UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2016

  

 

☐	TRANSITION REPORT PURSUANT TO 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
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

4730 Tejon St., Denver, Colorado 80211

(Address of principal executive offices and Zip Code)

 

Registrant’s telephone number, including area code: (323) 556-0746

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period 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 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.

 

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☐	Smaller reporting company ☒
	(Do not check if a 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  ☒

 

At April 6, 2017, there were 229,306,508 shares of the issuer’s common stock outstanding.  

 

 

Jammin Java Corp.

 

For the Three and Nine Months Ended October 31, 2016 and 2015

 

INDEX  

 

			Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements		F-1
	Condensed Balance Sheets as of October 31, 2016 (unaudited) and January 31, 2016		F-1
	Condensed Statements of Operations (unaudited) - For the three and nine months ended October 31, 2016 and 2015		F-2
	Condensed Statements of Cash Flows (unaudited) - For the nine months ended October 31, 2016 and 2015		F-3
	Notes to Condensed Financial Statements (unaudited)		F-4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31
Item 4.	Controls and Procedures		31
	PART II – OTHER INFORMATION		34
Item 1.	Legal Proceedings		34
Item 1A.	Risk Factors		35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3.	Defaults Upon Senior Securities		38
Item 4.	Mine Safety Disclosures		38
Item 5.	Other Information		38
Item 6.	Exhibits		39
Signatures			40

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

JAMMIN JAVA CORP.

BALANCE SHEETS

(Unaudited)

 

		October 31,				January 31,
		2016				2016
Assets
CURRENT ASSETS
Cash and cash equivalents		$	10,277			$	231,021
Current assets of discontinued operations			664,432				1,440,730
Prepaid expenses			5,000				5,000
Other current assets			3,000				8,000
Total current assets			682,709				1,684,751
Noncurrent assets of discontinued operations			—				781,163
Other assets			5,600				23,567
Total Assets		$	688,309			$	2,489,481
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	254,846			$	81,272
Accrued expenses			783,536				—
Current liabilities of discontinued operations			3,587,017				4,027,416
Convertible note payable in default			207,345				—
Current portion of convertible and other notes payable, net of discount			961,378				1,029,558
Derivative liability - conversion feature			—				778,951
Total current liabilities			5,794,122				5,917,197
Convertible notes payable, net of discount			231,404				—
Derivative liability - conversion feature			3,524,595				—
Total Liabilities			9,550,121				5,917,197
Commitments & Contingencies
Stockholders’ Deficit
Common stock, $0.001 par value, 5,112,861,525 shares authorized; 230,567,965 and 126,455,312 shares issued and outstanding as of October 31, 2016 and January 31, 2016, respectively			230,568				126,455
Additional paid-in capital			27,897,174				25,691,579
Common stock payable			54,347				—
Accumulated deficit			(37,043,901	)			(29,245,750	)
Total Stockholders’ Deficity			(8,861,812	)			(3,427,716	)
Total Liabilities and Stockholders’ Deficit		$	688,309			$	2,489,481

 

See accompanying notes to condensed financial statements.

 

 

JAMMIN JAVA CORP.

STATEMENTS OF OPERATIONS

Unaudited

 

		Three months ended October 31,								Nine months ended October 31,
		2016				2015				2016				2015
Sales, net		$	—			$	—			$	—			$	—
Operating Expenses:
Compensation and benefits			42,407				304,798				1,258,144				935,452
General and administrative			221,483				342,176				1,141,568				1,104,422
Total operating expenses			263,890				646,974				2,399,712				2,039,874
Other expense
Other income (expense)			—				(17,165	)			—				(49,702	)
Changes in fair value of derivative liability			(2,338,989	)			(118,370	)			(2,983,972	)			(118,370	)
Gain on extinguishment of debt			—				—				362,506				—
Loss on settlement of accounts payable			(28,516	)			—				(28,516	)			—
Interest expense			(731,144	)			(41,367	)			(1,917,519	)			(50,940	)
Total other income (expense)			(3,098,649	)			(176,902	)			(4,567,501	)			(219,012	)
Net loss from continuing operations			(3,362,539	)			(823,876	)			(6,967,213	)			(2,258,886	)
Net income (loss) from discontinued operations			(53,824	)			(672,953	)			(830,938	)			(1,403,674	)
Net Loss		$	(3,416,363	)		$	(1,496,829	)		$	(7,798,151	)		$	(3,662,560	)
Continuing operations		$	(0.02	)		$	(0.01)			$	(0.05	)		$	(0.02	)
Discontinued operations			0.00				(0.00	)			(0.00	)			(0.01	)
Total		$	(0.02	)		$	(0.01	)		$	(0.05	)		$	(0.03	)
Weighted average number of common shares outstanding - basic and diluted			190,115,702				125,687,580				149,769,338				125,375,347

 

See accompanying notes to condensed financial statements.

 

 

JAMMIN JAVA CORP.

