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 however that the Company may not open retail coffee houses under the Trademarks. In addition, Fifty Six 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”). The Licensed Products may be sold by the Company pursuant to the 2012 Trademarks 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 Fifty-Six Hope Road. The 2012 Trademarks License Agreement has a 15 year term and provides two renewal periods of 15 years at the discretion of the Company. In return, the Company agreed to pay royalties to Fifty-Six Hope Road in an amount equal to 3% of the net sales of all Licensed Products. In addition, such royalty payments are to be deferred during the first 20 months of the term of the 2012 Trademarks License Agreement, and such deferred payments shall be paid on a quarterly-basis thereafter. The total owed to Fifty-Six Hope Road is $264,670 at January 31, 2016.
In connection with the termination and replacement, the Company recorded an impairment of license agreement assets totaling $36,000 and amortization expense totaling $24,333 for the year ended January 31, 2013. No impairment was recorded for the year ended January 31, 2016 and amortization expense was $48,666 and $48,667 for the years ended January 31, 2016 and 2015, respectively.
| License agreement, net consists of the following: | January 31, | |||||||
| 2016 | 2015 | |||||||
| License Agreement | $ | 730,000 | $ | 730,000 | ||||
| Accumulated amortization | (170,332 | ) | (121,666 | ) | ||||
| License Agreement, net | $ | 559,668 | $ | 608,334 | ||||
| F-13 |
The license agreement net balance is included in intangible assets on the balance sheets. The amortization period is fifteen years. Amortization expense consists of the following:
| Years Ended January 31, | ||||||||
| 2016 | 2015 | |||||||
| License Agreement | $ | (48,666 | ) | $ | (48,667 | ) | ||
| Total License Agreement Amortization Expense | $ | (48,666 | ) | $ | (48,667 | ) | ||
As of January 31, 2016, the remaining useful life of the Company’s license agreement was approximately 11.5 years. The following table shows the estimated amortization expense for such assets for each of the five succeeding fiscal years and thereafter.
| Years Ending January 31, | |||||
| 2017 | $ | 46,292 | |||
| 2018 | 46,292 | ||||
| 2019 | 46,292 | ||||
| 2020 | 46,292 | ||||
| 2021 | 46,292 | ||||
| Thereafter | 328,208 | ||||
| Total | $ | 559,668 | |||
|
NOTE 5 –SALE OF DIVISION
On July 9, 2015, with an effective date of July 1, 2015, the Company entered into an Asset Purchase Agreement with Black Rock Beverages, LLC (“BRB”), pursuant to which it sold its Black Rock Beverage division and related assets to BRB (the “Sale Agreement”). Pursuant to the Sale Agreement, BRB agreed to pay the Company $300,000 in cash, with $200,000 payable on the closing date of the transaction (July 15, 2015), and $100,000 payable in 24 equal monthly installments, provided that if BRB’s average sales do not meet a minimum of $50,000 per month during each of the first six months following the closing, the aggregate amount of $100,000 in payments due is reduced by $5,000 for each month such $50,000 monthly minimum is not met. Black Rock Beverages, LLC paid $61,000 in December 2015 for the final payment owed under this purchase agreement and the gain was recognized at that time. Additionally, at the sale date the Company agreed to continue to pay the salary of one of its employees acquired in the Company’s original acquisition of the Black Rock Beverage division in August 2013 and to continue to cover the rent, for five months, on a warehouse located on Lipan St. in Denver, Colorado, and BRB agreed to assume certain of the Company’s capital and vehicle leases. We also agreed to a six-month freeze on increasing any cost of goods purchased by BRB for products sold through the Black Rock Beverage operations. Subsequent to December 2015, the Company has no further obligations related to the sale.
NOTE 6 – PREPAID EXPENSES
Prepaid expenses are comprised of the following: |
| January 31, 2016 | January 31, 2015 | |||||||
| Prepaid consulting services | $ | 15,721 | $ | — | ||||
| Prepaid administrative fees | 14,450 | 18,986 | ||||||
| Total | $ | 30,171 | $ | 18,986 | ||||
NOTE 7 – RELATED PARTY TRANSACTIONS
Marley Coffee, Ltd.; Other Related Parties
As of January 31, 2016 and 2015, respectively there are licensing fees accrued and payable of $260,496 and $265,960 to Fifty-Six Hope Road, for the license to use of the name “Marley Coffee”. From inception to January 31, 2016, the Company has incurred royalties of $689,194 to Fifty-Six Hope Road.
| F-14 |
During the years ended January 31, 2016 and 2015, the Company made purchases of $602,191 and $764,598, respectively, from Marley Coffee Ltd. (“MC”) a producer of Jamaican Blue Mountain coffee that the Company purchases in the normal course of its business. The Company’s Chairman, Rohan Marley, is an owner of approximately 25% of the equity of MC.
The Company also received $97,796 and $34,348 in rebates from MC during the years ended January 31, 2016 and 2015, respectively, on the Jamaican green coffee purchased. There were no rebates in the prior year. From our inception in 2011 to January 31, 2016, the Company has made purchases of $2,938,886 after credits and rebates from MC. The Company directs these purchases to third-party roasters for fulfillment of sales orders. MC was created in order to have a license to buy and sell Jamaican Blue Mountain (JBM) Coffee. We buy JBM coffee at the most favorable market rate in the market. For the majority of transactions, we buy raw unroasted beans from MC and then resell them to customers around the world. From time to time, it is more economically favorable for the Company to allow MC to sell to our customers directly and then receive a rebate. The Company directs these purchases to third-party roasters for fulfillment of sales orders.
The following describe transactions with entities which are licensees of Hope Road Merchandising, LLC a company in which Rohan Marley is a beneficiary. During the years ended January 31, 2016 and 2015, the Company made purchases of $11,833 and $40,798, respectively, from House of Marley. House of Marley produces headphones and speakers that the Company uses for promotions and trade shows. During the years ended January 31, 2016 and 2015, the Company made purchases of $6,411 and $47, respectively from Zion Rootswear. For the years ended January 31, 2016 and 2015, the Company has made purchases of $0 and $278 from Tuff Gong International. The purchases from Tuff Gong International and Zion Rootswear were for Bob Marley apparel and gifts that were used for marketing and promotions purposes.
The Company has made sales to related parties for the period ending January 31, 2016 of $1,408 to Island Records, $860 to Delivery Agent (for product that is sold on the Bob Marley Website) and $539 to Zion Rootswear. For the year ending January 31, 2015 the Company has made sales to the following related parties $3,780 to Homemedics, $1,980 to Zion Rootswear, and $646 to Bravado International. All of the companies above are licensees of Hope Road Merchandising, LLC, a company in which Rohan Marley is a beneficiary.
During the years ended January 31, 2016 and 2015, the Company paid Rohan Marley Enterprises and Rohan Marley $178,875 and $211,454, respectively, for directors consulting fees, stock salary and bonus and expense reimbursements. The January 31, 2016 total included $164,399 in cash payments and $14,476 in accrued director’s fees paid in February 2016. The January 31, 2015 total included $161,454 in cash payments and $50,000 in stock bonus paid. The Company has paid Rohan Marley Enterprises $385,439 and Rohan Marley $106,335 for a total of $491,774 from inception to January 31, 2016, for director’s fees and expense reimbursements. Rohan Marley Enterprises is the personal S-Corporation of Rohan Marley which he uses to record all of his business transactions.
The total paid to Marley and Plant in prior years was $7,500 in December 2013 for improvements on the Marley Farm.
The total owed to Mother Parker at January 31, 2016 is $2,053,298 and at January 31, 2015 $1,675,102 was due to Mother Parkers for coffee purchases. The total accounts receivable due from Mother Parkers as of January 31, 2016 and 2015 is $318,934 and $323,326.
During the years ended January 31, 2016 and 2015, the Company paid Sondra Toevs $7,242 and $18,416, respectively and Ellie Toevs $4,431 and $6,231, respectively, for part-time employment. Sondra Toevs is the wife of the CEO, Brent Toevs, and Ellie Toevs is the daughter of Mr. Toevs.
| F-15 |
NOTE 8 – CONVERTIBLE AND OTHER NOTES PAYABLE
Convertible and Other Notes Payable are as follows:
| Commitment | Outstanding as of January 31, 2016 | Available Proceeds | Interest Rate | Maturity | ||||||||||||||||
| Colorado Medical Finance Services, LLC * | $ | 500,000 | $ | 141,900 | $ | 358,100 | 17.50 | % | Sep-16 | |||||||||||
| JSJ | 275,000 | 275,000 | — | 12 | % | Mar-16 | ||||||||||||||
| Typenex | 1,005,000 | 255,000 | 750,000 | 10 | % | Apr-22 | ||||||||||||||
| JMJ | 900,000 | 385,000 | 515,000 | 10 | % | Sep-17 | ||||||||||||||
| Vis Vires | 250,000 | 254,000 | — | 8 | % | Jun-16 | ||||||||||||||
*Line of Credit.
Refer to Note 15 for subsequent event developments of JSJ and Typenex notes.
Revolving 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, 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 coffee goods and services, at the option of the lender, with our consent. 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. As of January 31, 2016, the Company had borrowed a total of $250,000 under the Line of Credit. As of January 31, 2016 there was $162,347 outstanding which included $141,900 in principle and $20,448 in interest due. The payments to this line of credit have been made on a month basis.
Convertible Note with JSJ Investments Inc.
On September 9, 2015, we entered into a 12% Convertible Note to JSJ Investments Inc. (“JSJ” and the “JSJ Convertible Note”) in the amount of $275,000. Amounts owed under the JSJ Convertible Note accrue interest at the rate of 12% per annum (18% upon an event of default). The JSJ Convertible Note is payable by us on demand by JSJ at any time after March 6, 2016. We have the right to repay the JSJ Convertible Note (a) for an amount equal to 135% of the then balance of such note until the 180th day following the date of the note, and (b) for an amount equal to 150% of the balance of such note subsequent to the maturity date (provided the holder consents to such payment after maturity).
The JSJ Convertible Note and all accrued interest is convertible at the option of the holder thereof into the Company’s common stock at any time. The conversion price of the JSJ Convertible Note is 60% (a 40% discount) to the third lowest intra-day trading price of the Company’s common stock during the 10 trading days prior to any conversion date of the note. In the event we do not issue the holder any shares due in connection with a conversion within three business days, we are required to issue the holder additional shares equal to 25% of the conversion amount, and an additional 25% of such shares for each additional five business days beyond such fourth business day that such failure continues. In the event we do not have a sufficient number of authorized but unissued shares of common stock to allow for the conversion of the note, the discount rate (40%) is increased by an additional 5%.
| F-16 |
In connection with the issuance of the note, we agreed to pay $5,000 of JSJ’s legal fees.
The JSJ Convertible Note contains standard and customary events of default, including in the event we fail to timely file any and all reports due with the Securities and Exchange Commission. Upon the occurrence of an event of default, JSJ can demand that we immediately repay 150% of the outstanding balance of the JSJ Convertible Note together with accrued interest (and default interest, if any).
Pursuant to the terms of the JSJ Convertible Note, JSJ agreed not to engage in any short sales or hedging transactions of our common stock. At no time may the JSJ Convertible Note be converted into shares of our common stock if such conversion would result in JSJ and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may be increased by JSJ to up to increases to 9.99% upon not less than 61 days’ prior written notice to us.
The goal is for the Company to utilize this debt as growth capital to help accelerate projects that generate revenue. We hope to repay the JSJ Convertible Note prior to any conversion. In the event that the JSJ Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the JSJ Note is converted into common stock.
Convertible Promissory Note with Typenex Co-Investment, LLC
On September 14, 2015 (the “Closing Date”), the Company entered into a Securities Purchase Agreement dated September 14, 2015 (the “Typenex SPA”) with Typenex Co-Investment, LLC (“Typenex”). Pursuant to the Typenex SPA, the Company issued to Typenex a convertible promissory note (the “Typenex Note”) in the principal amount of $1,005,000, deliverable in four tranches as described below.
The Typenex Note has a term of 20 months and an interest rate of 10% per annum (22% upon an event of default). The gross proceeds to the Company from the Typenex Note were $1,005,000, in the form of: (a) an initial tranche of $250,000 in cash (gross proceeds of $255,000, less $5,000 in expense reimbursements), and (b) three promissory notes of $250,000 each (collectively, the “Investor Notes”). Typenex may elect, in its sole discretion, to fund one or more of the Investor Notes. Absent such an election by Typenex, the Investor Notes will not result in cash proceeds to, or an obligation to repay on the part of, the Company. Each of the Investor Notes accrue interest at the rate of 10% per annum until paid (provided that all amounts due under the Investor Notes may be offset against amounts we owe Typenex in Typenex’s sole discretion), and as such, we do not anticipate owing any interest on the Investor Notes until such notes are funded by Typenex. Each of the Investor Notes are secured by a Membership Interest Pledge Agreement entered into by Typenex for our benefit.
Beginning on the date that is six (6) months after the Closing Date and on the same day of each month thereafter until the maturity date, so long as any amount is outstanding under the Typenex Note, the Company is required to pay to Typenex installments of principal equal to $75,000 (or such lesser principal amount as is then outstanding), plus the sum of any accrued and unpaid interest. Payments of each installment amount may be made in cash, subject to the terms of the note. Alternatively, Typenex or the Company may elect to convert an installment amount into Common Stock as described below.
Beginning six (6) months after the Closing Date, Typenex may convert the balance of the Typenex Note, or any installment or portion thereof, utilizing the conversion price calculation set forth below. Generally, the conversion price will be $0.30 per share; however, in the event the Company’s market capitalization falls below $3 million, then the conversion price is the lower of (a) $0.30 per share, and (b) the Market Price. The “Market Price” is calculated by applying a discount of 40% (provided that under certain events the discount may be reduced to up to 60%, upon the occurrence of certain events (with a reduction of 5% per event) such as the value of common stock (as calculated in the note) declining below $0.10 per share; the Company not being Deposit/Withdrawal At Custodian – DWAC eligible; the Company’s common stock not being DTC eligible; or the occurrence of any major default (as described in the note)), to the average of the three (3) lowest intra-day trading prices of the Company’s common stock during the ten (10) trading days immediately preceding the applicable conversion. The Company may also elect to make payment of installments in the form of equity on substantially the same terms, subject to the terms and conditions of the Typenex Note, and Typenex’s right in certain cases to require a certain portion of such payment to be paid in cash or stock. Additionally, 20 days after shares issued upon redemption of the note are eligible to be freely traded by Typenex (as described in the note), there is a required true up, whereby Typenex is required to be issued additional shares in the event the trading price of the Company’s common stock has declined from the time of original issuance to the date such shares are ‘free trading’ as described in the Typenex Note.
| F-17 |
The Company has the right to prepay the Typenex Note under certain circumstances, subject to payment of a 35% prepayment penalty during the first six months the note is outstanding and 50% thereafter.
If, at any time that the Typenex Note is outstanding, the Company sells or issues any common stock or other securities exercisable for, or convertible into, Common Stock for a price per share that is less than the conversion price applicable under the Typenex Note, then such lower price will apply to all subsequent conversions by Typenex for a period of 20 trading days.
The Typenex Note includes customary and usual events of default. In the event of a default, the Typenex Note may be accelerated by Typenex. The outstanding balance would be immediately due and payable and we are required to repay Typenex additional amounts (including the value of the amount then due in common stock, at the highest intraday trading price of the amount then due under the note) and/or liquidated damages in addition to the amount owed under the Typenex Note. In addition, we owe certain fees and liquidated damages to Typenex if we fail to timely issue shares of common stock under the Typenex Note.
Typenex is prohibited from owning more than 4.99% of the Company’s outstanding shares, pursuant to the Typenex Note, unless the market capitalization of the Company’s common stock is less than $10,000,000, in which case Typenex is prohibited from owning more than 9.99% of the Company’s outstanding shares.
Amounts owed by us under the Typenex Note are secured by a first priority security interest granted to Typenex pursuant to the terms of a Security Agreement entered into with Typenex, in each of the Investor Notes.
The goal is for the Company to utilize this debt as growth capital to help accelerate projects that generate revenue. We hope to repay the Typenex Convertible Note prior to any conversion. In the event that the Typenex Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Typenex Note is converted into common stock.
As of January 31, 2016, the outstanding balance of the Typenex Note was $255,000.
Convertible Promissory Note with JMJ Financial
On September 16, 2015, we sold JMJ Financial (“JMJ”) a Convertible Promissory Note in the principal amount of up to $900,000 (the “JMJ Convertible Note”). The initial amount received in connection with the sale of the JMJ Convertible Note was $350,000, and a total of $385,000 is currently due under the JMJ Convertible Note (not including the interest charge described below), as all amounts borrowed under the note include a 10% original issue discount. Moving forward, JMJ may loan us additional funds (up to $900,000 in aggregate) at our request, provided that JMJ has the right in its sole discretion to approve any future request for additional funding. Each advance under the JMJ Convertible Note is due two years from the date of such advance, with the amount initially funded under the note due on September 16, 2017.
The JMJ Convertible Note (including principal and accrued interest and where applicable other fees) is convertible into our common stock, at any time, at the lesser of $0.75 per share or 65% (a 35% discount) of the two lowest closing prices of our common stock in the 20 trading days prior to the date of any conversion, provided that if we are not DWAC eligible at the time of any conversion an additional 10% discount applies, and in the event our common stock is not DTC eligible at the time of any conversion, an additional 5% discount applies. The JMJ Convertible Note provides that unless we and JMJ agree in writing, JMJ is not eligible to convert any amount of the note into common stock which would result in JMJ owning more than 4.99% of our common stock.
A one-time interest charge of 12% was applied to the principal amount of the note, which remains payable regardless of the repayment (or conversion) date of the note.
| F-18 |
Until 180 days after the date of the note, we are able to prepay the note assuming we prepay all outstanding principal together with a penalty of 40% of such amount, interest, fees, liquidated damages (if any), and the original issuance discount due thereon; and after 160 days, we are not able to prepay the note without JMJ’s written approval.
We agreed that we would reserve 25 million shares of common stock for conversion of the note. In the event we fail to deliver shares within four days of the date of any conversion by JMJ, we are required to pay JMJ $2,000 per day in penalties.
The JMJ Convertible Note provides for customary events of default including, our failure to timely make payments under the JMJ Convertible Note when due, our entry into bankruptcy proceedings, our failure to file reports with the SEC, our loss of DTC eligibility for our common stock, and the investor’s loss of the ability to rely on Rule 144. Additionally, upon the occurrence of an event of default, as described in greater detail in the JMJ Convertible Note, and at the election of JMJ, we are required to pay JMJ, either (i) the amount then owed under the note divided by the applicable conversion price, on the date the default occurs or the default amount is demanded (whichever is lower), multiplied by the volume weighted average price on the date the default occurs or the default amount is demanded (whichever is higher), or (ii) 150% of the principal amount of the note, plus all of the unpaid interest, fees, liquidated damages (if any) and other amounts due. Any amount not paid when due accrues interest at the rate of 18% per annum until paid in full. JMJ is not required to provide us any written notice in order to accelerate the amounts owed under the JMJ Convertible Note in the event of the occurrence of an event of default.
For so long as the JMJ Convertible Note is outstanding JMJ agreed not to effect any “short sales” of our common stock.
The goal is for the Company to utilize this debt as growth capital to help accelerate projects that generate revenue. We hope to repay the JMJ Convertible Note prior to any conversion. In the event that the JMJ Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the JMJ Note is converted into common stock.
Convertible Promissory Note with Vis Vires Group
On September 24, 2015, we sold Vis Vires Group, Inc. (“Vis Vires”) a Convertible Promissory Note (with an issuance date of September 9, 2015) in the principal amount of $254,000 (the “Vis Vires Convertible Note”), pursuant to a Securities Purchase Agreement, dated September 9, 2015. The Vis Vires Convertible Note bears interest at the rate of 8% per annum (22% upon an event of default) and is due and payable on June 11, 2016. The Vis Vires Convertible Note provides for standard and customary events of default such as failing to timely make payments under the Vis Vires Convertible Note when due and the failure of the Company to timely comply with Exchange Act reporting requirements. Additionally, upon the occurrence of certain fundamental defaults, as described in the Vis Vires Convertible Note, we are required to repay Vis Vires liquidated damages in addition to the amount owed under the Vis Vires Convertible Note.
The principal amount of the Vis Vires Convertible Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the 180th day after the Vis Vires Convertible Note was issued. The conversion price of the Vis Vires Convertible Note is equal to the greater of (a) 65% (a 35% discount) multiplied by the average of the lowest five closing bid prices of our common stock during the ten trading days immediately prior to the date of any conversion; and (b) $0.00009, provided that the conversion price during major announcements (as described in the Vis Vires Convertible Note) is the lower of the conversion price on the announcement date of such major announcement and the conversion price on the date of conversion. In the event we fail to deliver the shares of common stock issuable upon conversion of the note within three business days of our receipt of a conversion notice, we are required to pay Vis Vires $2,000 per day for each day that we fail to deliver such shares. The Vis Vires Convertible Note conversion price also includes anti-dilution protection such that in the event we issue or are deemed to have issued common stock or convertible securities at a price equal to less than the conversion price of the Vis Vires Convertible Note in effect on the date of such issuance or deemed issuance, the conversion price of the Vis Vires Convertible Note is automatically reduced to such lower price, subject to certain exceptions in the note, including an exemption for persons with whom the Company was in discussions regarding an investment at the time the Vis Vires Convertible Note was entered into and officer and employee issuances/grants.
| F-19 |
At no time may the Vis Vires Convertible Note be converted into shares of our common stock if such conversion would result in Vis Vires and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.
We may prepay in full the unpaid principal and interest on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date. Any prepayment is subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the Vis Vires Convertible Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.
The Vis Vires Convertible Note also contains customary positive and negative covenants.
We paid $4,000 of Vis Vires’s attorney’s fees in connection with the sale of the Vis Vires Convertible Note.
The goal is for the Company to utilize this debt and similar debt incurred in the past several weeks as growth capital to help accelerate projects that generate revenue. We hope to repay the Vis Vires Convertible Note prior to any conversion. In the event that the Vis Vires Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Vis Vires Note is converted into common stock.
The Company assessed the classification of its derivative financial instruments as of January 31, 2016, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815. Conversion feature-derivative liability totaled $778,951 at January 31, 2016. Refer to Note 1 for more detail.
| F-20 |
Debt Maturity Schedule
The following table summarizes the Company’s annual principal maturities of debt for the five years subsequent to December 31, 2016:
| Year ended December 31, | |||||
| 2016 | $ | 670,900 | |||
| 2017 | 385,000 | ||||
| 2018 | — | ||||
| 2019 | — | ||||
| 2020 | — | ||||
| Thereafter | 255,000 | ||||
| $ | 1,310,900 |
Debt, net of discounts at January 31, 2016 totaled $1,029,558, which consists of total borrowings and accrued interest of $1,613,666 reduced by $584,108 in related discounts
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.