STATEMENTS OF CASH FLOWS

Unaudited

		Nine months ended October 31,
		2016				2015
Operating Activities:
Net loss		$	(7,798,151	)		$	(3,662,560	)
Net loss from discontinued operations			830,938				1,403,674
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Change in fair value of derivative liability			2,983,972				118,370
Loss on settlement of accounts payable			28,516				—
Amortization of stock options			840,471				939,808
Common stock issued for services			46,180				188,346
Original issue discount on convertible notes payable			(49,974	)			—
Amortization of discount on notes payable			881,994				—
Changes in operating assets and liabilities:
Other current assets			5,000				(27,167	)
Prepaids			—				—
Other assets			17,966				3
Accrued liability - related party			—				(11,957	)
Accounts payable and accrued liabilities			1,768,958				—
Net cash used in operating activities - continuing operations			(444,130	)			(1,051,483	)
Net cash provided by (used in) operating activities - discontinued operations			39,130				(861,594	)
Net cashed used in operating activities			(405,000	)			(1,913,077	)
Investing Activitites:
Net cash provided by investing activities - continuing operations			—				—
Net cash provided by investing activities - discontinued operations			31,912				65,108
Net cash provided by investing activities			31,912				65,108
Financing Activities:
Proceeds from issuance of notes payable			582,389				1,464,523
Proceeds from issuance of convertible notes payable			775,000				—
Repayments of notes payable			(680,392	)			—
Repayments of notes payable			(524,653	)			—
Net cash provided by financing activities			152,344				1,464,523
Net increase in cash			(220,744	)			(383,446	)
Cash - Beginning of Period			231,021				443,189
Cash - End of Period		$	10,277			$	59,743
Supplemental Disclosures of Cash Flow Information:
Cash Paid During The Period For:
Interest		$	—			$	—
Taxes		$	—			$	—
Noncash Investing and Financing Transactions:
Accounts payable converted to common stock		$	430,964			$	—
Settlement of derivative liability		$	362,506			$	—
Common stock issued for conversion of convertible note payable		$	338,540			$	—
Settlement of convertible notes payable - derivative liability		$	317,894			$	—
Derivative discount on convertible notes payable		$	618,977			$	—
Interest expense		$	—			$	4,400
Common stock issued for debt issuance costs		$	27,500			$	—
Note payable issued for accounts payable		$	297,324			$	—

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS 

OCTOBER 31, 2016 

(Unaudited)

 

Note 1. Basis of Presentation

 

The accompanying unaudited interim financial statements of Jammin Java Corp. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Company’s Annual Report on Form 10-K have been omitted. The accompanying balance sheet at January 31, 2016 has been derived from the audited balance sheet contained in such Form 10-K.

 

As used in this Quarterly Report, the terms “we,” “us,” “our,” “Jammin Java” and the “Company” mean Jammin Java Corp., unless otherwise indicated. All dollar amounts in this Quarterly Report are in U.S. dollars unless otherwise stated.

 

Note 2. Going Concern and Liquidity

 

These financial statements have been prepared by management assuming that the Company will be able to continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments to the recoverability of recorded asset amounts or the amounts or classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The Company incurred a net loss of $7,798,151 for the nine months ended October 31, 2016, and has an accumulated deficit since inception of $37,043,901. The Company has a history of losses and has lost its only source of revenue. 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 debt instruments as well as the sale of its common stock. The Company will, in the future, need to secure additional funds through future equity sales or other fund raising activities. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company.

 

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.

 

There can be no assurance that the Company will be able to increase sales, reduce expenses or obtain additional financing, if necessary, at a level to meet its current obligations. 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 a substantial doubt regarding the Company’s ability to continue as a going concern.

 

Note 3. Business Overview and Summary of Accounting Policies

 

Jammin Java, formerly doing business as Marley Coffee (provided that in February 2017, Jammin Java ceased doing business as Marley Coffee), is a United States (“U.S.”)-based company that provides sustainably grown, ethically farmed and artisan roasted gourmet coffee through multiple U.S. and international distribution channels, using (prior to February 2017) the Marley Coffee brand name. U.S. and international grocery retail channels have become the Company’s largest revenue channels, followed by online retail, office coffee services (referred to herein as OCS), food service outlets and licensing. The Company intends to continue to develop these revenue channels and achieve a leadership position in the gourmet coffee space.

 

 

Additionally, as of February 2017, the Company’s management has decided to explore possibilities of using its coffee brand and entering into the legalized cannabis industry with coffee and coffee related products. The Company has hired a California based consulting company that will assist in exporting these possibilities. The Company will consult with legal experts in this area to ensure that all legalities are satisfied in each state the company conducts cannabis related business.

 

Reclassifications. Certain prior period amounts have been reclassified to conform with the current period presentation for comparative purposes.

 

Use of Estimates in Financial Statement Preparation. 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. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from those estimates.

 

Cash and Cash Equivalents. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

 

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 the nine months ended October 31, 2016 and 2015 were $661,139 and $910,681, 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.