NOTE 9 – STOCKHOLDER’S EQUITY
Common Stock
Holders of common stock are entitled to one vote for each share held. There are no restrictions that limit the Company’s ability to pay dividends on its common stock, subject to the requirements of the Nevada Revised Statutes. The Company has not declared any dividends since incorporation.
As of January 31, 2016, the Company had 5,112,861,525 common shares authorized of its $0.001 par value common stock.
During the year ended January 31, 2016, the Company issued the following shares of $0.001 par value common stock:
| · | 1,894,044 shares in exchange for services from vendors providing finance, business development, investor relations and other services valued at $204,284. | |
| · | 130,488 shares retired for $50,000 of Accounts Receivable in connection with the settlement agreement with Sky. |
| F-21 |
NOTE 10 – STOCK BASED COMPENSATION
On August 5, 2011, the Board of Directors approved the Company’s 2011 Equity Compensation Plan (the “2011 Plan”). The 2011 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, performance shares and other securities as described in greater detail in the 2011 Plan, to the Company’s employees, officers, directors and consultants. A total of 20,000,000 shares are authorized for issuance under the 2011 Plan, which has not been approved by the stockholders of the Company as of January 31, 2016 a total of 16,333,333 shares are available for issuance under the 2011 Plan.
On October 14, 2012, the Board of Directors approved the Company’s 2012 Equity Incentive Plan, which was amended and restated on September 19, 2013 (as amended and restated, the “2012 Plan”). The 2012 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, restricted units, stock appreciation rights, performance shares and other securities as described in greater detail in the 2012 Plan, to the Company’s employees, officers, directors and consultants. A total of 12,000,000 shares are authorized for issuance under the 2012 Plan, which has been approved by the stockholders of the Company, and as of January 31, 2016, a total of 436,907 shares are available for issuance under the 2012 Plan.
On September 10, 2013, the Board of Directors approved the Company’s 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, restricted units, stock appreciation rights, performance shares and other securities as described in greater detail in the 2013 Plan, to the Company’s employees, officers, directors and consultants. A total of 12,000,000 shares are authorized for issuance under the 2013 Plan, which has been approved by the stockholders of the Company to date, and as of January 31, 2016, a total of 2,363,612 shares are available for issuance under the 2013 Plan.
On June 30, 2015, the Board of Directors approved and adopted the Company’s 2015 Equity Incentive Plan, which was amended and restated by the Board of Directors on March 10, 2016 (the Amended and Restated 2015 Equity Incentive Plan, the “2015 Plan”). The sole amendment to the 2015 Plan which was affected by the entry into the amended and restated plan was to clarify and confirm that no awards under the 2015 Plan can be issued or granted to any person under the 2015 Plan in connection with, or in consideration for, the offer or sale of securities in a capital-raising transaction, or where such services directly or indirectly promote or maintain a market for the Company’s securities. The 2015 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, restricted units, stock appreciation rights, performance shares and other securities as described in greater detail in the 2015 Plan, to the Company’s employees, officers, directors and consultants. Subject to adjustment in connection with the payment of a stock dividend, a stock split or subdivision or combination of the shares of common stock, or a reorganization or reclassification of the Company’s common stock, the maximum aggregate number of shares of common stock which may be issued pursuant to awards under the 2015 Plan is 17,500,000 shares, and as of January 31, 2016, a total of 11,500,000 shares are available for issuance under the 2015 Plan.
The Plans are administered by the Board of Directors in its discretion. The Board of Directors interprets the Plans and has broad discretion to select the eligible persons to whom awards will be granted, as well as the type, size and terms and conditions of each award, including the exercise price of stock options, the number of shares subject to awards, the expiration date of awards, and the vesting schedule or other restrictions applicable to awards.
| F-22 |
Activity in options during the year ended January 31, 2016 and related balances outstanding as of that date are set forth below:
| Weighted Average | ||||||||||||
| Number of | Weighted Average | Reaming Contract | ||||||||||
| Shares | Exercise Price | Term (# of years) | ||||||||||
| Outstanding at February 1, 2014 | 17,260,000 | $ | 0.35 | 4.23 | ||||||||
| Granted | 820,000 | 0.27 | ||||||||||
| Exercised | (50,000 | ) | 0.16 | |||||||||
| Forfeited and canceled | (200,000 | ) | — | |||||||||
| Outstanding at January 31, 2015 | 17,830,000 | $ | 0.35 | 3.63 | ||||||||
| Exercisable at January 31, 2015 | 10,952,633 | $ | 0.33 | 3.33 | ||||||||
| Outstanding at February 1, 2015 | 17,830,000 | 0.35 | 3.63 | |||||||||
| Granted | 6,780,000 | 0.30 | ||||||||||
| Exercised | — | — | ||||||||||
| Forfeited and canceled | (1,020,000 | ) | — | |||||||||
| Outstanding at January 31, 2016 | 23,590,000 | $ | 0.25 | 3.19 | ||||||||
| Exercisable at January 31, 2016 | 14,151,658 | $ | 0.28 | 2.22 | ||||||||
During the years ended January 31, 2016 and 2015, the Company recognized share-based compensation expenses totaling $1,713,764 and $1,864,995, respectively. The remaining amount of unamortized stock options expense at January 31, 2015 is $1,651,146.
There were also 333,333 options to purchase shares of common stock outside of the three plans mentioned above, all of which were exercisable as of January 31, 2016.
The intrinsic value of exercisable and outstanding options at January 31, 2016 was $0.
The grant date fair value of stock options granted during the year was $1,446,000 and $249,793 for the fiscal years ended January 31, 2016 and 2015, respectively.
NOTE 11 - WARRANTS
Transaction with Mother Parkers
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.
| Number of Shares | Weighted Average Exercise Price | Remaing Contract Term (# of years) | ||||||||||
| Warrants Outstanding at February 1, 2015 | 7,333,529 | $ | 0.34 | 2.29 | ||||||||
| Granted | ||||||||||||
| Exercised | — | — | ||||||||||
| Forfeited and canceled | — | — | ||||||||||
| Warrants Outstanding at January 31, 2016 | 7,333,529 | $ | 0.35 | 1.29 | ||||||||
NOTE 12- INCOME TAXES
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
F-23
At January 31, 2016 and 2015, the Company had cumulative federal operating loss carry forwards of $18,407,581 and $17,250,016, respectively, which begin to expire in 2031. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income and tax-planning.
Components of net deferred tax assets, including a valuation allowance, are as follows at January 31, 2016 and 2015:
| 2016 | 2015 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forward | $ | 6,821,077 | $ | 6,392,132 | ||||
| Stock based compensation | 2,728,166 | 2,212,946 | ||||||
| Charitable contribution carry forward | 52,414 | — | ||||||
| Allowance for bad debts | 26,372 | 37,056 | ||||||
| Total deferred tax assets | 9,628,029 | 8,642,133 | ||||||
| Less: Valuation allowance | (9,628,029 | ) | (8,642,133 | |||||
| Net deferred tax assets | $ | — | $ | — | ||||
The valuation allowance for deferred tax assets as of January 31, 2016 and 2015 was $9,628,028 and $8,642,133, respectively. The net operating losses will begin to expire in 2031. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. Management believes it is more likely than not that the deferred tax assets as of January 31, 2016 will not be realized based on the management’s assessment that the deductions ultimately recognized for tax purposes will be fully utilized. Therefore full valuation allowances were set up for these deferred tax assets as of January 31, 2016 and 2015.
Reconciliation between the statutory rate and the effective tax rate is as follows at January 31, 2016 and 2015:
| 2016 | 2015 | ||||||||
| Federal statutory rate | 33.74 | % | 33.78 | % | |||||
| State taxes, net of federal benefit | 3.06 | % | 3.05 | % | |||||
| Change in valuation allowance | (36.80 | )% | (36.83 | )% | |||||
| Effective tax rate | — | % | — | % | |||||
F-24
There was no income tax expense for the years ended January 31, 2016 and 2015.
| NOTE 13 – COMMITMENTS AND CONTINGENCIES |
Legal Proceedings
The Company’s commitments and contingencies include the usual claims and obligations of a wholesaler and distributor of coffee products in the normal course of a business. The Company may be, from time to time, involved in legal proceedings incidental to the conduct of its business, as described below:
On July 28, 2014, Shane Whittle, individually, a former significant shareholder and officer and director of the Company (“Whittle”) filed a complaint against the Company in the District Court, City and County of Denver, State of Colorado (Case No. 2014-CV-032991 Division: 209). The complaint alleged that Whittle entered into a consulting agreement with the Company for which the Company failed to make payments and that Rohan Marley, as both a director of the Company and of Marley Coffee Canada, Inc., additionally agreed that, as part of Whittle’s consulting compensation, the Company would assume a debt owed by Marley Coffee Canada to Whittle. The cause of action set forth in the complaint includes breach of contract. Damages claimed by Whittle included $60,000 under the consulting agreement and $19,715 related to payments assumed by the Company.
Effective on March 31, 2015, the Company and Mr. Whittle entered into a Settlement Agreement and Release of Claims (the “Settlement”), pursuant to which the parties agreed to dismiss their claims associated with the District Court, City and County of Denver, State of Colorado (Case No. 2014-CV-032991 Division: 209), lawsuit described above. Pursuant to the terms of the Settlement, the Company agreed to pay Mr. Whittle $80,000 which was accrued as of January 31, 2015 (to be paid in equal payments of $10,000 per month beginning on April 1, 2015, of which $10,000 is in default), the Company agreed to withdraw from a joinder in connection with the Federal Action pending between the parties (and certain other parties) as described below, the parties provided each other mutual releases and the parties agreed to mutually dismiss, with prejudice, their claims.
On September 30, 2014, Whittle individually, and derivatively on behalf of Marley Coffee LLC (“MC LLC”) filed a complaint against Rohan Marley, Cedella Marley, the Company, Hope Road Merchandising, LLC, Fifty-Six Hope Road Music Limited, and Marley Coffee Estate Limited in the United States District Court for the District of Colorado (Civil Action No. 2014-CV-2680).
The complaint alleges that Whittle entered into a partnership with Rohan Marley, the son of the late reggae music legend Robert Nesta Marley p/k/a Bob Marley, to sell premium coffee products branded after the name and likeness of Rohan Marley. The causes of action set forth in the complaint include, among others, racketeering activity, trademark infringement, breach of fiduciary duty, civil theft, and civil conspiracy (some of which causes of action are not directly alleged against the Company), which are alleged to have directly caused Whittle and Marley Coffee LLC substantial financial harm.
Damages claimed by Whittle and MC LLC include economic damages to be proven at trial, profits made by defendants, treble damages, punitive damages, attorneys’ fees and pre and post judgment interest.
Subsequently, all but the civil conspiracy claim against the Company was dismissed and the court ordered Whittle to amend his complaint to provide only for an alleged claim of breach of fiduciary duty (not against the Company) and conspiracy claims as an individual (not on a derivative basis). Prior to the filing of this report, Mr. Whittle and the Company agreed in principle to settlement terms, provided the parties are still negotiating the final terms of such settlement. Notwithstanding the parties’ agreement in principle, the outcome of this lawsuit cannot be predicted with any degree of reasonable certainty. In the event the matter is not settled, the Company intends to continue to vigorously defend itself against Whittle’s and MC LLC’s claims.
F-25
On December 15, 2014, a complaint was filed against the Company in the Superior Court of State of California, for the County of Los Angeles – Central Division (Case Number: BC566749), pursuant to which Sky Consulting Group, Inc. (“Sky”), made various claims against the Company, Mr. Tran, the Company’s President and Director, C&V International, and various other parties. The complaint alleged causes of action for breach of contract, fraud, negligent representation, intentional interference with contractual relationship and negligent interference with contractual relationship, relating to a May 2013 coffee distributor agreement between the Company and Sky, which provided Sky the right to sell Company branded coffee products in Korea. The suit seeks damages, punitive damages, court costs and attorney’s fees. The Company subsequently filed a motion to compel arbitration pursuant to the terms of the agreement, which was approved by the court on April 7, 2015. The parties subsequently entered arbitration in connection with the lawsuit. On September 8, 2015, the parties entered into a mutual settlement and release agreement, whereby Sky agreed to return 130,480 shares of common stock to the Company and stop distributing our products, displaying our tradenames or using our intellectual property; the parties agreed to each dismiss their claims/lawsuits; and each party provided the other a general release of all outstanding claims. The shares were returned to the Company and cancelled and the proceedings were dismissed on December 16, 2015.
On November 17, 2015, the SEC filed a complaint against us (Case 2:15-cv-08921) in the United States District Court Central District of California Western Division. Also included as defendants in the complaint were Shane G. Whittle (our former Chief Executive Officer and Director) and parties unrelated to us, Wayne S. P. Weaver, Michael K. Sun, Rene Berlinger, Stephen B. Wheatley, Kevin P. Miller, Mohammed A. Al-Barwani, Alexander J. Hunter, and Thomas E. Hunter (collectively, the “Defendants”). Pursuant to the complaint, the SEC alleged that Mr. Whittle orchestrated a “pump and dump” scheme with certain other of the Defendants in connection with our common stock. The scheme allegedly involved utilizing our July 2009 reverse merger transaction to secretly gain control of millions of our shares, spreading the stock to offshore entities, and dumping the shares on the unsuspecting public after the stock price soared following fraudulent promotional campaigns undertaken by Mr. Whittle and certain other of the Defendants in or around 2011. The complaint also alleges that to boost our stock price and provide cash to the Company, Mr. Whittle and certain other of the Defendants orchestrated a sham financing arrangement designed to create the false appearance of legitimate third-party interest and investment in the Company through a non-existent entity, Straight Path Capital, pursuant to which we raised approximately $2.5 million through the sale of 6.25 million shares of common stock in 2011. The SEC also alleges that Mr. Whittle and others caused us to make public announcements which caused our stock price to rise, which helped facilitate the alleged frauds among other allegations spelled out more completely in the complaint. The SEC’s complaint charges us, Mr. Whittle, Mr. Weaver, Mr. Sun, Mr. Berlinger, Mr. Wheatley, Mr. Miller, and Mr. Al-Barwani with conducting an illegal offering in violation of Sections 5(a) and 5(c) of the Securities Act. The complaint further alleges that Mr. Whittle, Mr. Weaver, Mr. Sun, Mr. Berlinger, and the Hunters violated Section 10(b) of the Exchange Act and Rule 10b-5, and Mr. Whittle, Mr. Weaver, Mr. Sun, and Mr. Berlinger violated Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 thereunder. Mr. Whittle is additionally charged with violating Section 16(a) of the Exchange Act and Rule 16a-3, and the Hunters are charged with violations of Sections 17(b) of the Securities Act, which prohibits fraudulent touting of stock. The SEC is seeking injunctions, disgorgement, prejudgment interest, and penalties as well as penny stock bars against all of the individual Defendants and an officer-and-director bar against Mr. Whittle. The Company has reached a settlement in principle with the Commission to settle the claims made by the Commission, which has not yet been formally approved or accepted by the Commission to date, and may not be approved or accepted. In the event the Company were to have to pay significant fines or disgorgement in the matter described above, and the Company was unable to raise sufficient funding to pay such fines or disgorgement, the Company could be forced to suspend its activities, terminate its operations or seek bankruptcy protection.
In addition to the above, we may become involved in other material legal proceedings in the future.
| F-26 |
Leases
On June 25, 2013, and effective August 1, 2013, we entered into a lease agreement for office space located at 4730 Tejon Street, Denver, Colorado 80211. The office space encompasses approximately 4,800 square feet. The lease has a term of 36 months expiring on July 31, 2016, provided that we have two additional three year options to renew the lease after the end of the initial term. Rent during the first three year option period escalates at the rate of 4% per year (starting with the last monthly rental cost of the initial term of the agreement, described below), and rent during the second three year option period will be at a rental cost mutually agreed by the Company and the landlord. Rent due under the initial term of the agreement is as follows:
| ▪ | $7,858 per month from August 1, 2013 to July 31, 2014; |
| ▪ | $8,172 per month from August 1, 2014 to July 31, 2015; and |
| ▪ | $8,499 per month from August 1, 2015 to July 31, 2016. |
We also had an option to renew this lease for an additional three year term, which option we have exercised as of the date of this report, and which three year renewal term provides for rent as follows:
| · | $8,839 per month from August 1, 2016 to July 31, 2017; |
| · | $9,192 per month from August 1, 2017 to July 31, 2018; and |
| · | $9,560 per month from August 1, 2018 to July 31, 2019. |
Finally, we have the option to extend the lease for an additional three year term, through July 21, 2022, with a rental cost per month negotiated in good faith by the parties based on then-current market rates, provided that we provide notice of our intent to extend such lease at least 120 days prior to the end of the then term.
On April 9, 2014, the Company entered into a lease agreement for office and warehouse space located at 4725-4745 Lipan St, Denver, Colorado 80211. The rental space encompasses approximately 3,466 square feet of office and warehouse space and approximately a 4,000 square foot yard. The lease expires on June 30, 2017, provided we have the right to one five year renewal term, with rent set at the “market value” of the last year of the initial lease term. Rent due under the initial term of the agreement is as follows:
| · | $0 per month from April 15, 2014 to June 30, 2014; |
| · | $2,800 per month from July 1, 2014 to June 30, 2015 |
| · | $2,950 per month from July 1, 2015 to June 30, 2016; and |
| · | $3,150 per month from July 1, 2016 to June 30, 2017 |
The rights to the lease were sold during 2015, and the purchaser currently pays the monthly rental cost due under such lease, provided that the Company remains legally obligated under such lease pursuant to its terms.
On April 28, 2014, the Company entered into a lease agreement for retail space located at 1536 Wynkoop, Denver, Colorado 80202. The rental space encompasses approximately 121 square feet. The lease has a term of 60 months. Rent is $1,500 per month for the first year, increasing with the annual increase in the consumer price index thereafter on the annual anniversary date of the lease.
NOTE 14 – CONCENTRATIONS
During the year ended January 31, 2016 two vendors accounted for 42% of our purchases. During the year ended January 31, 2015 three vendors accounted for 61% of our purchases. During the years ended January 31, 2016 and 2015 three distributors accounted for 42% and two customers accounted for 52% of our net revenues, respectively.
For fiscal 2016 and 2015 total sales in Canada totaled $922,517 and $1,546,422, respectively. The Canadian RealCup licensing revenue for the year ended January 31, 2016 and 2015 were $410,153 and $282,641, respectively.
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 fiscal 2016 sales in Chile totaled $808,658 and for fiscal 2015 sales in Chile totaled $196,099.
| F-27 |
NOTE 15 – SUBSEQUENT EVENTS
On March 1, 2016, we entered into a side letter agreement with JSJ. Pursuant to the side letter agreement, JSJ agreed to extend the maturity date of the JSJ Note to December 9, 2016 (from March 9, 2016), and we agreed to amend the terms of the JSJ Note relating to prepayment, to allow us the right to prepay the JSJ Note (a) from March 1, 2016 to September 9, 2016, provided we pay a redemption premium of 135% of the principal amount of such note together with accrued interest thereon, and (b) from September 10, 2016 to the maturity date, provided we pay a redemption premium of 150% of the principal amount of such note together with accrued interest thereon. The side letter agreement also amended the JSJ Note to (a) allow JSJ the right at any time after September 9, 2016, to convert the amount owed under the JSJ Note into shares of our common stock at a 40% discount to the third lowest trade during the previous 10 trading days prior to the date of conversion, provided that in no event will such conversion price be less than $0.00005 per share; and (b) to add a 4.99% ownership limitation which prevents JSJ from converting the note into our common stock in the event it and its affiliates would beneficially own more than 4.99% of our common stock upon such conversion, provided that such percentage can be increased by JSJ with 61 days prior written notice up to 9.99%. The side letter agreement also amended the events of default under the JSJ Note to include other additional customary events of default, in the event we cease filing reports with the Securities and Exchange Commission or if we file a Form 15.
In connection with the parties’ entry into the side letter agreement, we paid JSJ $117,253, including $16,003 of interest due on the JSJ Note through March 1, 2016, $5,000 of JSJ’s legal fees and $96,250 in consideration for JSJ agreeing to extend the due date of the JSJ Note (which represents the prepayment penalty which would have been due had we repaid the JSJ Note when due).
In March and April 2016, we repaid an aggregate of $150,000 ($75,000 in each of March and April) of the amount owed to Typenex in connection with a redemption request received from Typenex.
In February 2016, we borrowed $100,000 from a third party 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 a 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, and 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.
On March 8, 2016, and March 15, 2016, we sold Duck Duck Spruce, LLC (“Duck Duck”) two 5% Convertible Promissory Notes with face amounts of $330,000, representing $300,000 borrowed from Duck Duck and a 10% original issue discount ($30,000), and $220,000, representing $200,000 borrowed from Duck Duck and a 10% original issue discount ($20,000), respectively (each a “Duck Duck Note”, and collectively, the “Duck Duck Notes”). The Duck Duck Notes accrue interest at the rate of 5% per annum (the lesser of 10% per annum and the highest rate allowed per law upon an event of default), and are due on December 8, 2016 (as to the March 9, 2016 note) and March 15, 2017 (as to the March 15, 2016 note), provided that if we repay the Duck Duck Notes more than 90 days after the issuance date thereof, the 5% interest which would have accrued through maturity is required to be paid to Duck Duck at the time of repayment.
| F-28 |
The Duck Duck Notes can be repaid by us prior to the 180th day after the issuance date thereof along with a prepayment penalty of between 105% and 130% of the principal amount owed thereunder, plus interest (which as described above requires the total of interest through maturity if repaid more than 90 days after the issuance date). After the 180th day after the issuance date the notes cannot be repaid without the written consent of Duck Duck.
The Duck Duck Notes provide for standard and customary events of default such as failing to timely make payments under the Duck Duck Notes when due and the failure of the Company to timely comply with the Securities Exchange Act of 1934, as amended, reporting requirements.
The amounts owed under the Duck Duck Notes are convertible into shares of our common stock from time to time after the 180th day after the issuance date thereof at the option of Duck Duck, at a 35% discount (increasing by 10% if we are placed on the “chilled” list with the DTC, increasing by 5% if we are not DWAC eligible, and increasing by another 5% upon the occurrence of any event of default under the note) to the average of the two lowest closing prices of our common stock during the 10 consecutive trading days prior to the date of conversion, provided that all conversions are subject to a floor of $0.05 per share.
At no time may the Duck Duck Notes be converted into shares of our common stock if such conversion would result in Duck Duck and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.
The March 15, 2016 Duck Duck Note also (a) required us to issue 250,000 shares of restricted common stock to Duck Duck in consideration for agreeing to the sale of such note; and (b) provided that as long as the note is outstanding, upon any issuance by us of any convertible debt security (whether such debt begins with a convertible feature or such feature is added at a later date) with any conversion price term more favorable than such Duck Duck Note, then at Duck Duck’s option, such conversion price term can apply to such March 15, 2016 Duck Duck Note.
We hope to repay the Duck Duck Notes prior to any conversion. In the event that the Duck Duck Notes are not repaid in cash in their entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Duck Duck Notes is converted into common stock.
On March 16, 2016, we sold Vis Vires a Convertible Promissory Note (with an issuance date of March 11, 2016) in the principal amount of $225,000 (the “Vis Vires Convertible Note”), pursuant to a Securities Purchase Agreement, dated March 11, 2016. The Vis Vires Convertible Note bears interest at the rate of 8% per annum (22% upon an event of default) and is due and payable on December 15, 2016. The Vis Vires Convertible Note provides for standard and customary events of default such as failing to timely make payments under the Vis Vires Convertible Note when due and the failure of the Company to timely comply with the Securities Exchange Act of 1934, as amended, reporting requirements. Additionally, upon the occurrence of certain fundamental defaults, as described in the Vis Vires Convertible Note, we are required to pay Vis Vires liquidated damages in addition to the amount owed under the Vis Vires Convertible Note.
The principal amount of the Vis Vires Convertible Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the 180th day after the Vis Vires Convertible Note was issued. The conversion price of the Vis Vires Convertible Note is equal to the greater of (a) 65% (a 35% discount) multiplied by the average of the lowest five closing bid prices of our common stock during the ten trading days immediately prior to the date of any conversion; and (b) $0.00009, provided that the conversion price during major announcements (as described in the Vis Vires Convertible Note) is the lower of the conversion price on the announcement date of such major announcement and the conversion price on the date of conversion. In the event we fail to deliver the shares of common stock issuable upon conversion of the note within three business days of our receipt of a conversion notice, we are required to pay Vis Vires $2,000 per day for each day that we fail to deliver such shares. The Vis Vires Convertible Note conversion price also includes anti-dilution protection such that in the event we issue or are deemed to have issued common stock or convertible securities at a price equal to less than the conversion price of the Vis Vires Convertible Note in effect on the date of such issuance or deemed issuance, the conversion price of the Vis Vires Convertible Note is automatically reduced to such lower price, subject to certain exceptions in the note.
| F-29 |
At no time may the Vis Vires Convertible Note be converted into shares of our common stock if such conversion would result in Vis Vires and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.
We may prepay in full the unpaid principal and interest on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date. Any prepayment is subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the Vis Vires Convertible Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.
The Vis Vires Convertible Note also contains customary positive and negative covenants.
We paid $3,000 of Vis Vires’s attorney’s fees in connection with the sale of the Vis Vires Convertible Note.
We hope to repay the Vis Vires Convertible Note prior to any conversion. In the event that the Vis Vires Convertible Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Vis Vires Convertible Note is converted into common stock.
On March 10, 2016, the Board of Directors approved the repricing of options to purchase 6 million shares of the Company’s common stock originally issued to the Company’s executive officers and directors in June 2015. Specifically, the Board of Directors approved a change in the exercise price of such options from $0.195 per share to $0.12 per share, provided no other terms of the options were changed except for the re-pricing. As a result of the repricing, our executive officers and directors, Brent Toevs, Anh Tran and Rohan Marley, each hold options to purchase 2 million shares of the Company’s common stock at an exercise price of $0.12 per share, with 666,666 options vesting on June 30, 2016 and 666,667 options vesting on June 30, 2017 and 2018, respectively.
On April 20, 2016, the Company entered into a settlement and release with one of its officer and director insurance providers, pursuant to which among other things, the provider has agreed to buy out the Company’s officer and director liability insurance policy for the period from March 15, 2011 to March 15, 2012 for $400,000. The Company expects to receive payment approximately 30 days after the entry into the settlement.
The Company has reached a settlement in principle with the Securities and Exchange Commission to settle the claims made by the Commission, which has not yet been approved or accepted by the Commission to date, and may not be formally approved or accepted. In the event the Company were to have to pay significant fines or disgorgement in the matter described above, and the Company was unable to raise sufficient funding to pay such fines or disgorgement, the Company could be forced to suspend its activities, terminate its operations or seek bankruptcy protection.
On April 20, 2016, the Company entered into a settlement agreement and release with one of its officer and director insurance providers, pursuant to which among other things, the provider agreed to buy out the Company’s officer and director liability insurance policy for the period from March 15, 2011 to March 15, 2012 for $400,000, which the Company expects to receive approximately 30 days after the entry into the settlement.
| F-30 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| JAMMIN JAVA CORP. | ||
| By: /s/ Brent Toevs | ||
| Brent Toevs | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 6, 2016 |
| By: /s/ Anh Tran | ||
| Anh Tran | ||
| President, Chief Operating Officer, Secretary and Treasurer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| Date: May 6, 2016 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Brent Toevs | Chief Executive Officer | May 6, 2016 | ||
| Brent Toevs | (Principal Executive Officer) | |||
| Director | ||||
| /s/ Anh Tran | President, Chief Operating Officer, | May 6, 2016 | ||
| Anh Tran | Secretary and Treasurer | |||
| (Principal Financial Officer and | ||||
| Principal Accounting Officer) | ||||
| Director | ||||
| /s/ Rohan Marley | Chairman of the Board of Directors | May 6, 2016 | ||
| Rohan Marley |
| Exhibit Index |
| Exhibit Number | Description | |
| 3.1 | Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed April 1, 2014) | |
| 3.2 | Amended and Restated Bylaws of Jammin Java Corp. (May 23, 2014) (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed May 30, 2014) | |
| 10.1+ | 2011 Equity Compensation Plan (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed August 10, 2011) | |
| 10.2+ | Amended and Restated 2012 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company’s Form S-8/A Registration Statement filed October 17, 2013) | |
| 10.3+ | 2013 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-8 filed October 17, 2013) | |
| 10.4** | Supply and Toll Agreement, dated as of April 28, 2010, between Canterbury Coffee Corporation and the Company (incorporated by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K filed May 17, 2011) | |
| 10.5 | Exclusive Sales and Marketing Agreement, dated as of April 25, 2011, by and between National Coffee Service & Vending and the Company (incorporated by reference to Exhibit 10.3 of the Company’s Annual Report on Form 10-K filed May 17, 2011) | |
| 10.6** | First Amendment to Supply and Toll Agreement, dated as of May 12, 2011, by and between Canterbury Coffee Corporation and the Company (incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K filed May 17, 2011) | |
| 10.7+ | Grant of Contractor Stock Option, dated as of August 11, 2011, from the Company to Shane Whittle (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K/A filed August 11, 2011) | |
| 10.8+ | Grant of Employee Stock Option dated as of August 5, 2011, from the Company to Anh Tran (incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed August 10, 2011) | |
| 10.9+ | Grant of Employee Stock Option, dated as of August 5, 2011, from the Company to Rohan Marley (incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K filed August 10, 2011) | |
| 10.10+ | Grant of Employee Stock Option, dated as of August 10, 2011, from the Company to Brent Toevs (incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K filed August 10, 2011) | |
| 10.11** | Roasting and Distribution Agreement, dated as of January 1, 2012, by and between the Company and Canterbury Coffee Corporation, (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed May 14, 2012) | |
| 10.12 | License Agreement with Fifty-Six Hope Road Music Limited dated September 13, 2012 (incorporated by reference to Exhibit 10.7 of the Company’s Amended Report on Form 10-Q/A, filed on October 4, 2012) | |
| 10.13+ | Amended and Restated Employment Agreement with Brent Toevs (August 2013) (incorporated by reference to Exhibit 10.24 of the Company’s Quarterly Report on Form 10-Q filed September 12, 2013) |
| 10.14+ | Amended and Restated Employment Agreement with Anh Tran (August 2013) (incorporated by reference to Exhibit 10.25 of the Company’s Quarterly Report on Form 10-Q filed September 12, 2013) | |
| 10.15 | Lease Agreement (June 2013) – 4730 Tejon Street, Denver, Colorado 80211 (incorporated by reference to Exhibit 10.26 of the Company’s Quarterly Report on Form 10-Q filed September 12, 2013) | |
| 10.16 | Form of Subscription Agreement July/August 2013 Offering (incorporated by reference to Exhibit 10.28 of the Company’s Annual Report on Form 10-K filed May 16, 2014) | |
| 10.17 | Form of Common Stock Purchase Warrant Agreement July/August 2013 Offering (incorporated by reference to Exhibit 10.29 of the Company’s Annual Report on Form 10-K filed May 16, 2014) | |
| 10.18 | Amended and Restated License Agreement with Mother Parkers Tea & Coffee Inc. (May 20, 2014) (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed May 30, 2014) | |
| 10.19 | Form of 2013 Equity Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on August 29, 2014) | |
| 10.20+ | Form of Amended and Restated 2012 Equity Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on August 29, 2014) | |
| 10.21+ | Form of Restricted Stock Grant Agreement to Advisory Board Members (June 2014) (incorporated by reference to Exhibit 10.33 of the Company’s Quarterly Report on Form 10-Q filed on September 15, 2014) | |
| 10.22+ | First Amendment to Amended and Restated Employment Agreement with Brent Toevs (June 30, 2015) (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on July 31, 2015) | |
| 10.23+ | First Amendment to Amended and Restated Employment Agreement with Anh Tran (June 30, 2015) (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on July 31, 2015) | |
| 10.24+ | Form of 2013 Equity Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on August 29, 2014) | |
| 10.25+ | Form of 2015 Equity Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed on July 31, 2015) |
| 10.26 | $275,000 12% Convertible Note Issued September 9, 2015, by Jammin Java Corp. in favor of JSJ Investments Inc. (incorporated by reference to Exhibit 10.31 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2015, filed with the SEC on September 21, 2015) | |
| 10.27 | Securities Purchase Agreement dated September 14, 2015, by Jammin Java Corp. and Typenex Co-Investment, LLC (incorporated by reference to Exhibit 10.32 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2015, filed with the SEC on September 21, 2015) | |
| 10.28 | Secured Convertible Promissory Note dated September 14, 2015 ($1,005,000), by Jammin Java Corp. in favor of Typenex Co-Investment, LLC (incorporated by reference to Exhibit 10.33 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2015, filed with the SEC on September 21, 2015) |
| 10.29 | Membership Interest Pledge Agreement dated September 14, 2015, by and between Typenex Co-Investment, LLC and Jammin Java Corp. (incorporated by reference to Exhibit 10.34 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2015, filed with the SEC on September 21, 2015) | |
| 10.30 | Secured Investor Note #1 dated September 14, 2015 by and between Typenex Co-Investment, LLC and Jammin Java Corp. (incorporated by reference to Exhibit 10.35 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2015, filed with the SEC on September 21, 2015) |
| 10.31 | Security Agreement dated September 14, 2015, by Jammin Java Corp. in favor of Typenex Co-Investment, LLC (incorporated by reference to Exhibit 10.36 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2015, filed with the SEC on September 21, 2015) | |
| 10.32 | Convertible Promissory Note dated September 16, 2015, by Jammin Java Corp. in favor of JMJ Financial (incorporated by reference to Exhibit 10.37 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2015, filed with the SEC on September 21, 2015) |
| 10.33 | Securities Purchase Agreement dated September 9, 2015, by and between Jammin Java Corp. and Vis Vires Group, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 2, 2015) | |
| 10.34 | $254,000 Convertible Promissory Note dated September 9, 2015, by Jammin Java Corp. in favor of Vis Vires Group, Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on October 2, 2015) | |
| 10.35 | March 1, 2016 Side Letter Agreement with JSJ Investments, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 24, 2016) | |
| 10.36 | 5% Convertible Promissory Note ($330,000) with Duck Duck Spruce, LLC dated March 8, 2016 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed March 24, 2016) | |
| 10.37+ | Amended and Restated 2015 Equity Incentive Plan of Jammin Java Corp. (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed March 24, 2016) | |
| 10.38+ | Option Agreement of Rohan Marley effective June 30, 2015 (as amended) (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed March 24, 2016) | |
| 10.39+ | Option Agreement of Brent Toevs effective June 30, 2015 (as amended) (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed March 24, 2016) | |
| 10.40+ | Option Agreement of Anh Tran effective June 30, 2015 (as amended) (incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed March 24, 2016) | |
| 10.41 | Securities Purchase Agreement dated March 11, 2016, by and between Jammin Java Corp. and Vis Vires Group, Inc. (incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed March 24, 2016) | |
| 10.42 | $225,000 Convertible Promissory Note dated March 11, 2016, by Jammin Java Corp. in favor of Vis Vires Group, Inc. (incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K filed March 24, 2016) | |
| 10.43 | 5% Convertible Promissory Note ($220,000) with Duck Duck Spruce, LLC dated March 15, 2016 (incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K filed March 24, 2016) | |
| 14.1 | Code of Ethical Business Conduct, adopted March 31, 2014 (incorporated by reference to Exhibit 14.1 of the Company’s Current Report on Form 8-K filed April 1, 2014) | |
| 21.1 | List of Subsidiaries (incorporated by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-K filed May 16, 2014) | |
| 23.1* | Consent of Squar, Milner, Peterson, Miranda & Williamson, LLP | |
| 31.1* | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2* | Certification of the Principal Accounting and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1**** | Certifications of the Principal Executive Officer and the Principal Accounting and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS*** | XBRL Instance Document | |
| 101.SCH*** | XBRL Taxonomy Extension Schema Document | |
| 101.CAL*** | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF*** | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB*** | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE*** | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith.
** The Company has obtained confidential treatment of certain portions of this agreement which have been omitted and filed separately with the U.S. Securities and Exchange Commission.
*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.
**** Furnished herewith.
+ Indicates management contract or compensatory plan or arrangement.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-1848860, 333-191780 and 333-210409) of Jammin Java Corp. (hereinafter referred to as the “Company”) of our report dated May 6, 2016 relating to our audits of the Company’s January 31, 2016 and 2015 financial statements, which appear in this annual report on Form 10-K of Jammin Java Corp. Our aforementioned audit report includes an emphasis paragraph relating to an uncertainty as to the Company’s ability to continue as a going concern.
/s/ Squar Milner LLP (formerly SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP)
Newport Beach, California
May 6, 2016
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
| I, Brent Toevs, certify that: |
| 1. | I have reviewed this Annual Report on Form 10-K of Jammin Java Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of a Quarterly Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 6, 2016 | By: | /s/ Brent Toevs | |
| Brent Toevs | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
| I, Anh Tran, certify that: |
| 1. | I have reviewed this Annual Report on Form 10-K of Jammin Java Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of a Quarterly Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 6, 2016 | By: | /s/ Anh Tran | |
| Anh Tran | |||
| President, Chief Operating Officer, Secretary and Treasurer | |||
| (Principal Financial and Accounting Officer) | |||
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following certifications are being furnished solely to accompany the Annual Report on Form 10-K for the year ended January 31, 2016 (the “Report”) pursuant to U.S.C. Section 1350, and pursuant to SEC Release No. 33-8238 are being “furnished” to the Securities and Exchange Commission (the “SEC”) rather than “filed” either as part of the Report or as part of the Report of as a separate disclosure statement, and are not to be incorporated by referenced into the Report or any other filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. The foregoing certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of Section 18 or Section 11 and 12(a)(2) of the Securities Act of 1933, as amended.
Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Jammin Java, Corp. (the “Company”) hereby certifies, to such officer’s knowledge, that:
| 1. | the accompanying Annual Report on Form 10-K for the year ended January 31, 2016 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: May 6, 2016 | By: | /s/ Brent Toevs | |
| Brent Toevs | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
Certification of the Chief Financial and Accounting Officer
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Jammin Java, Corp. (the “Company”) hereby certifies, to such officer’s knowledge, that:
| 1. | the accompanying Annual Report on Form 10-K for the year ended January 31, 2016 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: May 6, 2016 | By: | /s/ Anh Tran | |
| Anh Tran | |||
| President, Secretary and Treasurer | |||
|
(Principal Financial and Accounting Officer) | |||
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Jan. 31, 2016 |
May. 03, 2016 |
Jul. 31, 2015 |
|
| Document And Entity Information [Abstract] | |||
| Entity Registrant Name | JAMMIN JAVA CORP. | ||
| Entity Central Index Key | 0001334586 | ||
| Document Type | 10-K | ||
| Document Period End Date | Jan. 31, 2016 | ||
| Amendment Flag | false | ||
| Current Fiscal Year End Date | --01-31 | ||
| Entity Well-known Seasoned Issuer | No | ||
| Entity Voluntary Filers | No | ||
| Entity Current Reporting Status | Yes | ||
| Entity Filer Category | Smaller Reporting Company | ||
| Entity Public Float | $ 24,948,964 | ||
| Entity Common Stock, Shares Outstanding | 130,134,439 | ||
| Entity Common Stock, Shares to be issued | 250,000 | ||
| Document Fiscal Year Focus | 2016 | ||
| Document Fiscal Period Focus | FY |
BALANCE SHEETS (Parenthetical) - $ / shares |
Jan. 31, 2016 |
Jan. 31, 2015 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 5,112,861,525 | 5,112,861,525 |
| Common stock, shares issued | 126,455,312 | 124,691,748 |
| Common stock, shares outstanding | 126,455,312 | 124,691,748 |
STATEMENTS OF OPERATIONS - USD ($) |
12 Months Ended | |
|---|---|---|
Jan. 31, 2016 |
Jan. 31, 2015 |
|
| Revenue: | ||
| Revenue | $ 12,312,620 | $ 9,569,791 |
| Discounts and allowances | (1,114,015) | (668,424) |
| Net revenue | 11,198,605 | 8,901,367 |
| Cost of sales: | ||
| Cost of sales products | 8,025,368 | 6,955,321 |
| Total cost of sales | 8,025,368 | 6,955,321 |
| Gross Profit | 3,173,237 | 1,946,046 |
| Operating Expenses: | ||
| Compensation and benefits | 3,708,352 | 4,465,889 |
| Selling and marketing | 2,688,117 | 3,150,274 |
| General and administrative | 1,594,808 | 2,807,296 |
| Total operating expenses | 7,991,277 | 10,423,459 |
| Other expense: | ||
| Other expense | $ (225,783) | |
| Loss on extinguishment of debt | (1,799,543) | |
| Changes in fair value of derivative liability | $ (7,796) | |
| Interest expense | (150,298) | (4,029) |
| Total other expense | (383,877) | (1,803,572) |
| Net Loss | $ (5,201,917) | $ (10,280,985) |
| Net loss per share: | ||
| Basic and diluted loss per share | $ (0.04) | $ (0.09) |
| Weighted average common shares outstanding - basic and diluted | 125,504,494 | 120,201,082 |
STATEMENTS OF STOCKHOLDERS' DEFICIT - USD ($) |
Common Stock [Member] |
Common Stock Shares To Be Issued [Member] |
Paid-In Capital [Member] |
Accumulated Deficit [Member] |
Total |
||
|---|---|---|---|---|---|---|---|
| Begining Balance at Jan. 31, 2014 | $ 103,166 | $ 16,514,630 | $ (13,762,848) | $ 2,854,948 | |||
| Begining Balance, Shares at Jan. 31, 2014 | 104,085,210 | 208,039 | |||||
| Issuance of common stock for services | $ 1,764 | 425,678 | 427,442 | ||||
| Issuance of common stock for services, shares | 1,764,356 | ||||||
| Issuance of common stock for cash | $ 7,334 | 2,492,666 | 2,500,000 | ||||
| Issuance of common stock for cash, shares | 7,333,529 | ||||||
| Shares issued to Ironridge | $ 12,220 | 2,527,533 | 2,539,753 | ||||
| Shares issued to Ironridge, shares | 12,219,871 | ||||||
| Shares to be issued to Black Rock Beverage | $ 158 | (158) | |||||
| Shares to be issued to Black Rock Beverage, shares | 158,039 | (158,039) | |||||
| Exercise of stock options | $ 50 | (50) | |||||
| Exercise of stock options, shares | 50,000 | (50,000) | |||||
| Stock based compensation | 1,864,995 | 1,864,995 | |||||
| Shares issued subsequently rescinded, shares | [1] | (919,257) | |||||
| Net loss | (10,280,985) | (10,280,985) | |||||
| Ending Balance at Jan. 31, 2015 | $ 124,692 | 23,825,294 | (24,043,833) | (93,847) | |||
| Ending Balance Shares at Jan. 31, 2015 | 124,691,748 | ||||||
| Issuance of common stock for services | $ 1,894 | 202,390 | 204,284 | ||||
| Issuance of common stock for services, shares | 1,894,044 | ||||||
| Stock based compensation | 1,713,764 | 1,713,764 | |||||
| Net loss | (5,201,917) | (5,201,917) | |||||
| Retirement of common stock for accounts receivable | $ (131) | (49,869) | (50,000) | ||||
| Retirement of common stock for accounts receivable, shares | (130,480) | ||||||
| Ending Balance at Jan. 31, 2016 | $ 126,455 | $ 25,691,579 | $ (29,245,750) | $ (3,427,716) | |||
| Ending Balance Shares at Jan. 31, 2016 | 126,455,312 | ||||||
| |||||||
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 1—NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jammin Java Corp. (the “Company” or “Jammin Java”), operates as a United States (U.S.) based company providing premium roasted coffee on a wholesale level to the grocery, retail, online, service, hospitality, office coffee service and big box store industry. Through the use of our roaster distributor relationships, we have the exclusive right to manufacture and market our coffee lines to gourmet, natural and independent grocery markets in the U.S., Canada, Mexico and the Caribbean and the non-exclusive right worldwide.
As used herein, the terms “we,” “us,” “our,” “Jammin Java” and “Company” mean Jammin Java Corp., unless otherwise indicated. All dollar amounts in these financial statements are in U.S. dollars unless otherwise stated.
Summary of Significant Accounting Policies. The summary of our significant accounting policies presented below is designed to assist the reader in understanding our financial statements. Such financial statements and related notes are the representations of our management, who are responsible for their integrity and objectivity. In the opinion of management, these accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying financial statements.
Basis of Presentation. These financial statements have been prepared by management assuming that the Company will be able to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business. However, certain conditions noted below currently exist which raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company has incurred net losses of $5,201,917 and $10,280,985 for the years ended January 31, 2016 and 2015, respectively and has an accumulated deficit of $29,245,750 at January 31, 2016. In addition to the Company’s recent history of losses, the Company has only recently begun to generate revenue as part of its principal operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Further, the operations of the Company have primarily been funded by the issuance of common stock and debt. In order for us to conduct our business for the next twelve months and to continue operations thereafter and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, reduce operating expenses, and potentially raise additional funds, through either debt and/or equity financing to meet our working capital needs. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may be required to curtail its operations.
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. Management intends to increase sales by increasing the Company’s product offerings, expanding its direct sales force and expanding its domestic and international distributor relationships. The Company has reached a settlement in principle with the Commission to settle the claims made by the Commission, which has not yet been formally approved or accepted by the Commission to date, and may not be approved or accepted. In the event the Company were to have to pay significant legal fees to defend itself against the allegations made in the complaint or pay significant fines or disgorgement in the matter, and the Company was unable to raise sufficient funding to pay such fines or disgorgement, the Company could be forced to suspend its activities, terminate its operations or seek bankruptcy protection, all of which could lead to the value of the Company’s common stock declining in value or becoming worthless.
Pursuant to the terms and conditions of the FSHR License Agreement, FSHR can terminate that agreement under certain circumstances, subject where applicable and as described in the agreement, our right to cure such breaches and other events, including: in the event the Securities and Exchange Commission or any similar government agency in any country, territory or possession makes any negative or unlawful finding regarding our activities. Notwithstanding our categorical denial of the allegations made in the SEC’s November 2015 complaint, as discussed below under “Part I” - “Item 2. Legal Proceedings”, in the event the SEC’s complaint constitutes a “negative or unlawful finding regarding our activities” or we consent to any actions against us by the SEC in connection with the allegations made by the SEC in the November 2015 complaint which constitute a “negative or unlawful finding regarding our activities”, FSHR can terminate the FSHR License Agreement.
The termination of the FSHR License Agreement would have a material adverse effect on our results of operations and assets, could force us to scale back and/or abandon our business operations, or force us to seek bankruptcy protection and could cause the value of our common stock to decline in value or become worthless. As we’ve stated above, none of the officers in the Company have been named in the SEC suit and we believe that we will be found innocent of the charges alleged.
If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which our net assets 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 reflect any adjustments related to the outcome of this uncertainty.
Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation for comparative purposes.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the assessment of the impairment of long-lived assets, the allowance for doubtful accounts, valuation allowances for deferred tax assets, and valuation of our financial and equity instruments. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.
Fair Value Matters. The carrying amount of the Company’s cash, accounts receivables, accounts payables, approximates their estimated fair values due to the short-term maturities of those financial instruments.
The Company has adopted a single definition of fair value, a framework for measuring fair value, and providing expanded disclosures concerning fair value whereby estimated fair value is the price to be paid for an asset or the amount to settle a liability in an orderly transaction between market participants at the measurement date. Accordingly, fair value is a market-based measurement and not an entity-specific measurement.
The Company utilizes the following hierarchy in fair value measurements:
Cash and Cash Equivalents. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At January 31, 2016 and 2015, the Company has no cash equivalents. No funds were invested in money market accounts during the year ended January 31, 2016.
Concentrations of Credit Risk. Our cash and cash equivalents are principally on deposit in a non-insured short-term asset management account at a large financial institution. Accounts receivable potentially subject us to concentrations of credit risk. Currently, our customer base is comprised of only a limited number of customers (see Note 14).
Revenue Recognition. Revenue is derived from the sale of coffee products and is recognized on a gross basis upon shipment to the customer. All revenue is recognized when (i) persuasive evidence of an arrangement exists; (ii) the service or sale is completed; (iii) the price is fixed or determinable; and (iv) the ability to collect is reasonably assured. Revenue is recognized as the net amount estimated to be received after deducting estimated amounts for discounts, trade allowances and product terms. We record promotional and return allowances based on recent and historical trends. Promotional allowances, including customer incentive and trade promotion activities, are recorded as a reduction to sales based on amounts estimated being due to customers, based primarily on historical utilization and redemption rates. Discounts and promotional allowances deducted from sales for fiscal years 2016 and 2015 were $1,114,015 and $668,424, respectively.
The Company utilizes third parties for the production and fulfillment of orders placed by customers. The Company, acting as principal, takes title to the product and assumes the risks of ownership; namely, the risks of loss for collection, delivery and returns.
Allowance for Doubtful Accounts. The Company does not require collateral from its customers with respect to accounts receivable. The Company determines any required allowance by considering a number of factors, including the terms for each customer, and the length of time accounts receivable are outstanding. Management provides an allowance for accounts receivable whenever it is evident that they become uncollectible. The Company has determined that a $71,168 allowance for doubtful accounts was required at January 31, 2016 and $100,000 for January 31, 2015. Because our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.
Inventories. Inventories are stated at the lower of cost or market. Cost is computed using weighted average cost, which approximates actual cost, on a first-in, first-out basis. Inventories on hand are evaluated on an on-going basis to determine if any items are obsolete or in excess of future needs. Items determined to be obsolete are reserved for. From time to time the Company provides for the possible inability to sell its inventories by providing an excess inventory reserve. As of January 31, 2016 and 2015, the Company determined that no reserve was required.
Acquisition of BlackRock Beverage Services, Inc. and Bike Caffe Franchising Inc. On August 16, 2013, the Company purchased certain assets including inventory, fixed assets, and IP owned by BlackRock Beverage Services Inc. for $81,118 in total consideration consisting of $10,000 in cash and 158,039 common shares of the Company valued at $71,118. In addition, on December 4, 2013, the Company purchased certain assets including fixed assets, inventory, IP and trademarks owned by Bike Caffe Franchising, Inc. for total consideration of $140,000 consisting of $40,000 in cash and 250,000 common shares of the Company valued at $100,000. No liabilities were assumed as part of the acquisitions. The acquisitions were accounted for by the Company using the purchase method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, at the date of acquisition, the net assets of BlackRock and BikeCaffe were recorded at their respective fair values and represents management’s estimates based on a third party valuation report. The Company incurred $5,000 of acquisition-related costs, which were expensed as incurred in the accompanying Statement of Operations included within Other Operating Expenses.
The results of BikeCaffe operations are included in the accompanying statements of operations from the date of acquisition. The net assets acquired were recorded at their fair values at the date of acquisition, as summarized in the following table:
Bike Caffe Franchising, Inc.
The Company sold Black Rock Beverages, LLC (“BRB”) in July 2015 and there are no longer any intangibles or fixed assets related to this company. See Note 5 for more details.
Property and Equipment. Equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs, as incurred, are charged to expense. Renewals and enhancements which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are three years.
Our property and equipment is summarized as follows:
Depreciation expense was $176,884 and $115,372 for the years ended January 31, 2016 and 2015, respectively.
Impairment of Long-Lived Assets. Long-lived assets consist primarily of a license agreement that was recorded at the estimated cost to acquire the asset. 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 January 31, 2016 or 2015.
Stock-Based Compensation. Pursuant to the provisions of Financial Accounting Standards Board (“FASB”) FASB ASC 718-10, “Compensation – Stock Compensation,” which establishes accounting for equity instruments exchanged for employee service, management utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock option awards 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.
Common stock issued for services to non-employees is recorded based on the value of the services or the value of the common stock whichever is more clearly determinable. Whenever the value of the services is not determinable, the measurement date occurs generally at the date of issuance of the stock. In more limited cases, it occurs when a commitment for performance has been reached with the counterparty and nonperformance is subject to significant disincentives. If the total value of stock issued exceeds the par value, the value in excess of the par value is added to the additional paid-in-capital.
We estimate volatility of our publicly-listed common stock by considering historical stock volatility.
Income Taxes. The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No 740, Income Taxes.
The Company records deferred tax assets and liabilities based on the differences between the financial statement and tax bases of assets and liabilities and on net operating loss carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Earnings or Loss Per Common Share. Basic earnings per common share equal net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share include the impact on dilution from all contingently issuable shares, including options, warrants and convertible securities. The common stock equivalents from contingent shares are determined by the treasury stock method. The Company incurred a net loss for the years ended January 31, 2016 and 2015, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be anti-dilutive. Anti-dilutive shares include -0- and 11,144,863 options for the years ended January 31, 2016 and 2015.
Derivative Liabilities. A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities. As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company entered into certain debt financing transactions in fiscal 2016, as disclosed in Note 8, containing certain embedded features that have resulted in the instruments being deemed derivatives. The Company may engage in other similar complex financing transactions in the future, but not with the intention to enter into derivative instruments. Derivatives are measured at fair value using the Monte Carlo simulation pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions. Changes in these subjective assumptions can materially affect the estimate of the fair value of derivative liabilities and, consequently, the related amount recognized as a change in fair value of derivative liabilities on the consolidated statement of operations. Furthermore, depending on the terms of a derivative, the valuation of derivatives may be removed from the financial statements upon exercise or conversion of the underlying instrument into some other security or if the contract is modified.
We evaluate derivative instruments to properly classify such instruments within stockholders' equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed at each balance sheet date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.
During fiscal 2016, we adopted the guidance, as codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, that requires us to apply a two-step model in determining whether a financial instrument or an embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. The embedded conversion option features did not qualify for equity classification as they had no conversion price floor and as such required treatment as derivative liabilities. Accordingly, $778,951 of conversion feature derivative liabilities are carried at January 31, 2016.
Fair Value Measurements. We follow FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring basis for any period reported.
ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories. We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.
The hierarchy noted above requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. There were no transfers between Level 1, Level 2 and/or Level 3 during fiscal 2016. Our fair value measurements at the January 31, 2016 reporting date are classified based on the valuation technique level noted in the table below:
The following table presents the estimated fair value of financial liabilities measured at estimated fair value on a recurring basis included in the Company’s financial statements as of January 31, 2016:
Significant Recently Issued Accounting Pronouncements. 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 following:
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.
FASB 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.
Subsequent Events. Management has evaluated events subsequent to January 31, 2016 through the date the accompanying statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements. |
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INVENTORY |
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| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||
| INVENTORY | NOTE 2 – INVENTORY
Inventories were comprised of:
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RECEIVABLES |
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| RECEIVABLES | NOTE 3 – RECEIVABLES
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LICENSE AGREEMENTS |
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| Trademark License Agreements and Intangible Assets [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LICENSE AGREEMENTS | NOTE 4 – LICENSE AGREEMENTS
On March 31, 2010, the Company obtained a sub-license agreement (the “Agreement”) with Marley Coffee, LLC (“MCL”), a private limited liability company of which Rohan Marley, a Director of the Company, and his family have a combined controlling interest as more fully described below.
2010 MCL Trademark License Agreement
Fifty-Six Hope Road Music Limited, a Bahamas international business company (“Fifty-Six Hope Road”) owns and controls the intellectual property rights, including the “Marley Coffee” trademarks relating to the late reggae performer, Robert Nesta Marley, professionally known as Bob Marley (the “Trademarks”). On March 31, 2010, Fifty-Six Hope Road and MCL entered into an agreement which granted to MCL the exclusive, oral, terminable license to use the Trademarks and granted to the Company an exclusive, terminable, sublicense to use the Trademark.
On March 31, 2010, MCL entered into the Agreement with the Company, effective March 30, 2010, pursuant to which it sublicensed the use of the Trademarks to the Company (the “MCL Trademarks License Agreement”). Rohan Marley, a director of the Company, also serves as the managing member of MCL and is the beneficial owner of one-third of MCL’s membership interests.
The consideration for the MCL Trademarks License Agreement was as follows:
In accordance with FASB ASC 505-25- “Share-Based payments to Non Employees,” management recorded the transaction based on the estimated fair value of the perpetual license at the measurement date of March 31, 2010 totaling $766,000, (the date when the Trademarks and its underlying rights were granted to the Company and when MCL’s performance was completed).
On August 5, 2011, the parties expanded the scope of the MCL Trademarks License Agreement in favor of the Company by an amendment in consideration for the Company assuming $126,000 in additional obligations of MCL. As part of the Agreement, the Company had issued 2,000,000 shares of its common stock.
On September 13, 2012, the MCL Agreement was replaced and superseded with the 2012 Trademarks License Agreement with Fifty-Six Hope Road more fully described below. The MCL Termination Agreement provided that all of the Company’s obligations under the MCL Agreement were terminated except for the Company’s obligations to: (i) issue to MCL the 1 million shares of its common stock which were due to MCL on March 31, 2012 (which obligation has since been forgiven); and (ii) repay its remaining outstanding debt obligation of $19,715 in monthly installments, the final installment of which was paid in February 2013.
2012 Trademarks License Agreement
On September 13, 2012, the Company entered into a new trademark license agreement with Fifty-Six Hope Road which superseded and replaced the MCL Trademarks License Agreement (the “2012 Trademarks License Agreement”), with an effective date of August 7, 2012. Pursuant to the 2012 Trademarks License Agreement, Fifty-Six Hope Road granted to the Company a worldwide, exclusive, non-transferable license to utilize 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 however that the Company may not open retail coffee houses under the Trademarks. In addition, Fifty Six 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”). The Licensed Products may be sold by the Company pursuant to the 2012 Trademarks 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 Fifty-Six Hope Road. The 2012 Trademarks License Agreement has a 15 year term and provides two renewal periods of 15 years at the discretion of the Company. In return, the Company agreed to pay royalties to Fifty-Six Hope Road in an amount equal to 3% of the net sales of all Licensed Products. In addition, such royalty payments are to be deferred during the first 20 months of the term of the 2012 Trademarks License Agreement, and such deferred payments shall be paid on a quarterly-basis thereafter. The total owed to Fifty-Six Hope Road is $264,670 at January 31, 2016.
In connection with the termination and replacement, the Company recorded an impairment of license agreement assets totaling $36,000 and amortization expense totaling $24,333 for the year ended January 31, 2013. No impairment was recorded for the year ended January 31, 2016 and amortization expense was $48,666 and $48,667 for the years ended January 31, 2016 and 2015, respectively.
The license agreement net balance is included in intangible assets on the balance sheets. The amortization period is fifteen years. Amortization expense consists of the following:
As of January 31, 2016, the remaining useful life of the Company’s license agreement was approximately 11.5 years. The following table shows the estimated amortization expense for such assets for each of the five succeeding fiscal years and thereafter.
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SALE OF DIVISION |
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| Discontinued Operations and Disposal Groups [Abstract] | ||
| SALE OF DIVISION |
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| PREPAID EXPENSES |
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RELATED PARTY TRANSACTIONS |
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| Related Party Transactions [Abstract] | |
| RELATED PARTY TRANSACTIONS | NOTE 7 – RELATED PARTY TRANSACTIONS
Marley Coffee, Ltd.; Other Related Parties
As of January 31, 2016 and 2015, respectively there are licensing fees accrued and payable of $260,496 and $265,960 to Fifty-Six Hope Road, for the license to use of the name “Marley Coffee”. From inception to January 31, 2016, the Company has incurred royalties of $689,194 to Fifty-Six Hope Road.
During the years ended January 31, 2016 and 2015, the Company made purchases of $602,191 and $764,598, respectively, from Marley Coffee Ltd. (“MC”) a producer of Jamaican Blue Mountain coffee that the Company purchases in the normal course of its business. The Company’s Chairman, Rohan Marley, is an owner of approximately 25% of the equity of MC.
The Company also received $97,796 and $34,348 in rebates from MC during the years ended January 31, 2016 and 2015, respectively, on the Jamaican green coffee purchased. There were no rebates in the prior year. From our inception in 2011 to January 31, 2016, the Company has made purchases of $2,938,886 after credits and rebates from MC. The Company directs these purchases to third-party roasters for fulfillment of sales orders. MC was created in order to have a license to buy and sell Jamaican Blue Mountain (JBM) Coffee. We buy JBM coffee at the most favorable market rate in the market. For the majority of transactions, we buy raw unroasted beans from MC and then resell them to customers around the world. From time to time, it is more economically favorable for the Company to allow MC to sell to our customers directly and then receive a rebate. The Company directs these purchases to third-party roasters for fulfillment of sales orders.
The following describe transactions with entities which are licensees of Hope Road Merchandising, LLC a company in which Rohan Marley is a beneficiary. During the years ended January 31, 2016 and 2015, the Company made purchases of $11,833 and $40,798, respectively, from House of Marley. House of Marley produces headphones and speakers that the Company uses for promotions and trade shows. During the years ended January 31, 2016 and 2015, the Company made purchases of $6,411 and $47, respectively from Zion Rootswear. For the years ended January 31, 2016 and 2015, the Company has made purchases of $0 and $278 from Tuff Gong International. The purchases from Tuff Gong International and Zion Rootswear were for Bob Marley apparel and gifts that were used for marketing and promotions purposes.
The Company has made sales to related parties for the period ending January 31, 2016 of $1,408 to Island Records, $860 to Delivery Agent (for product that is sold on the Bob Marley Website) and $539 to Zion Rootswear. For the year ending January 31, 2015 the Company has made sales to the following related parties $3,780 to Homemedics, $1,980 to Zion Rootswear, and $646 to Bravado International. All of the companies above are licensees of Hope Road Merchandising, LLC, a company in which Rohan Marley is a beneficiary.
During the years ended January 31, 2016 and 2015, the Company paid Rohan Marley Enterprises and Rohan Marley $178,875 and $211,454, respectively, for directors consulting fees, stock salary and bonus and expense reimbursements. The January 31, 2016 total included $164,399 in cash payments and $14,476 in accrued director’s fees paid in February 2016. The January 31, 2015 total included $161,454 in cash payments and $50,000 in stock bonus paid. The Company has paid Rohan Marley Enterprises $385,439 and Rohan Marley $106,335 for a total of $491,774 from inception to January 31, 2016, for director’s fees and expense reimbursements. Rohan Marley Enterprises is the personal S-Corporation of Rohan Marley which he uses to record all of his business transactions.
The total paid to Marley and Plant in prior years was $7,500 in December 2013 for improvements on the Marley Farm.
The total owed to Mother Parker at January 31, 2016 is $2,053,298 and at January 31, 2015 $1,675,102 was due to Mother Parkers for coffee purchases. The total accounts receivable due from Mother Parkers as of January 31, 2016 and 2015 is $318,934 and $323,326.
During the years ended January 31, 2016 and 2015, the Company paid Sondra Toevs $7,242 and $18,416, respectively and Ellie Toevs $4,431 and $6,231, respectively, for part-time employment. Sondra Toevs is the wife of the CEO, Brent Toevs, and Ellie Toevs is the daughter of Mr. Toevs. |
CONVERTIBLE AND OTHER NOTES PAYABLE |
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| CONVERTIBLE AND OTHER NOTES PAYABLE | NOTE 8 – CONVERTIBLE AND OTHER NOTES PAYABLE
Convertible and Other Notes Payable are as follows:
*Line of Credit. Refer to Note 15 for subsequent event developments of JSJ and Typenex notes.
Revolving 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, 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 coffee goods and services, at the option of the lender, with our consent. 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. As of January 31, 2016, the Company had borrowed a total of $250,000 under the Line of Credit. As of January 31, 2016 there was $162,347 outstanding which included $141,900 in principle and $20,448 in interest due. The payments to this line of credit have been made on a month basis.
Convertible Note with JSJ Investments Inc.
On September 9, 2015, we entered into a 12% Convertible Note to JSJ Investments Inc. (“JSJ” and the “JSJ Convertible Note”) in the amount of $275,000. Amounts owed under the JSJ Convertible Note accrue interest at the rate of 12% per annum (18% upon an event of default). The JSJ Convertible Note is payable by us on demand by JSJ at any time after March 6, 2016. We have the right to repay the JSJ Convertible Note (a) for an amount equal to 135% of the then balance of such note until the 180th day following the date of the note, and (b) for an amount equal to 150% of the balance of such note subsequent to the maturity date (provided the holder consents to such payment after maturity).
The JSJ Convertible Note and all accrued interest is convertible at the option of the holder thereof into the Company’s common stock at any time. The conversion price of the JSJ Convertible Note is 60% (a 40% discount) to the third lowest intra-day trading price of the Company’s common stock during the 10 trading days prior to any conversion date of the note. In the event we do not issue the holder any shares due in connection with a conversion within three business days, we are required to issue the holder additional shares equal to 25% of the conversion amount, and an additional 25% of such shares for each additional five business days beyond such fourth business day that such failure continues. In the event we do not have a sufficient number of authorized but unissued shares of common stock to allow for the conversion of the note, the discount rate (40%) is increased by an additional 5%.
In connection with the issuance of the note, we agreed to pay $5,000 of JSJ’s legal fees.
The JSJ Convertible Note contains standard and customary events of default, including in the event we fail to timely file any and all reports due with the Securities and Exchange Commission. Upon the occurrence of an event of default, JSJ can demand that we immediately repay 150% of the outstanding balance of the JSJ Convertible Note together with accrued interest (and default interest, if any).
Pursuant to the terms of the JSJ Convertible Note, JSJ agreed not to engage in any short sales or hedging transactions of our common stock. At no time may the JSJ Convertible Note be converted into shares of our common stock if such conversion would result in JSJ and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may be increased by JSJ to up to increases to 9.99% upon not less than 61 days’ prior written notice to us.
The goal is for the Company to utilize this debt as growth capital to help accelerate projects that generate revenue. We hope to repay the JSJ Convertible Note prior to any conversion. In the event that the JSJ Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the JSJ Note is converted into common stock.
Convertible Promissory Note with Typenex Co-Investment, LLC
On September 14, 2015 (the “Closing Date”), the Company entered into a Securities Purchase Agreement dated September 14, 2015 (the “Typenex SPA”) with Typenex Co-Investment, LLC (“Typenex”). Pursuant to the Typenex SPA, the Company issued to Typenex a convertible promissory note (the “Typenex Note”) in the principal amount of $1,005,000, deliverable in four tranches as described below.
The Typenex Note has a term of 20 months and an interest rate of 10% per annum (22% upon an event of default). The gross proceeds to the Company from the Typenex Note were $1,005,000, in the form of: (a) an initial tranche of $250,000 in cash (gross proceeds of $255,000, less $5,000 in expense reimbursements), and (b) three promissory notes of $250,000 each (collectively, the “Investor Notes”). Typenex may elect, in its sole discretion, to fund one or more of the Investor Notes. Absent such an election by Typenex, the Investor Notes will not result in cash proceeds to, or an obligation to repay on the part of, the Company. Each of the Investor Notes accrue interest at the rate of 10% per annum until paid (provided that all amounts due under the Investor Notes may be offset against amounts we owe Typenex in Typenex’s sole discretion), and as such, we do not anticipate owing any interest on the Investor Notes until such notes are funded by Typenex. Each of the Investor Notes are secured by a Membership Interest Pledge Agreement entered into by Typenex for our benefit.
Beginning on the date that is six (6) months after the Closing Date and on the same day of each month thereafter until the maturity date, so long as any amount is outstanding under the Typenex Note, the Company is required to pay to Typenex installments of principal equal to $75,000 (or such lesser principal amount as is then outstanding), plus the sum of any accrued and unpaid interest. Payments of each installment amount may be made in cash, subject to the terms of the note. Alternatively, Typenex or the Company may elect to convert an installment amount into Common Stock as described below.
Beginning six (6) months after the Closing Date, Typenex may convert the balance of the Typenex Note, or any installment or portion thereof, utilizing the conversion price calculation set forth below. Generally, the conversion price will be $0.30 per share; however, in the event the Company’s market capitalization falls below $3 million, then the conversion price is the lower of (a) $0.30 per share, and (b) the Market Price. The “Market Price” is calculated by applying a discount of 40% (provided that under certain events the discount may be reduced to up to 60%, upon the occurrence of certain events (with a reduction of 5% per event) such as the value of common stock (as calculated in the note) declining below $0.10 per share; the Company not being Deposit/Withdrawal At Custodian – DWAC eligible; the Company’s common stock not being DTC eligible; or the occurrence of any major default (as described in the note)), to the average of the three (3) lowest intra-day trading prices of the Company’s common stock during the ten (10) trading days immediately preceding the applicable conversion. The Company may also elect to make payment of installments in the form of equity on substantially the same terms, subject to the terms and conditions of the Typenex Note, and Typenex’s right in certain cases to require a certain portion of such payment to be paid in cash or stock. Additionally, 20 days after shares issued upon redemption of the note are eligible to be freely traded by Typenex (as described in the note), there is a required true up, whereby Typenex is required to be issued additional shares in the event the trading price of the Company’s common stock has declined from the time of original issuance to the date such shares are ‘free trading’ as described in the Typenex Note.
The Company has the right to prepay the Typenex Note under certain circumstances, subject to payment of a 35% prepayment penalty during the first six months the note is outstanding and 50% thereafter.
If, at any time that the Typenex Note is outstanding, the Company sells or issues any common stock or other securities exercisable for, or convertible into, Common Stock for a price per share that is less than the conversion price applicable under the Typenex Note, then such lower price will apply to all subsequent conversions by Typenex for a period of 20 trading days.
The Typenex Note includes customary and usual events of default. In the event of a default, the Typenex Note may be accelerated by Typenex. The outstanding balance would be immediately due and payable and we are required to repay Typenex additional amounts (including the value of the amount then due in common stock, at the highest intraday trading price of the amount then due under the note) and/or liquidated damages in addition to the amount owed under the Typenex Note. In addition, we owe certain fees and liquidated damages to Typenex if we fail to timely issue shares of common stock under the Typenex Note.
Typenex is prohibited from owning more than 4.99% of the Company’s outstanding shares, pursuant to the Typenex Note, unless the market capitalization of the Company’s common stock is less than $10,000,000, in which case Typenex is prohibited from owning more than 9.99% of the Company’s outstanding shares.
Amounts owed by us under the Typenex Note are secured by a first priority security interest granted to Typenex pursuant to the terms of a Security Agreement entered into with Typenex, in each of the Investor Notes.
The goal is for the Company to utilize this debt as growth capital to help accelerate projects that generate revenue. We hope to repay the Typenex Convertible Note prior to any conversion. In the event that the Typenex Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Typenex Note is converted into common stock.
As of January 31, 2016, the outstanding balance of the Typenex Note was $255,000.
Convertible Promissory Note with JMJ Financial
On September 16, 2015, we sold JMJ Financial (“JMJ”) a Convertible Promissory Note in the principal amount of up to $900,000 (the “JMJ Convertible Note”). The initial amount received in connection with the sale of the JMJ Convertible Note was $350,000, and a total of $385,000 is currently due under the JMJ Convertible Note (not including the interest charge described below), as all amounts borrowed under the note include a 10% original issue discount. Moving forward, JMJ may loan us additional funds (up to $900,000 in aggregate) at our request, provided that JMJ has the right in its sole discretion to approve any future request for additional funding. Each advance under the JMJ Convertible Note is due two years from the date of such advance, with the amount initially funded under the note due on September 16, 2017.
The JMJ Convertible Note (including principal and accrued interest and where applicable other fees) is convertible into our common stock, at any time, at the lesser of $0.75 per share or 65% (a 35% discount) of the two lowest closing prices of our common stock in the 20 trading days prior to the date of any conversion, provided that if we are not DWAC eligible at the time of any conversion an additional 10% discount applies, and in the event our common stock is not DTC eligible at the time of any conversion, an additional 5% discount applies. The JMJ Convertible Note provides that unless we and JMJ agree in writing, JMJ is not eligible to convert any amount of the note into common stock which would result in JMJ owning more than 4.99% of our common stock.
A one-time interest charge of 12% was applied to the principal amount of the note, which remains payable regardless of the repayment (or conversion) date of the note.
Until 180 days after the date of the note, we are able to prepay the note assuming we prepay all outstanding principal together with a penalty of 40% of such amount, interest, fees, liquidated damages (if any), and the original issuance discount due thereon; and after 160 days, we are not able to prepay the note without JMJ’s written approval.
We agreed that we would reserve 25 million shares of common stock for conversion of the note. In the event we fail to deliver shares within four days of the date of any conversion by JMJ, we are required to pay JMJ $2,000 per day in penalties.
The JMJ Convertible Note provides for customary events of default including, our failure to timely make payments under the JMJ Convertible Note when due, our entry into bankruptcy proceedings, our failure to file reports with the SEC, our loss of DTC eligibility for our common stock, and the investor’s loss of the ability to rely on Rule 144. Additionally, upon the occurrence of an event of default, as described in greater detail in the JMJ Convertible Note, and at the election of JMJ, we are required to pay JMJ, either (i) the amount then owed under the note divided by the applicable conversion price, on the date the default occurs or the default amount is demanded (whichever is lower), multiplied by the volume weighted average price on the date the default occurs or the default amount is demanded (whichever is higher), or (ii) 150% of the principal amount of the note, plus all of the unpaid interest, fees, liquidated damages (if any) and other amounts due. Any amount not paid when due accrues interest at the rate of 18% per annum until paid in full. JMJ is not required to provide us any written notice in order to accelerate the amounts owed under the JMJ Convertible Note in the event of the occurrence of an event of default.
For so long as the JMJ Convertible Note is outstanding JMJ agreed not to effect any “short sales” of our common stock.
The goal is for the Company to utilize this debt as growth capital to help accelerate projects that generate revenue. We hope to repay the JMJ Convertible Note prior to any conversion. In the event that the JMJ Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the JMJ Note is converted into common stock.
Convertible Promissory Note with Vis Vires Group
On September 24, 2015, we sold Vis Vires Group, Inc. (“Vis Vires”) a Convertible Promissory Note (with an issuance date of September 9, 2015) in the principal amount of $254,000 (the “Vis Vires Convertible Note”), pursuant to a Securities Purchase Agreement, dated September 9, 2015. The Vis Vires Convertible Note bears interest at the rate of 8% per annum (22% upon an event of default) and is due and payable on June 11, 2016. The Vis Vires Convertible Note provides for standard and customary events of default such as failing to timely make payments under the Vis Vires Convertible Note when due and the failure of the Company to timely comply with Exchange Act reporting requirements. Additionally, upon the occurrence of certain fundamental defaults, as described in the Vis Vires Convertible Note, we are required to repay Vis Vires liquidated damages in addition to the amount owed under the Vis Vires Convertible Note.
The principal amount of the Vis Vires Convertible Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the 180th day after the Vis Vires Convertible Note was issued. The conversion price of the Vis Vires Convertible Note is equal to the greater of (a) 65% (a 35% discount) multiplied by the average of the lowest five closing bid prices of our common stock during the ten trading days immediately prior to the date of any conversion; and (b) $0.00009, provided that the conversion price during major announcements (as described in the Vis Vires Convertible Note) is the lower of the conversion price on the announcement date of such major announcement and the conversion price on the date of conversion. In the event we fail to deliver the shares of common stock issuable upon conversion of the note within three business days of our receipt of a conversion notice, we are required to pay Vis Vires $2,000 per day for each day that we fail to deliver such shares. The Vis Vires Convertible Note conversion price also includes anti-dilution protection such that in the event we issue or are deemed to have issued common stock or convertible securities at a price equal to less than the conversion price of the Vis Vires Convertible Note in effect on the date of such issuance or deemed issuance, the conversion price of the Vis Vires Convertible Note is automatically reduced to such lower price, subject to certain exceptions in the note, including an exemption for persons with whom the Company was in discussions regarding an investment at the time the Vis Vires Convertible Note was entered into and officer and employee issuances/grants.
At no time may the Vis Vires Convertible Note be converted into shares of our common stock if such conversion would result in Vis Vires and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.
We may prepay in full the unpaid principal and interest on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date. Any prepayment is subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the Vis Vires Convertible Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.
The Vis Vires Convertible Note also contains customary positive and negative covenants.
We paid $4,000 of Vis Vires’s attorney’s fees in connection with the sale of the Vis Vires Convertible Note.
The goal is for the Company to utilize this debt and similar debt incurred in the past several weeks as growth capital to help accelerate projects that generate revenue. We hope to repay the Vis Vires Convertible Note prior to any conversion. In the event that the Vis Vires Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Vis Vires Note is converted into common stock.
The Company assessed the classification of its derivative financial instruments as of January 31, 2016, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815. Conversion feature-derivative liability totaled $778,951 at January 31, 2016. Refer to Note 1 for more detail.
Debt Maturity Schedule
The following table summarizes the Company’s annual principal maturities of debt for the five years subsequent to December 31, 2016:
Debt, net of discounts at January 31, 2016 totaled $1,029,558, which consists of total borrowings and accrued interest of $1,613,666 reduced by $584,108 in related discounts 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. |
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STOCKHOLDERS EQUITY |
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| Equity [Abstract] | |||||||
| STOCKHOLDERS EQUITY | NOTE 9 – STOCKHOLDER’S EQUITY
Common Stock
Holders of common stock are entitled to one vote for each share held. There are no restrictions that limit the Company’s ability to pay dividends on its common stock, subject to the requirements of the Nevada Revised Statutes. The Company has not declared any dividends since incorporation.
As of January 31, 2016, the Company had 5,112,861,525 common shares authorized of its $0.001 par value common stock.
During the year ended January 31, 2016, the Company issued the following shares of $0.001 par value common stock:
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STOCK BASED COMPENSATION |
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| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| STOCK BASED COMPENSATION | NOTE 10 – STOCK BASED COMPENSATION
On August 5, 2011, the Board of Directors approved the Company’s 2011 Equity Compensation Plan (the “2011 Plan”). The 2011 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, performance shares and other securities as described in greater detail in the 2011 Plan, to the Company’s employees, officers, directors and consultants. A total of 20,000,000 shares are authorized for issuance under the 2011 Plan, which has not been approved by the stockholders of the Company as of January 31, 2016 a total of 16,333,333 shares are available for issuance under the 2011 Plan.
On October 14, 2012, the Board of Directors approved the Company’s 2012 Equity Incentive Plan, which was amended and restated on September 19, 2013 (as amended and restated, the “2012 Plan”). The 2012 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, restricted units, stock appreciation rights, performance shares and other securities as described in greater detail in the 2012 Plan, to the Company’s employees, officers, directors and consultants. A total of 12,000,000 shares are authorized for issuance under the 2012 Plan, which has been approved by the stockholders of the Company, and as of January 31, 2016, a total of 436,907 shares are available for issuance under the 2012 Plan.
On September 10, 2013, the Board of Directors approved the Company’s 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, restricted units, stock appreciation rights, performance shares and other securities as described in greater detail in the 2013 Plan, to the Company’s employees, officers, directors and consultants. A total of 12,000,000 shares are authorized for issuance under the 2013 Plan, which has been approved by the stockholders of the Company to date, and as of January 31, 2016, a total of 2,363,612 shares are available for issuance under the 2013 Plan.
On June 30, 2015, the Board of Directors approved and adopted the Company’s 2015 Equity Incentive Plan, which was amended and restated by the Board of Directors on March 10, 2016 (the Amended and Restated 2015 Equity Incentive Plan, the “2015 Plan”). The sole amendment to the 2015 Plan which was affected by the entry into the amended and restated plan was to clarify and confirm that no awards under the 2015 Plan can be issued or granted to any person under the 2015 Plan in connection with, or in consideration for, the offer or sale of securities in a capital-raising transaction, or where such services directly or indirectly promote or maintain a market for the Company’s securities. The 2015 Plan authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, restricted units, stock appreciation rights, performance shares and other securities as described in greater detail in the 2015 Plan, to the Company’s employees, officers, directors and consultants. Subject to adjustment in connection with the payment of a stock dividend, a stock split or subdivision or combination of the shares of common stock, or a reorganization or reclassification of the Company’s common stock, the maximum aggregate number of shares of common stock which may be issued pursuant to awards under the 2015 Plan is 17,500,000 shares, and as of January 31, 2016, a total of 11,500,000 shares are available for issuance under the 2015 Plan.
The Plans are administered by the Board of Directors in its discretion. The Board of Directors interprets the Plans and has broad discretion to select the eligible persons to whom awards will be granted, as well as the type, size and terms and conditions of each award, including the exercise price of stock options, the number of shares subject to awards, the expiration date of awards, and the vesting schedule or other restrictions applicable to awards.
Activity in options during the year ended January 31, 2016 and related balances outstanding as of that date are set forth below:
During the years ended January 31, 2016 and 2015, the Company recognized share-based compensation expenses totaling $1,713,764 and $1,864,995, respectively. The remaining amount of unamortized stock options expense at January 31, 2015 is $1,651,146.
There were also 333,333 options to purchase shares of common stock outside of the three plans mentioned above, all of which were exercisable as of January 31, 2016.
The intrinsic value of exercisable and outstanding options at January 31, 2016 was $0.
The grant date fair value of stock options granted during the year was $1,446,000 and $249,793 for the fiscal years ended January 31, 2016 and 2015, respectively. |
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WARRANTS |
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| Warrants and Rights Note Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| WARRANTS | NOTE 11 - WARRANTS
Transaction with Mother Parkers
On April 24, 2014, the Company entered into a Subscription Agreement with Mother Parkers Tea & Coffee Inc. (“Mother Parkers” and the “Subscription”). Pursuant to the Subscription, Mother Parkers purchased 7,333,529 units from the Company, each consisting of (a) one share of the Company’s common stock, $0.001 par value per share (the “Shares”); and (b) one (1) warrant to purchase one share of the Company’s common stock (the “Warrants” and collectively with the Shares, the “Units”) at a price per Unit equal to the fifty day weighted-average price per share of the Company’s common stock on the OTCQB market, for the fifty trading days ending March 7, 2014 (the date the parties first discussed the transactions contemplated by the Subscription), which was $0.3409 (the “Per Unit Price”). The total purchase price paid for the Units was $2,500,000.
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INCOME TAXES |
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| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES | NOTE 12- INCOME TAXES
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
At January 31, 2016 and 2015, the Company had cumulative federal operating loss carry forwards of $18,407,581 and $17,250,016, respectively, which begin to expire in 2031. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income and tax-planning.
Components of net deferred tax assets, including a valuation allowance, are as follows at January 31, 2016 and 2015:
The valuation allowance for deferred tax assets as of January 31, 2016 and 2015 was $9,628,028 and $8,642,133, respectively. The net operating losses will begin to expire in 2031. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. Management believes it is more likely than not that the deferred tax assets as of January 31, 2016 will not be realized based on the management’s assessment that the deductions ultimately recognized for tax purposes will be fully utilized. Therefore full valuation allowances were set up for these deferred tax assets as of January 31, 2016 and 2015.
Reconciliation between the statutory rate and the effective tax rate is as follows at January 31, 2016 and 2015:
There was no income tax expense for the years ended January 31, 2016 and 2015. |
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COMMITMENTS AND CONTINGENCIES |
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| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES |
Legal Proceedings
The Company’s commitments and contingencies include the usual claims and obligations of a wholesaler and distributor of coffee products in the normal course of a business. The Company may be, from time to time, involved in legal proceedings incidental to the conduct of its business, as described below:
On July 28, 2014, Shane Whittle, individually, a former significant shareholder and officer and director of the Company (“Whittle”) filed a complaint against the Company in the District Court, City and County of Denver, State of Colorado (Case No. 2014-CV-032991 Division: 209). The complaint alleged that Whittle entered into a consulting agreement with the Company for which the Company failed to make payments and that Rohan Marley, as both a director of the Company and of Marley Coffee Canada, Inc., additionally agreed that, as part of Whittle’s consulting compensation, the Company would assume a debt owed by Marley Coffee Canada to Whittle. The cause of action set forth in the complaint includes breach of contract. Damages claimed by Whittle included $60,000 under the consulting agreement and $19,715 related to payments assumed by the Company.
Effective on March 31, 2015, the Company and Mr. Whittle entered into a Settlement Agreement and Release of Claims (the “Settlement”), pursuant to which the parties agreed to dismiss their claims associated with the District Court, City and County of Denver, State of Colorado (Case No. 2014-CV-032991 Division: 209), lawsuit described above. Pursuant to the terms of the Settlement, the Company agreed to pay Mr. Whittle $80,000 which was accrued as of January 31, 2015 (to be paid in equal payments of $10,000 per month beginning on April 1, 2015, of which $10,000 is in default), the Company agreed to withdraw from a joinder in connection with the Federal Action pending between the parties (and certain other parties) as described below, the parties provided each other mutual releases and the parties agreed to mutually dismiss, with prejudice, their claims.
On September 30, 2014, Whittle individually, and derivatively on behalf of Marley Coffee LLC (“MC LLC”) filed a complaint against Rohan Marley, Cedella Marley, the Company, Hope Road Merchandising, LLC, Fifty-Six Hope Road Music Limited, and Marley Coffee Estate Limited in the United States District Court for the District of Colorado (Civil Action No. 2014-CV-2680).
The complaint alleges that Whittle entered into a partnership with Rohan Marley, the son of the late reggae music legend Robert Nesta Marley p/k/a Bob Marley, to sell premium coffee products branded after the name and likeness of Rohan Marley. The causes of action set forth in the complaint include, among others, racketeering activity, trademark infringement, breach of fiduciary duty, civil theft, and civil conspiracy (some of which causes of action are not directly alleged against the Company), which are alleged to have directly caused Whittle and Marley Coffee LLC substantial financial harm.
Damages claimed by Whittle and MC LLC include economic damages to be proven at trial, profits made by defendants, treble damages, punitive damages, attorneys’ fees and pre and post judgment interest.
Subsequently, all but the civil conspiracy claim against the Company was dismissed and the court ordered Whittle to amend his complaint to provide only for an alleged claim of breach of fiduciary duty (not against the Company) and conspiracy claims as an individual (not on a derivative basis). Prior to the filing of this report, Mr. Whittle and the Company agreed in principle to settlement terms, provided the parties are still negotiating the final terms of such settlement. Notwithstanding the parties’ agreement in principle, the outcome of this lawsuit cannot be predicted with any degree of reasonable certainty. In the event the matter is not settled, the Company intends to continue to vigorously defend itself against Whittle’s and MC LLC’s claims.
On December 15, 2014, a complaint was filed against the Company in the Superior Court of State of California, for the County of Los Angeles – Central Division (Case Number: BC566749), pursuant to which Sky Consulting Group, Inc. (“Sky”), made various claims against the Company, Mr. Tran, the Company’s President and Director, C&V International, and various other parties. The complaint alleged causes of action for breach of contract, fraud, negligent representation, intentional interference with contractual relationship and negligent interference with contractual relationship, relating to a May 2013 coffee distributor agreement between the Company and Sky, which provided Sky the right to sell Company branded coffee products in Korea. The suit seeks damages, punitive damages, court costs and attorney’s fees. The Company subsequently filed a motion to compel arbitration pursuant to the terms of the agreement, which was approved by the court on April 7, 2015. The parties subsequently entered arbitration in connection with the lawsuit. On September 8, 2015, the parties entered into a mutual settlement and release agreement, whereby Sky agreed to return 130,480 shares of common stock to the Company and stop distributing our products, displaying our tradenames or using our intellectual property; the parties agreed to each dismiss their claims/lawsuits; and each party provided the other a general release of all outstanding claims. The shares were returned to the Company and cancelled and the proceedings were dismissed on December 16, 2015.
On November 17, 2015, the SEC filed a complaint against us (Case 2:15-cv-08921) in the United States District Court Central District of California Western Division. Also included as defendants in the complaint were Shane G. Whittle (our former Chief Executive Officer and Director) and parties unrelated to us, Wayne S. P. Weaver, Michael K. Sun, Rene Berlinger, Stephen B. Wheatley, Kevin P. Miller, Mohammed A. Al-Barwani, Alexander J. Hunter, and Thomas E. Hunter (collectively, the “Defendants”). Pursuant to the complaint, the SEC alleged that Mr. Whittle orchestrated a “pump and dump” scheme with certain other of the Defendants in connection with our common stock. The scheme allegedly involved utilizing our July 2009 reverse merger transaction to secretly gain control of millions of our shares, spreading the stock to offshore entities, and dumping the shares on the unsuspecting public after the stock price soared following fraudulent promotional campaigns undertaken by Mr. Whittle and certain other of the Defendants in or around 2011. The complaint also alleges that to boost our stock price and provide cash to the Company, Mr. Whittle and certain other of the Defendants orchestrated a sham financing arrangement designed to create the false appearance of legitimate third-party interest and investment in the Company through a non-existent entity, Straight Path Capital, pursuant to which we raised approximately $2.5 million through the sale of 6.25 million shares of common stock in 2011. The SEC also alleges that Mr. Whittle and others caused us to make public announcements which caused our stock price to rise, which helped facilitate the alleged frauds among other allegations spelled out more completely in the complaint. The SEC’s complaint charges us, Mr. Whittle, Mr. Weaver, Mr. Sun, Mr. Berlinger, Mr. Wheatley, Mr. Miller, and Mr. Al-Barwani with conducting an illegal offering in violation of Sections 5(a) and 5(c) of the Securities Act. The complaint further alleges that Mr. Whittle, Mr. Weaver, Mr. Sun, Mr. Berlinger, and the Hunters violated Section 10(b) of the Exchange Act and Rule 10b-5, and Mr. Whittle, Mr. Weaver, Mr. Sun, and Mr. Berlinger violated Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 thereunder. Mr. Whittle is additionally charged with violating Section 16(a) of the Exchange Act and Rule 16a-3, and the Hunters are charged with violations of Sections 17(b) of the Securities Act, which prohibits fraudulent touting of stock. The SEC is seeking injunctions, disgorgement, prejudgment interest, and penalties as well as penny stock bars against all of the individual Defendants and an officer-and-director bar against Mr. Whittle. The Company has reached a settlement in principle with the Commission to settle the claims made by the Commission, which has not yet been formally approved or accepted by the Commission to date, and may not be approved or accepted. In the event the Company were to have to pay significant fines or disgorgement in the matter described above, and the Company was unable to raise sufficient funding to pay such fines or disgorgement, the Company could be forced to suspend its activities, terminate its operations or seek bankruptcy protection.
In addition to the above, we may become involved in other material legal proceedings in the future.
Leases
On June 25, 2013, and effective August 1, 2013, we entered into a lease agreement for office space located at 4730 Tejon Street, Denver, Colorado 80211. The office space encompasses approximately 4,800 square feet. The lease has a term of 36 months expiring on July 31, 2016, provided that we have two additional three year options to renew the lease after the end of the initial term. Rent during the first three year option period escalates at the rate of 4% per year (starting with the last monthly rental cost of the initial term of the agreement, described below), and rent during the second three year option period will be at a rental cost mutually agreed by the Company and the landlord. Rent due under the initial term of the agreement is as follows:
We also had an option to renew this lease for an additional three year term, which option we have exercised as of the date of this report, and which three year renewal term provides for rent as follows:
Finally, we have the option to extend the lease for an additional three year term, through July 21, 2022, with a rental cost per month negotiated in good faith by the parties based on then-current market rates, provided that we provide notice of our intent to extend such lease at least 120 days prior to the end of the then term.
On April 9, 2014, the Company entered into a lease agreement for office and warehouse space located at 4725-4745 Lipan St, Denver, Colorado 80211. The rental space encompasses approximately 3,466 square feet of office and warehouse space and approximately a 4,000 square foot yard. The lease expires on June 30, 2017, provided we have the right to one five year renewal term, with rent set at the “market value” of the last year of the initial lease term. Rent due under the initial term of the agreement is as follows:
The rights to the lease were sold during 2015, and the purchaser currently pays the monthly rental cost due under such lease, provided that the Company remains legally obligated under such lease pursuant to its terms.
On April 28, 2014, the Company entered into a lease agreement for retail space located at 1536 Wynkoop, Denver, Colorado 80202. The rental space encompasses approximately 121 square feet. The lease has a term of 60 months. Rent is $1,500 per month for the first year, increasing with the annual increase in the consumer price index thereafter on the annual anniversary date of the lease. |
CONCENTRATIONS |
12 Months Ended |
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Jan. 31, 2016 | |
| Risks and Uncertainties [Abstract] | |
| CONCENTRATIONS | NOTE 14 – CONCENTRATIONS
During the year ended January 31, 2016 two vendors accounted for 42% of our purchases. During the year ended January 31, 2015 three vendors accounted for 61% of our purchases. During the years ended January 31, 2016 and 2015 three distributors accounted for 42% and two customers accounted for 52% of our net revenues, respectively.
For fiscal 2016 and 2015 total sales in Canada totaled $922,517 and $1,546,422, respectively. The Canadian RealCup licensing revenue for the year ended January 31, 2016 and 2015 were $410,153 and $282,641, respectively.
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 fiscal 2016 sales in Chile totaled $808,658 and for fiscal 2015 sales in Chile totaled $196,099. |
SUBSEQUENT EVENTS |
12 Months Ended |
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Jan. 31, 2016 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | NOTE 15 – SUBSEQUENT EVENTS
On March 1, 2016, we entered into a side letter agreement with JSJ. Pursuant to the side letter agreement, JSJ agreed to extend the maturity date of the JSJ Note to December 9, 2016 (from March 9, 2016), and we agreed to amend the terms of the JSJ Note relating to prepayment, to allow us the right to prepay the JSJ Note (a) from March 1, 2016 to September 9, 2016, provided we pay a redemption premium of 135% of the principal amount of such note together with accrued interest thereon, and (b) from September 10, 2016 to the maturity date, provided we pay a redemption premium of 150% of the principal amount of such note together with accrued interest thereon. The side letter agreement also amended the JSJ Note to (a) allow JSJ the right at any time after September 9, 2016, to convert the amount owed under the JSJ Note into shares of our common stock at a 40% discount to the third lowest trade during the previous 10 trading days prior to the date of conversion, provided that in no event will such conversion price be less than $0.00005 per share; and (b) to add a 4.99% ownership limitation which prevents JSJ from converting the note into our common stock in the event it and its affiliates would beneficially own more than 4.99% of our common stock upon such conversion, provided that such percentage can be increased by JSJ with 61 days prior written notice up to 9.99%. The side letter agreement also amended the events of default under the JSJ Note to include other additional customary events of default, in the event we cease filing reports with the Securities and Exchange Commission or if we file a Form 15.
In connection with the parties’ entry into the side letter agreement, we paid JSJ $117,253, including $16,003 of interest due on the JSJ Note through March 1, 2016, $5,000 of JSJ’s legal fees and $96,250 in consideration for JSJ agreeing to extend the due date of the JSJ Note (which represents the prepayment penalty which would have been due had we repaid the JSJ Note when due).
In March and April 2016, we repaid an aggregate of $150,000 ($75,000 in each of March and April) of the amount owed to Typenex in connection with a redemption request received from Typenex.
In February 2016, we borrowed $100,000 from a third party 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 a 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, and 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.
On March 8, 2016, and March 15, 2016, we sold Duck Duck Spruce, LLC (“Duck Duck”) two 5% Convertible Promissory Notes with face amounts of $330,000, representing $300,000 borrowed from Duck Duck and a 10% original issue discount ($30,000), and $220,000, representing $200,000 borrowed from Duck Duck and a 10% original issue discount ($20,000), respectively (each a “Duck Duck Note”, and collectively, the “Duck Duck Notes”). The Duck Duck Notes accrue interest at the rate of 5% per annum (the lesser of 10% per annum and the highest rate allowed per law upon an event of default), and are due on December 8, 2016 (as to the March 9, 2016 note) and March 15, 2017 (as to the March 15, 2016 note), provided that if we repay the Duck Duck Notes more than 90 days after the issuance date thereof, the 5% interest which would have accrued through maturity is required to be paid to Duck Duck at the time of repayment.
The Duck Duck Notes can be repaid by us prior to the 180th day after the issuance date thereof along with a prepayment penalty of between 105% and 130% of the principal amount owed thereunder, plus interest (which as described above requires the total of interest through maturity if repaid more than 90 days after the issuance date). After the 180th day after the issuance date the notes cannot be repaid without the written consent of Duck Duck.
The Duck Duck Notes provide for standard and customary events of default such as failing to timely make payments under the Duck Duck Notes when due and the failure of the Company to timely comply with the Securities Exchange Act of 1934, as amended, reporting requirements.
The amounts owed under the Duck Duck Notes are convertible into shares of our common stock from time to time after the 180th day after the issuance date thereof at the option of Duck Duck, at a 35% discount (increasing by 10% if we are placed on the “chilled” list with the DTC, increasing by 5% if we are not DWAC eligible, and increasing by another 5% upon the occurrence of any event of default under the note) to the average of the two lowest closing prices of our common stock during the 10 consecutive trading days prior to the date of conversion, provided that all conversions are subject to a floor of $0.05 per share.
At no time may the Duck Duck Notes be converted into shares of our common stock if such conversion would result in Duck Duck and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.
The March 15, 2016 Duck Duck Note also (a) required us to issue 250,000 shares of restricted common stock to Duck Duck in consideration for agreeing to the sale of such note; and (b) provided that as long as the note is outstanding, upon any issuance by us of any convertible debt security (whether such debt begins with a convertible feature or such feature is added at a later date) with any conversion price term more favorable than such Duck Duck Note, then at Duck Duck’s option, such conversion price term can apply to such March 15, 2016 Duck Duck Note.
We hope to repay the Duck Duck Notes prior to any conversion. In the event that the Duck Duck Notes are not repaid in cash in their entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Duck Duck Notes is converted into common stock.
On March 16, 2016, we sold Vis Vires a Convertible Promissory Note (with an issuance date of March 11, 2016) in the principal amount of $225,000 (the “Vis Vires Convertible Note”), pursuant to a Securities Purchase Agreement, dated March 11, 2016. The Vis Vires Convertible Note bears interest at the rate of 8% per annum (22% upon an event of default) and is due and payable on December 15, 2016. The Vis Vires Convertible Note provides for standard and customary events of default such as failing to timely make payments under the Vis Vires Convertible Note when due and the failure of the Company to timely comply with the Securities Exchange Act of 1934, as amended, reporting requirements. Additionally, upon the occurrence of certain fundamental defaults, as described in the Vis Vires Convertible Note, we are required to pay Vis Vires liquidated damages in addition to the amount owed under the Vis Vires Convertible Note.
The principal amount of the Vis Vires Convertible Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the 180th day after the Vis Vires Convertible Note was issued. The conversion price of the Vis Vires Convertible Note is equal to the greater of (a) 65% (a 35% discount) multiplied by the average of the lowest five closing bid prices of our common stock during the ten trading days immediately prior to the date of any conversion; and (b) $0.00009, provided that the conversion price during major announcements (as described in the Vis Vires Convertible Note) is the lower of the conversion price on the announcement date of such major announcement and the conversion price on the date of conversion. In the event we fail to deliver the shares of common stock issuable upon conversion of the note within three business days of our receipt of a conversion notice, we are required to pay Vis Vires $2,000 per day for each day that we fail to deliver such shares. The Vis Vires Convertible Note conversion price also includes anti-dilution protection such that in the event we issue or are deemed to have issued common stock or convertible securities at a price equal to less than the conversion price of the Vis Vires Convertible Note in effect on the date of such issuance or deemed issuance, the conversion price of the Vis Vires Convertible Note is automatically reduced to such lower price, subject to certain exceptions in the note.
At no time may the Vis Vires Convertible Note be converted into shares of our common stock if such conversion would result in Vis Vires and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.
We may prepay in full the unpaid principal and interest on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date. Any prepayment is subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the Vis Vires Convertible Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.
The Vis Vires Convertible Note also contains customary positive and negative covenants.
We paid $3,000 of Vis Vires’s attorney’s fees in connection with the sale of the Vis Vires Convertible Note.
We hope to repay the Vis Vires Convertible Note prior to any conversion. In the event that the Vis Vires Convertible Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the Vis Vires Convertible Note is converted into common stock.
On March 10, 2016, the Board of Directors approved the repricing of options to purchase 6 million shares of the Company’s common stock originally issued to the Company’s executive officers and directors in June 2015. Specifically, the Board of Directors approved a change in the exercise price of such options from $0.195 per share to $0.12 per share, provided no other terms of the options were changed except for the re-pricing. As a result of the repricing, our executive officers and directors, Brent Toevs, Anh Tran and Rohan Marley, each hold options to purchase 2 million shares of the Company’s common stock at an exercise price of $0.12 per share, with 666,666 options vesting on June 30, 2016 and 666,667 options vesting on June 30, 2017 and 2018, respectively.
On April 20, 2016, the Company entered into a settlement and release with one of its officer and director insurance providers, pursuant to which among other things, the provider has agreed to buy out the Company’s officer and director liability insurance policy for the period from March 15, 2011 to March 15, 2012 for $400,000. The Company expects to receive payment approximately 30 days after the entry into the settlement.
The Company has reached a settlement in principle with the Securities and Exchange Commission to settle the claims made by the Commission, which has not yet been approved or accepted by the Commission to date, and may not be formally approved or accepted. In the event the Company were to have to pay significant fines or disgorgement in the matter described above, and the Company was unable to raise sufficient funding to pay such fines or disgorgement, the Company could be forced to suspend its activities, terminate its operations or seek bankruptcy protection.
On April 20, 2016, the Company entered into a settlement agreement and release with one of its officer and director insurance providers, pursuant to which among other things, the provider agreed to buy out the Company’s officer and director liability insurance policy for the period from March 15, 2011 to March 15, 2012 for $400,000, which the Company expects to receive approximately 30 days after the entry into the settlement. |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation | Basis of Presentation. These financial statements have been prepared by management assuming that the Company will be able to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business. However, certain conditions noted below currently exist which raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company has incurred net losses of $5,201,917 and $10,280,985 for the years ended January 31, 2016 and 2015, respectively and has an accumulated deficit of $29,245,750 at January 31, 2016. In addition to the Company’s recent history of losses, the Company has only recently begun to generate revenue as part of its principal operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Further, the operations of the Company have primarily been funded by the issuance of common stock and debt. In order for us to conduct our business for the next twelve months and to continue operations thereafter and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, reduce operating expenses, and potentially raise additional funds, through either debt and/or equity financing to meet our working capital needs. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may be required to curtail its operations.
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. Management intends to increase sales by increasing the Company’s product offerings, expanding its direct sales force and expanding its domestic and international distributor relationships. The Company has reached a settlement in principle with the Commission to settle the claims made by the Commission, which has not yet been formally approved or accepted by the Commission to date, and may not be approved or accepted. In the event the Company were to have to pay significant legal fees to defend itself against the allegations made in the complaint or pay significant fines or disgorgement in the matter, and the Company was unable to raise sufficient funding to pay such fines or disgorgement, the Company could be forced to suspend its activities, terminate its operations or seek bankruptcy protection, all of which could lead to the value of the Company’s common stock declining in value or becoming worthless.
Pursuant to the terms and conditions of the FSHR License Agreement, FSHR can terminate that agreement under certain circumstances, subject where applicable and as described in the agreement, our right to cure such breaches and other events, including: in the event the Securities and Exchange Commission or any similar government agency in any country, territory or possession makes any negative or unlawful finding regarding our activities. Notwithstanding our categorical denial of the allegations made in the SEC’s November 2015 complaint, as discussed below under “Part I” - “Item 2. Legal Proceedings”, in the event the SEC’s complaint constitutes a “negative or unlawful finding regarding our activities” or we consent to any actions against us by the SEC in connection with the allegations made by the SEC in the November 2015 complaint which constitute a “negative or unlawful finding regarding our activities”, FSHR can terminate the FSHR License Agreement.
The termination of the FSHR License Agreement would have a material adverse effect on our results of operations and assets, could force us to scale back and/or abandon our business operations, or force us to seek bankruptcy protection and could cause the value of our common stock to decline in value or become worthless. As we’ve stated above, none of the officers in the Company have been named in the SEC suit and we believe that we will be found innocent of the charges alleged.
If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which our net assets 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 reflect any adjustments related to the outcome of this uncertainty. |
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| Reclassifications | Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation for comparative purposes. |
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| Use of Estimates | Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the assessment of the impairment of long-lived assets, the allowance for doubtful accounts, valuation allowances for deferred tax assets, and valuation of our financial and equity instruments. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates. |
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| Fair Value Matters | Fair Value Matters. The carrying amount of the Company’s cash, accounts receivables, accounts payables, approximates their estimated fair values due to the short-term maturities of those financial instruments.
The Company has adopted a single definition of fair value, a framework for measuring fair value, and providing expanded disclosures concerning fair value whereby estimated fair value is the price to be paid for an asset or the amount to settle a liability in an orderly transaction between market participants at the measurement date. Accordingly, fair value is a market-based measurement and not an entity-specific measurement.
The Company utilizes the following hierarchy in fair value measurements:
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| Cash and Cash Equivalents | Cash and Cash Equivalents. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At January 31, 2016 and 2015, the Company has no cash equivalents. No funds were invested in money market accounts during the year ended January 31, 2016. |
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| Concentrations of Credit Risk | Concentrations of Credit Risk. Our cash and cash equivalents are principally on deposit in a non-insured short-term asset management account at a large financial institution. Accounts receivable potentially subject us to concentrations of credit risk. Currently, our customer base is comprised of only a limited number of customers (see Note 14). |
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| Revenue Recognition | Revenue Recognition. Revenue is derived from the sale of coffee products and is recognized on a gross basis upon shipment to the customer. All revenue is recognized when (i) persuasive evidence of an arrangement exists; (ii) the service or sale is completed; (iii) the price is fixed or determinable; and (iv) the ability to collect is reasonably assured. Revenue is recognized as the net amount estimated to be received after deducting estimated amounts for discounts, trade allowances and product terms. We record promotional and return allowances based on recent and historical trends. Promotional allowances, including customer incentive and trade promotion activities, are recorded as a reduction to sales based on amounts estimated being due to customers, based primarily on historical utilization and redemption rates. Discounts and promotional allowances deducted from sales for fiscal years 2016 and 2015 were $1,114,015 and $668,424, respectively.
The Company utilizes third parties for the production and fulfillment of orders placed by customers. The Company, acting as principal, takes title to the product and assumes the risks of ownership; namely, the risks of loss for collection, delivery and returns. |
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| Allowance for Doubtful Accounts | Allowance for Doubtful Accounts. The Company does not require collateral from its customers with respect to accounts receivable. The Company determines any required allowance by considering a number of factors, including the terms for each customer, and the length of time accounts receivable are outstanding. Management provides an allowance for accounts receivable whenever it is evident that they become uncollectible. The Company has determined that a $71,168 allowance for doubtful accounts was required at January 31, 2016 and $100,000 for January 31, 2015. Because our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results. |
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| Inventories | Inventories. Inventories are stated at the lower of cost or market. Cost is computed using weighted average cost, which approximates actual cost, on a first-in, first-out basis. Inventories on hand are evaluated on an on-going basis to determine if any items are obsolete or in excess of future needs. Items determined to be obsolete are reserved for. From time to time the Company provides for the possible inability to sell its inventories by providing an excess inventory reserve. As of January 31, 2016 and 2015, the Company determined that no reserve was required. |
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| Acquisition of BlackRock Beverage Services, Inc. and Bike Caffe Franchising Inc. | Acquisition of BlackRock Beverage Services, Inc. and Bike Caffe Franchising Inc. On August 16, 2013, the Company purchased certain assets including inventory, fixed assets, and IP owned by BlackRock Beverage Services Inc. for $81,118 in total consideration consisting of $10,000 in cash and 158,039 common shares of the Company valued at $71,118. In addition, on December 4, 2013, the Company purchased certain assets including fixed assets, inventory, IP and trademarks owned by Bike Caffe Franchising, Inc. for total consideration of $140,000 consisting of $40,000 in cash and 250,000 common shares of the Company valued at $100,000. No liabilities were assumed as part of the acquisitions. The acquisitions were accounted for by the Company using the purchase method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, at the date of acquisition, the net assets of BlackRock and BikeCaffe were recorded at their respective fair values and represents management’s estimates based on a third party valuation report. The Company incurred $5,000 of acquisition-related costs, which were expensed as incurred in the accompanying Statement of Operations included within Other Operating Expenses.
The results of BikeCaffe operations are included in the accompanying statements of operations from the date of acquisition. The net assets acquired were recorded at their fair values at the date of acquisition, as summarized in the following table:
Bike Caffe Franchising, Inc.
The Company sold Black Rock Beverages, LLC (“BRB”) in July 2015 and there are no longer any intangibles or fixed assets related to this company. See Note 5 for more details. |
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| Property and Equipment | Property and Equipment. Equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs, as incurred, are charged to expense. Renewals and enhancements which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are three years.
Our property and equipment is summarized as follows:
Depreciation expense was $176,884 and $115,372 for the years ended January 31, 2016 and 2015, respectively. |
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| Impairment of Long-Lived Assets | Impairment of Long-Lived Assets. Long-lived assets consist primarily of a license agreement that was recorded at the estimated cost to acquire the asset. 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 January 31, 2016 or 2015. |
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| Stock-Based Compensation | Stock-Based Compensation. Pursuant to the provisions of Financial Accounting Standards Board (“FASB”) FASB ASC 718-10, “Compensation – Stock Compensation,” which establishes accounting for equity instruments exchanged for employee service, management utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock option awards 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.
Common stock issued for services to non-employees is recorded based on the value of the services or the value of the common stock whichever is more clearly determinable. Whenever the value of the services is not determinable, the measurement date occurs generally at the date of issuance of the stock. In more limited cases, it occurs when a commitment for performance has been reached with the counterparty and nonperformance is subject to significant disincentives. If the total value of stock issued exceeds the par value, the value in excess of the par value is added to the additional paid-in-capital.
We estimate volatility of our publicly-listed common stock by considering historical stock volatility. |
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| Income Taxes | Income Taxes. The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No 740, Income Taxes.
The Company records deferred tax assets and liabilities based on the differences between the financial statement and tax bases of assets and liabilities and on net operating loss carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. |
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| Earnings or Loss Per Common Share | Earnings or Loss Per Common Share. Basic earnings per common share equal net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share include the impact on dilution from all contingently issuable shares, including options, warrants and convertible securities. The common stock equivalents from contingent shares are determined by the treasury stock method. The Company incurred a net loss for the years ended January 31, 2016 and 2015, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be anti-dilutive. Anti-dilutive shares include -0- and 11,144,863 options for the years ended January 31, 2016 and 2015. |
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| Derivative Liabilities | Derivative Liabilities. A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities. As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company entered into certain debt financing transactions in fiscal 2016, as disclosed in Note 8, containing certain embedded features that have resulted in the instruments being deemed derivatives. The Company may engage in other similar complex financing transactions in the future, but not with the intention to enter into derivative instruments. Derivatives are measured at fair value using the Monte Carlo simulation pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions. Changes in these subjective assumptions can materially affect the estimate of the fair value of derivative liabilities and, consequently, the related amount recognized as a change in fair value of derivative liabilities on the consolidated statement of operations. Furthermore, depending on the terms of a derivative, the valuation of derivatives may be removed from the financial statements upon exercise or conversion of the underlying instrument into some other security or if the contract is modified.
We evaluate derivative instruments to properly classify such instruments within stockholders' equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed at each balance sheet date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.
During fiscal 2016, we adopted the guidance, as codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, that requires us to apply a two-step model in determining whether a financial instrument or an embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. The embedded conversion option features did not qualify for equity classification as they had no conversion price floor and as such required treatment as derivative liabilities. Accordingly, $778,951 of conversion feature derivative liabilities are carried at January 31, 2016. |
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| Fair Value Measurements | Fair Value Measurements. We follow FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring basis for any period reported.
ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories. We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.
The hierarchy noted above requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. There were no transfers between Level 1, Level 2 and/or Level 3 during fiscal 2016. Our fair value measurements at the January 31, 2016 reporting date are classified based on the valuation technique level noted in the table below:
The following table presents the estimated fair value of financial liabilities measured at estimated fair value on a recurring basis included in the Company’s financial statements as of January 31, 2016:
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| Significant Recently Issued Accounting Pronouncements | Significant Recently Issued Accounting Pronouncements. 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 following:
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.
FASB 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. |
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| Subsequent Events | Subsequent Events. Management has evaluated events subsequent to January 31, 2016 through the date the accompanying statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements. |
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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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Jan. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of the consideration paid and net assets acquired on the date of acquisition | The net assets acquired were recorded at their fair values at the date of acquisition, as summarized in the following table:
Bike Caffe Franchising, Inc.
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| Schedule of property and equipment | Our property and equipment is summarized as follows:
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| Schedule of estimated fair value of liabilities | The following table presents the estimated fair value of financial liabilities measured at estimated fair value on a recurring basis included in the Company’s financial statements as of January 31, 2016:
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INVENTORY (Tables) |
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Jan. 31, 2016 | ||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||
| Schedule of inventory | Inventories were comprised of:
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RECEIVABLES (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jan. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Receivables [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of receivables |
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LICENSE AGREEMENTS (Tables) |
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Jan. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Trademark License Agreements and Intangible Assets [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of license agreement, net |
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| Schedule of amortization expense | Amortization expense consists of the following:
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| Schedule of future amortization expense | The following table shows the estimated amortization expense for such assets for each of the five succeeding fiscal years and thereafter.
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PREPAID EXPENSES (Tables) |
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Jan. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||
| Prepaid Expense, Current [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of prepaid expenses |
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CONVERTIBLE AND OTHER NOTES PAYABLE (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jan. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of convertible and other notes payable | Convertible and Other Notes Payable are as follows:
*Line of Credit. |
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| Schedule of annual principal maturities of debt | The following table summarizes the Company’s annual principal maturities of debt for the five years subsequent to December 31, 2016:
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STOCK BASED COMPENSATION (Tables) |
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Jan. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of activity in stock options | Activity in options during the year ended January 31, 2016 and related balances outstanding as of that date are set forth below:
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WARRANTS (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jan. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants and Rights Note Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of warrants |
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INCOME TAXES (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jan. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of components of net deferred tax assets | Components of net deferred tax assets, including a valuation allowance, are as follows at January 31, 2016 and 2015:
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| Schedule of reconciliation between statutory rate and effective tax rate | Reconciliation between the statutory rate and the effective tax rate is as follows at January 31, 2016 and 2015:
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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) |
12 Months Ended | ||||
|---|---|---|---|---|---|
Dec. 04, 2013 |
Aug. 16, 2013 |
Jan. 31, 2016 |
Jan. 31, 2015 |
Jan. 31, 2014 |
|
| Net Loss | $ (5,201,917) | $ (10,280,985) | |||
| Accumulated deficit | 29,245,750 | 24,043,833 | |||
| Discounts and allowances | 1,114,015 | 668,424 | |||
| Allowance for doubtful accounts | $ 71,168 | 100,000 | |||
| Acquisition-related costs | $ 5,000 | ||||
| Estimated useful lives of assets | 3 years | ||||
| Depreciation Expense | $ 176,884 | $ 115,372 | |||
| Anti-dilutive options excluded from earnings per share calculation | 11,144,863 | ||||
| Bike Caffe Franchising, Inc. [Member] | |||||
| Cash paid in acquisition | $ 40,000 | ||||
| Issuance of shares in acquisitions, shares | 250,000 | ||||
| Issuance of shares in acquisitions | $ 100,000 | ||||
| BlackRock Beverage Services, Inc. [Member] | |||||
| Cash paid in acquisition | $ 10,000 | ||||
| Issuance of shares in acquisitions, shares | 158,039 | ||||
| Issuance of shares in acquisitions | $ 71,118 | ||||
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - Bike Caffe Franchising, Inc. [Member] |
Dec. 04, 2013
USD ($)
|
|---|---|
| Current Assets | |
| WIP & Inventory | $ 75,656 |
| Fixed Assets - Property and Equipment,net | 7,400 |
| Total Tangible Assets | 83,056 |
| Intangible Assets Acquired | |
| Customer Base | 15,000 |
| Trade-Name/Marks | 20,800 |
| Non-Compete | 14,100 |
| Total Intangible Assets Acquired | 49,900 |
| Goodwill | 7,044 |
| Total Consideration Paid | $ 140,000 |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) - USD ($) |
Jan. 31, 2016 |
Jan. 31, 2015 |
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | $ 490,973 | $ 537,154 |
| Less Accumulated Depreciation | 303,135 | 155,906 |
| Property and equipment, net | 187,838 | 381,248 |
| Furniture [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | 66,507 | 75,851 |
| Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | 205,548 | 242,385 |
| Computer [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | 67,545 | 67,545 |
| Leasehold improvements [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | $ 151,373 | $ 151,373 |
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) - USD ($) |
Jan. 31, 2016 |
Jan. 31, 2015 |
|---|---|---|
| Business Acquisition [Line Items] | ||
| Fair value of derivative liabilities | $ 778,951 | |
| Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 - Internal models with significant unobservable market parameters [Member] | ||
| Business Acquisition [Line Items] | ||
| Fair value of derivative liabilities | 778,951 | |
| Fair Value, Measurements, Recurring [Member] | Carrying Value [Member] | ||
| Business Acquisition [Line Items] | ||
| Fair value of derivative liabilities | $ 778,951 |
INVENTORY (Details) - USD ($) |
Jan. 31, 2016 |
Jan. 31, 2015 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Finished Goods - Coffee | $ 197,581 | |
| Total | $ 197,581 |
RECEIVABLES (Details) - USD ($) |
Jan. 31, 2016 |
Jan. 31, 2015 |
|---|---|---|
| Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
| Allowance for doubtful accounts | $ (71,168) | $ (100,000) |
| Receivables, net | 1,415,559 | 1,154,252 |
| Online Clients [Member] | ||
| Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
| Receivables, gross | 3,856 | 15,718 |
| Licensing - Related Party [Member] | ||
| Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
| Receivables, gross | 83,939 | 373,445 |
| International [Member] | ||
| Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
| Receivables, gross | 220,131 | 172,705 |
| Other Foodservice Clients [Member] | ||
| Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
| Receivables, gross | 19,681 | 96,135 |
| Grocery retail clients [Member] | ||
| Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
| Receivables, gross | $ 1,159,120 | $ 596,249 |
LICENSE AGREEMENTS (Details) - USD ($) |
Jan. 31, 2016 |
Jan. 31, 2015 |
|---|---|---|
| Trademark License Agreements and Intangible Assets [Abstract] | ||
| License Agreement | $ 730,000 | $ 730,000 |
| Accumulated amortization | (170,332) | (121,666) |
| License Agreement, net | $ 559,668 | $ 608,334 |
LICENSE AGREEMENTS (Details 1) - USD ($) |
12 Months Ended | |
|---|---|---|
Jan. 31, 2016 |
Jan. 31, 2015 |
|
| Trademark License Agreements and Intangible Assets [Abstract] | ||
| License Agreement | $ (48,666) | $ (48,667) |
LICENSE AGREEMENTS (Details 2) - USD ($) |
Jan. 31, 2016 |
Jan. 31, 2015 |
|---|---|---|
| Years Ending January 31, | ||
| 2017 | $ 46,292 | |
| 2018 | 46,292 | |
| 2019 | 46,292 | |
| 2020 | 46,292 | |
| 2021 | 46,292 | |
| Thereafter | 328,208 | |
| License Agreement, net | $ 559,668 | $ 608,334 |
SALE OF DIVISION (Details) - Black Rock Beverage Division [Member] - USD ($) |
1 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Jul. 15, 2015 |
||
| Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] | |||
| Consideration receivable | $ 300,000 | ||
| Consideration receivable on closing date | 200,000 | ||
| Consideration receivable in installments | $ 100,000 | ||
| Description of conditional consideration |
|
||
| Final payment of purchase agreement | $ 61,000 |
PREPAID EXPENSES (Details) - USD ($) |
Jan. 31, 2016 |
Jan. 31, 2015 |
|---|---|---|
| Prepaid Expense, Current [Abstract] | ||
| Prepaid consulting services | $ 15,721 | |
| Prepaid customer discounts | 14,450 | $ 18,986 |
| Prepaid expenses | $ 30,171 | $ 18,986 |
CONVERTIBLE AND OTHER NOTES PAYABLE (Details Narrative) - USD ($) |
11 Months Ended | 12 Months Ended | |
|---|---|---|---|
Mar. 26, 2015 |
Jan. 31, 2016 |
Jan. 31, 2016 |
|
| Line of Credit | |||
| Line of credit facility, effective date | Feb. 16, 2015 | ||
| Line of credit, amount advanced | $ 250,000 | $ 250,000 | |
| Line of credit facility, interest rate payable in cash | 10.00% | 10.00% | |
| Line of credit facility, interest rate payable in cash or products and services | 7.50% | 7.50% | |
| Line of credit facility, expiration date | Sep. 26, 2016 | ||
| Line of credit facility, days given to cure default | 10 days | ||
| Line of credit facility, interest rate upon default | 20.00% | 20.00% | |
| Line of credit facility, amount outstanding | $ 162,347 | $ 162,347 | |
| Line of credit facility, principal due | 141,900 | 141,900 | |
| Line of credit facility, interest payable | $ 20,448 | $ 20,448 |
CONVERTIBLE AND OTHER NOTES PAYABLE (Details Narrative 1) - USD ($) |
12 Months Ended | |||||
|---|---|---|---|---|---|---|
Sep. 24, 2015 |
Sep. 16, 2015 |
Sep. 14, 2015 |
Sep. 09, 2015 |
Jan. 31, 2016 |
Jan. 31, 2015 |
|
| Convertible Notes Payable | ||||||
| Convertible notes payable, net of discount | $ 1,029,558 | |||||
| Total borrowings | 1,613,666 | |||||
| Debt discounts | 584,108 | |||||
| Conversion feature - derivative liability | $ 778,951 | |||||
| Vis Vires Group Convertible Note [Member] | ||||||
| Convertible Notes Payable | ||||||
| Debt issuance date | Sep. 24, 2015 | |||||
| Note face amount | $ 254,000 | $ 250,000 | ||||
| Interest rate | 8.00% | |||||
| Default interest rate | 22.00% | |||||
| Amount outstanding | $ 254,000 | |||||
| Payment terms of convertible debt | The principal amount of the Vis Vires Convertible
Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the
180th day after the Vis Vires Convertible Note was issued. The conversion price of the Vis Vires Convertible Note is equal to
the greater of (a) 65% (a 35% discount) multiplied by the average of the lowest five closing bid prices of our common stock during
the ten trading days immediately prior to the date of any conversion; and (b) $0.00009, provided that the conversion price during
major announcements (as described in the Vis Vires Convertible Note) is the lower of the conversion price on the announcement
date of such major announcement and the conversion price on the date of conversion. In the event we fail to deliver the shares
of common stock issuable upon conversion of the note within three business days of our receipt of a conversion notice, we are
required to pay Vis Vires $2,000 per day for each day that we fail to deliver such shares. The Vis Vires Convertible Note conversion
price also includes anti-dilution protection such that in the event we issue or are deemed to have issued common stock or convertible
securities at a price equal to less than the conversion price of the Vis Vires Convertible Note in effect on the date of such
issuance or deemed issuance, the conversion price of the Vis Vires Convertible Note is automatically reduced to such lower price,
subject to certain exceptions in the note, including an exemption for persons with whom the Company was in discussions regarding
an investment at the time the Vis Vires Convertible Note was entered into and officer and employee issuances/grants.
|
|||||
| Conversion price, percentage against trading price | 65.00% | |||||
| Debt issuance costs | $ 4,000 | |||||
| Default provisions | The Vis Vires Convertible Note provides for standard
and customary events of default such as failing to timely make payments under the Vis Vires Convertible Note when due and the
failure of the Company to timely comply with Exchange Act reporting requirements. Additionally, upon the occurrence of certain
fundamental defaults, as described in the Vis Vires Convertible Note, we are required to repay Vis Vires liquidated damages in
addition to the amount owed under the Vis Vires Convertible Note.
|
|||||
| Debt covenants | At no time may the Vis Vires Convertible Note be
converted into shares of our common stock if such conversion would result in Vis Vires and its affiliates owning an aggregate
of in excess of 9.99% of the then outstanding shares of our common stock.We may prepay in full the unpaid principal and interest
on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date. Any prepayment is subject
to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the Vis Vires Convertible Note
(inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.
|
|||||
| Debt conversion price per share | $ 0.00009 | |||||
| Prepayment terms of convertible debt | We may prepay in full the unpaid principal and
interest on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date.
Any prepayment is subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance of the
Vis Vires Convertible Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when
such prepayment is made.
|
|||||
| JMJ Convertible Note [Member] | ||||||
| Convertible Notes Payable | ||||||
| Debt issuance date | Sep. 16, 2015 | |||||
| Note face amount | $ 900,000 | |||||
| Interest rate | 10.00% | |||||
| Amount outstanding | $ 385,000 | |||||
| Terms of note conversion | The JMJ Convertible Note (including principal and
accrued interest and where applicable other fees) is convertible into our common stock, at any time, at the lesser of $0.75 per
share or 65% (a 35% discount) of the two lowest closing prices of our common stock in the 20 trading days prior to the date of
any conversion, provided that if we are not DWAC eligible at the time of any conversion an additional 10% discount applies, and
in the event our common stock is not DTC eligible at the time of any conversion, an additional 5% discount applies. The JMJ Convertible
Note provides that unless we and JMJ agree in writing, JMJ is not eligible to convert any amount of the note into common stock
which would result in JMJ owning more than 4.99% of our common stock.
|
|||||
| Conversion price, percentage against trading price | 65.00% | |||||
| Default provisions | The JMJ Convertible Note provides for customary
events of default including, our failure to timely make payments under the JMJ Convertible Note when due, our entry into bankruptcy
proceedings, our failure to file reports with the SEC, our loss of DTC eligibility for our common stock, and the investor's loss
of the ability to rely on Rule 144. Additionally, upon the occurrence of an event of default, as described in greater detail in
the JMJ Convertible Note, and at the election of JMJ, we are required to pay JMJ, either (i) the amount then owed under the note
divided by the applicable conversion price, on the date the default occurs or the default amount is demanded (whichever is lower),
multiplied by the volume weighted average price on the date the default occurs or the default amount is demanded (whichever is
higher), or (ii) 150% of the principal amount of the note, plus all of the unpaid interest, fees, liquidated damages (if any)
and other amounts due. Any amount not paid when due accrues interest at the rate of 18% per annum until paid in full. JMJ is not
required to provide us any written notice in order to accelerate the amounts owed under the JMJ Convertible Note in the event
of the occurrence of an event of default.
|
|||||
| Debt instrument term | 2 years | |||||
| Gross proceeds from issuance of debt | $ 350,000 | |||||
| Debt conversion price per share | $ 0.75 | |||||
| Prepayment terms of convertible debt | Until 180 days after the date of the note, we are able to
prepay the note assuming we prepay all outstanding principal together with a penalty of 40% of such amount, interest,
fees, liquidated damages (if any), and the original issuance discount due thereon; and after 160 days, we are not able to
prepay the note without JMJ’s written approval.
|
|||||
| Additional conversion terms | We agreed that we would reserve 25 million shares of common stock for conversion of the note. In teh event we fail to deliver shares within four days of the date of any conversion by JMJ, we are required to pay JMJ $2,000 per day in penalties.
|
|||||
| Debt issue discount | 10.00% | |||||
| Additional funds available from noteholder | $ 900,000 | |||||
| One-time interest rate charged | 12.00% | |||||
| Shares reserved for conversion | 25,000,000 | |||||
| Typenex Convertible Note [Member] | ||||||
| Convertible Notes Payable | ||||||
| Debt issuance date | Sep. 14, 2015 | |||||
| Note face amount | $ 1,005,000 | |||||
| Interest rate | 10.00% | |||||
| Default interest rate | 22.00% | |||||
| Amount outstanding | $ 255,000 | |||||
| Payment terms of convertible debt | Beginning
on the date that is six (6) months after the Closing Date and on the same day of each month thereafter until the maturity date,
so long as any amount is outstanding under the Typenex Note, the Company is required to pay to Typenex installments of principal
equal to $75,000 (or such lesser principal amount as is then outstanding), plus the sum of any accrued and unpaid interest. Payments
of each installment amount may be made in cash, subject to the terms of the note. Alternatively, Typenex or the Company may elect
to convert an installment amount into Common Stock as described below.
|
|||||
| Terms of note conversion | Beginning six (6) months after the Closing Date,
Typenex may convert the balance of the Typenex Note, or any installment or portion thereof, utilizing the conversion price calculation
set forth below. Generally, the conversion price will be $0.30 per share; however, in the event the Company's market capitalization
falls below $3 million, then the conversion price is the lower of (a) $0.30 per share, and (b) the Market Price. The “Market
Price” is calculated by applying a discount of 40% (provided that under certain events the discount may be reduced to
up to 60%, upon the occurrence of certain events (with a reduction of 5% per event) such as the value of common stock (as calculated
in the note) declining below $0.10 per share; the Company not being Deposit/Withdrawal At Custodian - DWAC eligible; the
Company's common stock not being DTC eligible; or the occurrence of any major default (as described in the note)), to the average
of the three (3) lowest intra-day trading prices of the Company's common stock during the ten (10) trading days immediately preceding
the applicable conversion. The Company may also elect to make payment of installments in the form of equity on substantially the
same terms, subject to the terms and conditions of the Typenex Note, and Typenex's right in certain cases to require a certain
portion of such payment to be paid in cash or stock. Additionally, 20 days after shares issued upon redemption of the note are
eligible to be freely traded by Typenex (as described in the note), there is a required true up, whereby Typenex is required to
be issued additional shares in the event the trading price of the Company's common stock has declined from the time of original
issuance to the date such shares are ‘free trading' as described in the Typenex Note.
|
|||||
| Default provisions | The Typenex Note contains customary and usual events of
default. In the event of a default, the Typenex Note may be accelerated by Typenex. The outstanding balance would be
immediately due and payable and we are required to repay Typenex additional amounts (including the value of the amount then
due in common stock, at the highest intraday trading price of the amount then due under the note) and/or liquidated damages
in addition to the amount owed under the Typenex Note. In addition, we owe certain fees and liquidated damages to Typenex if
we fail to timely issue shares of common stock under the Typenex Note.
|
|||||
| Debt covenants | Typenex is prohibited from owning more than 4.99%
of the Company's outstanding shares, pursuant to the Typenex Note, unless the market capitalization of the Company's common stock
is less than $10,000,000, in which case Typenex is prohibited from owning more than 9.99% of the Company's outstanding shares.
|
|||||
| Debt instrument term | 20 months | |||||
| Payment frequency | Monthly | |||||
| Periodic principal payment | $ 75,000 | |||||
| Debt conversion price per share | $ 0.30 | |||||
| Prepayment terms of convertible debt | The Company has the right to prepay the Typenex Note
under certain circumstances, subject to payment of a 35% prepayment penalty during the first six months the note is
outstanding and 50% thereafter.
|
|||||
| Additional conversion terms | If, at any time that the Typenex Note is outstanding, the
Company sells or issues any common stock or other securities exercisable for, or convertible into, Common Stock for a price
per share that is less than the conversion price applicable under the Typenex Note, then such lower price will apply to all
subsequent conversions by Typenex for a period of 20 trading days.
|
|||||
| Typenex Convertible Note [Member] | Initial Tranche [Member] | ||||||
| Convertible Notes Payable | ||||||
| Note face amount | $ 250,000 | |||||
| Interest rate | 10.00% | |||||
| Debt issuance costs | $ 5,000 | |||||
| Gross proceeds from issuance of debt | 255,000 | |||||
| Typenex Convertible Note [Member] | Investor Notes [Member] | ||||||
| Convertible Notes Payable | ||||||
| Note face amount | $ 750,000 | |||||
| Interest rate | 10.00% | |||||
| Number of notes | 3 | |||||
| Face amount of each note | $ 250,000 | |||||
| JSJ Convertible Note [Member] | ||||||
| Convertible Notes Payable | ||||||
| Debt issuance date | Sep. 09, 2015 | |||||
| Note face amount | $ 275,000 | |||||
| Interest rate | 12.00% | |||||
| Default interest rate | 18.00% | |||||
| Amount outstanding | $ 275,000 | |||||
| Payment terms of convertible debt | The JSJ convertible note is payable by us on demand
by JSJ at any time after March 6, 2016. We have the right to repay the JSJ Convertible Note (a) for an amount equal to 135% of
the then balance of such note until the 180th day following the date of the note, and (b) for an amount equal to 150% of the balance
of such note subsequent to the maturity date (provided the holder consents to such payment after maturity).
|
|||||
| Terms of note conversion | The JSJ Convertible Note and all accrued interest
is convertible at the option of the holder thereof into the Company's common stock at any time. The conversion price of the JSJ
Convertible Note is 60% (a 40% discount) to the third lowest intra-day trading price of the Company's common stock during the
10 trading days prior to any conversion date of the note. In the event we do not issue the holder any shares due in connection
with a conversion within three business days, we are required to issue the holder additional shares equal to 25% of the conversion
amount, and an additional 25% of such shares for each additional five business days beyond such fourth business day that such
failure continues. In the event we do not have a sufficient number of authorized but unissued shares of common stock to allow
for the conversion of the note, the discount rate (40%) is increased by an additional 5%.
|
|||||
| Conversion price, percentage against trading price | 60.00% | |||||
| Debt issuance costs | $ 5,000 | |||||
| Default provisions | The JSJ Convertible Note contains standard and
customary events of default, including in the event we fail to timely file any and all reports due with the Securities and Exchange
Commission. Upon the occurrence of an event of default, JSJ can demand that we immediately repay 150% of the outstanding balance
of the JSJ Convertible Note together with accrued interest (and default interest, if any).
|
|||||
| Debt covenants | Pursuant to the terms of the JSJ Convertible Note,
JSJ agreed not to engage in any short sales or hedging transactions of our common stock. At no time may the JSJ Convertible Note
be converted into shares of our common stock if such conversion would result in JSJ and its affiliates owning an aggregate of
in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may be increased by JSJ to up
to increases to 9.99% upon not less than 61 days prior written notice to us.
|
CONVERTIBLE AND OTHER NOTES PAYABLE (Details 1) |
Jan. 31, 2016
USD ($)
|
|---|---|
| Year ended December 31, | |
| 2016 | $ 670,900 |
| 2017 | 385,000 |
| Thereafter | 255,000 |
| Long-term Debt | $ 1,310,900 |
STOCKHOLDER'S EQUITY (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Jan. 31, 2016 |
Jan. 31, 2015 |
|
| Common stock, shares authorized | 5,112,861,525 | 5,112,861,525 |
| Common stock, par value | $ 0.001 | $ 0.001 |
| Issuance of common stock for services | $ 204,284 | $ 427,442 |
| Retirement of common stock for accounts receivable | 50,000 | |
| Common Stock [Member] | ||
| Issuance of common stock for services | $ 1,894 | $ 1,764 |
| Issuance of common stock for services, shares | 1,894,044 | 1,764,356 |
| Retirement of common stock for accounts receivable | $ 131 | |
| Retirement of common stock for accounts receivable, shares | (130,480) | |
| Paid-In Capital [Member] | ||
| Issuance of common stock for services | $ 202,390 | $ 425,678 |
| Retirement of common stock for accounts receivable | $ 49,869 | |
STOCK BASED COMPENSATION (Details) - $ / shares |
12 Months Ended | ||
|---|---|---|---|
Jan. 31, 2016 |
Jan. 31, 2015 |
Jan. 31, 2014 |
|
| Number of Shares | |||
| Outstanding | 17,830,000 | 17,260,000 | |
| Granted | 6,780,000 | 820,000 | |
| Forfeited and canceled | (1,020,000) | (200,000) | |
| Outstanding | 23,590,000 | 17,830,000 | 17,260,000 |
| Exercisable | 14,151,658 | 10,952,633 | |
| Weighted Average Exercise Price | |||
| Outstanding | $ 0.35 | $ 0.35 | |
| Granted | 0.30 | 0.27 | |
| Exercised | 0.16 | ||
| Outstanding | 0.25 | 0.35 | $ 0.35 |
| Exercisable | $ 0.28 | $ 0.33 | |
| Weighted Average Remaining Contract Term | |||
| Outstanding | 3 years 2 months 9 days | 3 years 7 months 17 days | 4 years 2 months 23 days |
| Exercisable | 2 years 2 months 19 days | 3 years 3 months 29 days | |
INCOME TAXES (Details Narrative) |
Jan. 31, 2016
USD ($)
|
|---|---|
| Income Tax Disclosure [Abstract] | |
| Net operating loss carryforward | $ 18,407,581 |
INCOME TAXES (Details) - USD ($) |
Jan. 31, 2016 |
Jan. 31, 2015 |
|---|---|---|
| Deferred tax assets: | ||
| Net operating loss carryforward | $ 6,821,077 | $ 6,392,132 |
| Stock based compensation | 2,728,166 | 2,212,946 |
| Charitable contribution carry forward | 52,414 | |
| Allowance for bad debts | 26,372 | 37,056 |
| Total deferred tax assets | 9,628,029 | 8,642,133 |
| Less, valuation allowance | $ (9,628,029) | $ (8,642,133) |
INCOME TAXES (Details 1) |
12 Months Ended | |
|---|---|---|
Jan. 31, 2016 |
Jan. 31, 2015 |
|
| Income Tax Disclosure [Abstract] | ||
| Federal statutory rate | 33.74% | 33.78% |
| State taxes, net of federal benefit | 3.06% | 3.05% |
| Change in valuation allowance | (36.80%) | (36.83%) |
CONCENTRATIONS (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Jan. 31, 2016 |
Jan. 31, 2015 |
|
| Concentration Risk [Line Items] | ||
| Sales | $ 11,198,605 | $ 8,901,367 |
| CHILE [Member] | ||
| Concentration Risk [Line Items] | ||
| Sales | 808,658 | 196,099 |
| CANADA [Member] | ||
| Concentration Risk [Line Items] | ||
| Sales | 922,517 | 1,546,422 |
| License and Services Revenue | 410,153 | 282,641 |
| KOREA, REPUBLIC OF [Member] | ||
| Concentration Risk [Line Items] | ||
| Sales | $ 28,723 | $ 227,751 |
| Vendor Concentration Risk [Member] | Purchases [Member] | ||
| Concentration Risk [Line Items] | ||
| Percentage concentration | 42.00% | 61.00% |
| Percentage concentration, additional description | Two vendors | Three vendors |
| Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | ||
| Concentration Risk [Line Items] | ||
| Percentage concentration | 42.00% | 52.00% |
| Percentage concentration, additional description | Three distributors | Two customers |
SUBSEQUENT EVENTS (Details Narrative) - USD ($) |
1 Months Ended | 2 Months Ended | 4 Months Ended | 12 Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Apr. 20, 2016 |
Mar. 15, 2016 |
Mar. 10, 2016 |
Mar. 08, 2016 |
Sep. 24, 2015 |
Sep. 16, 2015 |
Sep. 09, 2015 |
Apr. 30, 2016 |
Mar. 31, 2016 |
Mar. 16, 2016 |
Apr. 30, 2016 |
Jun. 30, 2016 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Jan. 31, 2016 |
Jun. 30, 2015 |
Jan. 31, 2015 |
Jan. 31, 2014 |
|
| Debt discounts | $ 584,108 | |||||||||||||||||
| Options outstanding | 23,590,000 | 17,830,000 | 17,260,000 | |||||||||||||||
| Subsequent Event [Member] | ||||||||||||||||||
| Subsequent Event Date | Apr. 20, 2016 | |||||||||||||||||
| Subsequent Event Description | On April 20, 2016, the Company entered into a settlement and release with one of its officer and director insurance providers, pursuant to which among other things, the provider has agreed to buy out the Company’s officer and director liability insurance policy for the period from March 15, 2011 to March 15, 2012 for $400,000. |
|||||||||||||||||
| Settlement buyout of insurance | $ 400,000 | |||||||||||||||||
| 2015 Directors and Officers Plan [Member] | ||||||||||||||||||
| Options exercise price | $ 0.195 | |||||||||||||||||
| 2015 Directors and Officers Plan [Member] | Subsequent Event [Member] | ||||||||||||||||||
| Subsequent Event Description | Mar. 10, 2016 | |||||||||||||||||
| Payment terms of convertible debt | On March 10, 2016, the Board of Directors approved the repricing of options to purchase 6 million shares of the Company’s common stock originally issued to the Company’s executive officers and directors in June 2015. |
|||||||||||||||||
| Options outstanding | 6,000,000 | |||||||||||||||||
| Options exercise price | $ 0.12 | |||||||||||||||||
| 2015 Directors and Officers Plan [Member] | Subsequent Event [Member] | Rohan Marley [Member] | ||||||||||||||||||
| Options outstanding | 2,000,000 | |||||||||||||||||
| Options exercise price | $ 0.12 | |||||||||||||||||
| Options vesting | 666,666 | 666,667 | 666,667 | |||||||||||||||
| 2015 Directors and Officers Plan [Member] | Subsequent Event [Member] | Brent Toevs [Member] | ||||||||||||||||||
| Options outstanding | 2,000,000 | |||||||||||||||||
| Options exercise price | $ 0.12 | |||||||||||||||||
| Options vesting | 666,666 | 666,667 | 666,667 | |||||||||||||||
| 2015 Directors and Officers Plan [Member] | Subsequent Event [Member] | Anh Tran [Member] | ||||||||||||||||||
| Options outstanding | 2,000,000 | |||||||||||||||||
| Options exercise price | $ 0.12 | |||||||||||||||||
| Options vesting | 666,666 | 666,667 | 666,667 | |||||||||||||||
| Outside of The Equity Incentive Plans [Member] | ||||||||||||||||||
| Options outstanding | 333,333 | |||||||||||||||||
| Duck Duck Spruce Convertible Note 2 [Member] | Subsequent Event [Member] | ||||||||||||||||||
| Debt issuance date | Mar. 15, 2016 | |||||||||||||||||
| Interest rate | 5.00% | |||||||||||||||||
| Note face amount | $ 220,000 | |||||||||||||||||
| Gross proceeds from issuance of debt | $ 200,000 | |||||||||||||||||
| Debt issue discount | 10.00% | |||||||||||||||||
| Debt discounts | $ 20,000 | |||||||||||||||||
| Convertible notes maturity | Mar. 15, 2017 | |||||||||||||||||
| Shares issued as consideration for debt | 250,000 | |||||||||||||||||
| Duck Duck Spruce Convertible Note 1 [Member] | Subsequent Event [Member] | ||||||||||||||||||
| Debt issuance date | Mar. 08, 2016 | |||||||||||||||||
| Interest rate | 5.00% | |||||||||||||||||
| Note face amount | $ 330,000 | |||||||||||||||||
| Gross proceeds from issuance of debt | $ 300,000 | |||||||||||||||||
| Debt issue discount | 10.00% | |||||||||||||||||
| Debt discounts | $ 30,000 | |||||||||||||||||
| Convertible notes maturity | Dec. 08, 2016 | |||||||||||||||||
| Vis Vires Group Convertible Note [Member] | ||||||||||||||||||
| Payment terms of convertible debt | The principal amount of the Vis Vires Convertible
Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the
180th day after the Vis Vires Convertible Note was issued. The conversion price of the Vis Vires Convertible Note is equal to
the greater of (a) 65% (a 35% discount) multiplied by the average of the lowest five closing bid prices of our common stock during
the ten trading days immediately prior to the date of any conversion; and (b) $0.00009, provided that the conversion price during
major announcements (as described in the Vis Vires Convertible Note) is the lower of the conversion price on the announcement
date of such major announcement and the conversion price on the date of conversion. In the event we fail to deliver the shares
of common stock issuable upon conversion of the note within three business days of our receipt of a conversion notice, we are
required to pay Vis Vires $2,000 per day for each day that we fail to deliver such shares. The Vis Vires Convertible Note conversion
price also includes anti-dilution protection such that in the event we issue or are deemed to have issued common stock or convertible
securities at a price equal to less than the conversion price of the Vis Vires Convertible Note in effect on the date of such
issuance or deemed issuance, the conversion price of the Vis Vires Convertible Note is automatically reduced to such lower price,
subject to certain exceptions in the note, including an exemption for persons with whom the Company was in discussions regarding
an investment at the time the Vis Vires Convertible Note was entered into and officer and employee issuances/grants.
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| Default provisions | The Vis Vires Convertible Note provides for standard
and customary events of default such as failing to timely make payments under the Vis Vires Convertible Note when due and the
failure of the Company to timely comply with Exchange Act reporting requirements. Additionally, upon the occurrence of certain
fundamental defaults, as described in the Vis Vires Convertible Note, we are required to repay Vis Vires liquidated damages in
addition to the amount owed under the Vis Vires Convertible Note.
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| Debt issuance date | Sep. 24, 2015 | |||||||||||||||||
| Interest rate | 8.00% | |||||||||||||||||
| Note face amount | $ 254,000 | $ 250,000 | ||||||||||||||||
| Convertible notes maturity | Jun. 11, 2016 | |||||||||||||||||
| Prepayment terms of convertible debt | We may prepay in full the unpaid principal and
interest on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date.
Any prepayment is subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance of the
Vis Vires Convertible Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when
such prepayment is made.
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| Debt covenants | At no time may the Vis Vires Convertible Note be
converted into shares of our common stock if such conversion would result in Vis Vires and its affiliates owning an aggregate
of in excess of 9.99% of the then outstanding shares of our common stock.We may prepay in full the unpaid principal and interest
on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date. Any prepayment is subject
to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the Vis Vires Convertible Note
(inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.
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| Default interest rate | 22.00% | |||||||||||||||||
| Debt issuance costs | $ 4,000 | |||||||||||||||||
| Vis Vires Group Convertible Note [Member] | Subsequent Event [Member] | ||||||||||||||||||
| Terms of note conversion | The principal amount of the Vis Vires Convertible Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the 180th day after the Vis Vires Convertible Note was issued. The conversion price of the Vis Vires Convertible Note is equal to the greater of (a) 65% (a 35% discount) multiplied by the average of the lowest five closing bid prices of our common stock during the ten trading days immediately prior to the date of any conversion; and (b) $0.00009, provided that the conversion price during major announcements (as described in the Vis Vires Convertible Note) is the lower of the conversion price on the announcement date of such major announcement and the conversion price on the date of conversion. In the event we fail to deliver the shares of common stock issuable upon conversion of the note within three business days of our receipt of a conversion notice, we are required to pay Vis Vires $2,000 per day for each day that we fail to deliver such shares. The Vis Vires Convertible Note conversion price also includes anti-dilution protection such that in the event we issue or are deemed to have issued common stock or convertible securities at a price equal to less than the conversion price of the Vis Vires Convertible Note in effect on the date of such issuance or deemed issuance, the conversion price of the Vis Vires Convertible Note is automatically reduced to such lower price, subject to certain exceptions in the note. |
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| Default provisions | he Vis Vires Convertible Note provides for standard and customary events of default such as failing to timely make payments under the Vis Vires Convertible Note when due and the failure of the Company to timely comply with the Securities Exchange Act of 1934, as amended, reporting requirements. Additionally, upon the occurrence of certain fundamental defaults, as described in the Vis Vires Convertible Note, we are required to pay Vis Vires liquidated damages in addition to the amount owed under the Vis Vires Convertible Note. |
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| Debt issuance date | Mar. 11, 2016 | |||||||||||||||||
| Interest rate | 8.00% | |||||||||||||||||
| Note face amount | $ 225,000 | |||||||||||||||||
| Prepayment terms of convertible debt | We may prepay in full the unpaid principal and interest on the Vis Vires Convertible Note, upon notice, any time prior to the 180th day after the issuance date. Any prepayment is subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the Vis Vires Convertible Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made. |
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| Debt covenants | At no time may the Vis Vires Convertible Note be converted into shares of our common stock if such conversion would result in Vis Vires and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock. |
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| Default interest rate | 22.00% | |||||||||||||||||
| Debt issuance costs | $ 3,000 | |||||||||||||||||
| JMJ Convertible Note [Member] | ||||||||||||||||||
| Terms of note conversion | The JMJ Convertible Note (including principal and
accrued interest and where applicable other fees) is convertible into our common stock, at any time, at the lesser of $0.75 per
share or 65% (a 35% discount) of the two lowest closing prices of our common stock in the 20 trading days prior to the date of
any conversion, provided that if we are not DWAC eligible at the time of any conversion an additional 10% discount applies, and
in the event our common stock is not DTC eligible at the time of any conversion, an additional 5% discount applies. The JMJ Convertible
Note provides that unless we and JMJ agree in writing, JMJ is not eligible to convert any amount of the note into common stock
which would result in JMJ owning more than 4.99% of our common stock.
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| Default provisions | The JMJ Convertible Note provides for customary
events of default including, our failure to timely make payments under the JMJ Convertible Note when due, our entry into bankruptcy
proceedings, our failure to file reports with the SEC, our loss of DTC eligibility for our common stock, and the investor's loss
of the ability to rely on Rule 144. Additionally, upon the occurrence of an event of default, as described in greater detail in
the JMJ Convertible Note, and at the election of JMJ, we are required to pay JMJ, either (i) the amount then owed under the note
divided by the applicable conversion price, on the date the default occurs or the default amount is demanded (whichever is lower),
multiplied by the volume weighted average price on the date the default occurs or the default amount is demanded (whichever is
higher), or (ii) 150% of the principal amount of the note, plus all of the unpaid interest, fees, liquidated damages (if any)
and other amounts due. Any amount not paid when due accrues interest at the rate of 18% per annum until paid in full. JMJ is not
required to provide us any written notice in order to accelerate the amounts owed under the JMJ Convertible Note in the event
of the occurrence of an event of default.
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| Debt issuance date | Sep. 16, 2015 | |||||||||||||||||
| Interest rate | 10.00% | |||||||||||||||||
| Note face amount | $ 900,000 | |||||||||||||||||
| Gross proceeds from issuance of debt | $ 350,000 | |||||||||||||||||
| Debt issue discount | 10.00% | |||||||||||||||||
| Convertible notes maturity | Sep. 16, 2017 | |||||||||||||||||
| Prepayment terms of convertible debt | Until 180 days after the date of the note, we are able to
prepay the note assuming we prepay all outstanding principal together with a penalty of 40% of such amount, interest,
fees, liquidated damages (if any), and the original issuance discount due thereon; and after 160 days, we are not able to
prepay the note without JMJ’s written approval.
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| JSJ Convertible Note [Member] | ||||||||||||||||||
| Payment terms of convertible debt | The JSJ convertible note is payable by us on demand
by JSJ at any time after March 6, 2016. We have the right to repay the JSJ Convertible Note (a) for an amount equal to 135% of
the then balance of such note until the 180th day following the date of the note, and (b) for an amount equal to 150% of the balance
of such note subsequent to the maturity date (provided the holder consents to such payment after maturity).
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| Terms of note conversion | The JSJ Convertible Note and all accrued interest
is convertible at the option of the holder thereof into the Company's common stock at any time. The conversion price of the JSJ
Convertible Note is 60% (a 40% discount) to the third lowest intra-day trading price of the Company's common stock during the
10 trading days prior to any conversion date of the note. In the event we do not issue the holder any shares due in connection
with a conversion within three business days, we are required to issue the holder additional shares equal to 25% of the conversion
amount, and an additional 25% of such shares for each additional five business days beyond such fourth business day that such
failure continues. In the event we do not have a sufficient number of authorized but unissued shares of common stock to allow
for the conversion of the note, the discount rate (40%) is increased by an additional 5%.
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| Default provisions | The JSJ Convertible Note contains standard and
customary events of default, including in the event we fail to timely file any and all reports due with the Securities and Exchange
Commission. Upon the occurrence of an event of default, JSJ can demand that we immediately repay 150% of the outstanding balance
of the JSJ Convertible Note together with accrued interest (and default interest, if any).
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| Debt issuance date | Sep. 09, 2015 | |||||||||||||||||
| Interest rate | 12.00% | |||||||||||||||||
| Note face amount | $ 275,000 | |||||||||||||||||
| Convertible notes maturity | Mar. 06, 2016 | |||||||||||||||||
| Debt covenants | Pursuant to the terms of the JSJ Convertible Note,
JSJ agreed not to engage in any short sales or hedging transactions of our common stock. At no time may the JSJ Convertible Note
be converted into shares of our common stock if such conversion would result in JSJ and its affiliates owning an aggregate of
in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may be increased by JSJ to up
to increases to 9.99% upon not less than 61 days prior written notice to us.
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| Default interest rate | 18.00% | |||||||||||||||||
| Debt issuance costs | $ 5,000 | |||||||||||||||||
| JSJ Convertible Note [Member] | Subsequent Event [Member] | ||||||||||||||||||
| Subsequent Event Date | Mar. 01, 2016 | |||||||||||||||||
| Subsequent Event Description | On March 1, 2016, we entered into a side letter agreement with JSJ. Pursuant to the side letter agreement, JSJ agreed to extend the maturity date of the JSJ Note to December 9, 2016 (from March 9, 2016), and we agreed to amend the terms of the JSJ Note |
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| Payment terms of convertible debt | JSJ agreed to extend the maturity date of the JSJ Note to December 9, 2016 (from March 9, 2016), and we agreed to amend the terms of the JSJ Note relating to prepayment, to allow us the right to prepay the JSJ Note (a) from March 1, 2016 to September 9, 2016, provided we pay a redemption premium of 135% of the principal amount of such note together with accrued interest thereon, and (b) from September 10, 2016 to the maturity date, provided we pay a redemption premium of 150% of the principal amount of such note together with accrued interest thereon. | |||||||||||||||||
| Terms of note conversion | The side letter agreement also amended the JSJ
Note to (a) allow JSJ the right at any time after September 9, 2016, to convert the amount owed under the JSJ Note into shares
of our common stock at a 40% discount to the third lowest trade during the previous 10 trading days prior to the date of conversion,
provided that in no event will such conversion price be less than $0.00005 per share; and (b) to add a 4.99% ownership limitation
which prevents JSJ from converting the note into our common stock in the event it and its affiliates would beneficially own more
than 4.99% of our common stock upon such conversion, provided that such percentage can be increased by JSJ with 61 days prior
written notice up to 9.99%.
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| Default provisions | The side letter agreement also amended the events
of default under the JSJ Note to include other additional customary events of default, in the event we cease filing reports with
the Securities and Exchange Commission or if we file a Form 15.
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| Debt extension costs | $ 117,253 | |||||||||||||||||
| Interest paid | 16,003 | |||||||||||||||||
| Legal fees paid | 5,000 | |||||||||||||||||
| Consideration Paid | 96,250 | |||||||||||||||||
| Typenex Convertible Note [Member] | ||||||||||||||||||
| Payment terms of convertible debt | Beginning
on the date that is six (6) months after the Closing Date and on the same day of each month thereafter until the maturity date,
so long as any amount is outstanding under the Typenex Note, the Company is required to pay to Typenex installments of principal
equal to $75,000 (or such lesser principal amount as is then outstanding), plus the sum of any accrued and unpaid interest. Payments
of each installment amount may be made in cash, subject to the terms of the note. Alternatively, Typenex or the Company may elect
to convert an installment amount into Common Stock as described below.
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| Terms of note conversion | Beginning six (6) months after the Closing Date,
Typenex may convert the balance of the Typenex Note, or any installment or portion thereof, utilizing the conversion price calculation
set forth below. Generally, the conversion price will be $0.30 per share; however, in the event the Company's market capitalization
falls below $3 million, then the conversion price is the lower of (a) $0.30 per share, and (b) the Market Price. The “Market
Price” is calculated by applying a discount of 40% (provided that under certain events the discount may be reduced to
up to 60%, upon the occurrence of certain events (with a reduction of 5% per event) such as the value of common stock (as calculated
in the note) declining below $0.10 per share; the Company not being Deposit/Withdrawal At Custodian - DWAC eligible; the
Company's common stock not being DTC eligible; or the occurrence of any major default (as described in the note)), to the average
of the three (3) lowest intra-day trading prices of the Company's common stock during the ten (10) trading days immediately preceding
the applicable conversion. The Company may also elect to make payment of installments in the form of equity on substantially the
same terms, subject to the terms and conditions of the Typenex Note, and Typenex's right in certain cases to require a certain
portion of such payment to be paid in cash or stock. Additionally, 20 days after shares issued upon redemption of the note are
eligible to be freely traded by Typenex (as described in the note), there is a required true up, whereby Typenex is required to
be issued additional shares in the event the trading price of the Company's common stock has declined from the time of original
issuance to the date such shares are ‘free trading' as described in the Typenex Note.
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| Default provisions | The Typenex Note contains customary and usual events of
default. In the event of a default, the Typenex Note may be accelerated by Typenex. The outstanding balance would be
immediately due and payable and we are required to repay Typenex additional amounts (including the value of the amount then
due in common stock, at the highest intraday trading price of the amount then due under the note) and/or liquidated damages
in addition to the amount owed under the Typenex Note. In addition, we owe certain fees and liquidated damages to Typenex if
we fail to timely issue shares of common stock under the Typenex Note.
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| Debt issuance date | Sep. 14, 2015 | |||||||||||||||||
| Interest rate | 10.00% | |||||||||||||||||
| Note face amount | $ 1,005,000 | |||||||||||||||||
| Convertible notes maturity | Apr. 30, 2022 | |||||||||||||||||
| Prepayment terms of convertible debt | The Company has the right to prepay the Typenex Note
under certain circumstances, subject to payment of a 35% prepayment penalty during the first six months the note is
outstanding and 50% thereafter.
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| Debt covenants | Typenex is prohibited from owning more than 4.99%
of the Company's outstanding shares, pursuant to the Typenex Note, unless the market capitalization of the Company's common stock
is less than $10,000,000, in which case Typenex is prohibited from owning more than 9.99% of the Company's outstanding shares.
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| Default interest rate | 22.00% | |||||||||||||||||
| Typenex Convertible Note [Member] | Subsequent Event [Member] | ||||||||||||||||||
| Repayments of convertible debt | $ 75,000 | $ 75,000 | $ 150,000 | |||||||||||||||
| Duck Duck Spruce Convertible Notes [Member] | Subsequent Event [Member] | ||||||||||||||||||
| Payment terms of convertible debt | if we repay the Duck Duck Notes more than 90 days after the issuance date thereof, the 5% interest which would have accrued through maturity is required to be paid to Duck Duck at the time of repayment |
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| Terms of note conversion | The amounts owed under the Duck Duck Notes are convertible into shares of our common stock from time to time after the 180th day after the issuance date thereof at the option of Duck Duck, at a 35% discount (increasing by 10% if we are placed on the “chilled” list with the DTC, increasing by 5% if we are not DWAC eligible, and increasing by another 5% upon the occurrence of any event of default under the note) to the average of the two lowest closing prices of our common stock during the 10 consecutive trading days prior to the date of conversion, provided that all conversions are subject to a floor of $0.05 per share. |
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| Default provisions | The Duck Duck Notes provide for standard and customary events of default such as failing to timely make payments under the Duck Duck Notes when due and the failure of the Company to timely comply with the Securities Exchange Act of 1934, as amended, reporting requirements. |
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| Interest rate | 5.00% | |||||||||||||||||
| Default interest rate, textual description | the lesser of 10% per annum and the highest rate allowed per law upon an event of default |
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| Prepayment terms of convertible debt | The Duck Duck Notes can be repaid by us prior to
the 180th day after the issuance date thereof along with a prepayment penalty of between 105% and 130% of the principal amount
owed thereunder, plus interest (which as described above requires the total of interest through maturity if repaid more than 90
days after the issuance date). After the 180th day after the issuance date the notes cannot be repaid without the written consent
of Duck Duck.
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| Debt covenants | At no time may the Duck Duck Notes be converted into shares of our common stock if such conversion would result in Duck Duck and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock. |
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