 

Accounts due to/due from Roasters. We source coffee that we sell to our roaster, Mother Parkers Tea & Coffee Inc. (“Mother Parkers”), a related party and shareholder of the Company, who in turn sells it to its own customers. This is especially the case with Jamaican Blue Mountain coffee secured by us. At October 31, 2016, we are owed $268,250 by Mother Parkers (included in current assets of discontinued operations). We also utilize the services of Mother Parkers, to roast coffee to our specifications for sale to the Company’s customers. As a result, at October 31, 2016, we owed $1,771,003 to Mother Parkers for roasting services (included in current liabilities of discontinued operations).

 

Financial assets and liabilities are subject to offset and presented as net amounts in the statement of financial position when, and only when, the Company currently has a legally enforceable right to offset amounts and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. The Company does not have offset rights with respect to Mother Parkers due to/due from amounts at October 31, 2016.

 

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 reserved an allowance of $78,760 and $71,168, respectively for doubtful accounts at October 31, 2016 and January 31, 2016. 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. The Company provides for the possible inability to sell its inventories by providing an excess inventory reserve. As of October 31, 2016 and January 31, 2016, inventory was not significant.

 

 

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.

 

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 (see Note 4). 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 long-lived assets including the license and determined that no impairment existed at October 31, 2016.

 

Stock-Based Compensation.  Pursuant to the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 FASB ASC 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 or loss per common share equals net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings or loss per share includes 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 three months and nine months ended October 31, 2016 and 2015, respectively. As a result, contingently issuable shares were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive for all periods presented. In addition, basic and diluted earnings or loss per share for such periods are the same because all potential common equivalent shares total 513,304,750 shares were excluded from the calculation.

 

 

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.

 

Note 4. Trademark License Agreements and Intangible Assets

 

On June 27, 2016, and effective June 24, 2016, Fifty-Six Hope Road Music Limited (“56 Hope Road”) provided the Company with a notice of the termination of the fifteen year license agreement entered into with 56 Hope Road on September 13, 2012 (the “License Agreement”). 56 Hope Road terminated the License Agreement due to the Company’s alleged breach of certain of its terms, including, but not limited to, the Company’s failure to deliver quarterly statements in a timely manner, the Company’s failure to timely make licensing payments, the Company’s failure to deliver audited financial statements in a timely manner, and the SEC’s complaint against the Company. Some of these breaches were due to cash flow issues and corporate governance matters.

 

Rohan Marley, our former Chairman, owns an interest in 56 Hope Road.

 

On July 6, 2016, the Company and Hope Road Merchandising, LLC (“HRM”), which exclusively controls all licensing of 56 Hope Road’s intellectual property rights, entered into a Short Term License Agreement (the “Short-Term License”) in exchange for a Secured Promissory Note for $297,324. The Secured Promissory Note bears interest at 0.71% per year and is payable along with accrued interest at maturity on August 31, 2016. This note is currently in default and a party to the litigation described below. The Short-Term License provides the Company the right to use the “Marley Coffee” trademarks (the “Trademarks”) from June 27, 2016 until December 27, 2016 (a term of six months). This note is currently in default and the subject of the litigation described below.

 

The Company planned to continue to work with HRM and 56 Hope Road in good faith to try to extend the terms of the Short-Term License and remain partners, as well as to preserve shareholder value. Notwithstanding that, on July 21, 2016, HRM and 56 Hope Road provided the Company notice of the termination of the Short-Term License and demanded that all use of the Trademarks cease immediately. 56 Hope Road terminated the Short-Term License due to the Company’s alleged breach of certain of the terms of the Short-Term License, including, but not limited to, the Company’s failure to deliver quarterly statements and annual audited financial statements in a timely manner, and issues raised regarding security interests alleged to have been granted by the Company in connection with the licenses, to various third parties in alleged violation of the licenses. The Company believes that the termination notice received on July 21, 2016 as well as the termination of the License Agreement, was without merit and that 56 Hope Road has no reasonable basis for such terminations.  

 

On August 1, 2016, 56 Hope Road and HRM filed a complaint against the Company in the Superior Court of the State of California, County of Los Angeles, Central Division (Case No. BC628981). The complaint (a) seeks a declaratory judgment relating to the termination of the licenses, (b) seeks damages for our alleged (i) breaches of the License Agreement and Short-Term License, (ii) tortious interference with 56 Hope Road’s and HRM’s economic relationships with licenses and prospective licensees, and (iii) trademark infringement; (c) requests an accounting of our books and records; and (d) requests punitive and exemplary damages in connection with allegations of fraud and misrepresentation. The Company vehemently denies the allegations made by 56 Hope Road and HRM, and plans to vigorously defend themselves against the claims made in the complaint.

 

On August 4, 2016, the Company filed (a) a notice of removal with the court, requesting the case be removed from state court to the United States District Court for the Central District of California; (b) a request for a temporary restraining order requesting the court to reinstate the Short-Term License until a final decision on the pending lawsuit is determined; and (c) an answer to the complaint denying the allegations of 56 Hope Road and HRM, including certain affirmative defenses, and pleading counterclaims against (i) 56 Hope Road for breach of contract and breach of implied covenants of good faith and fair dealing, (ii) 56 Hope Road and HRM for intentional and negligent interference with prospective economic advantage and intentional and negligent misrepresentation, and (iii) breach of fiduciary duty against Rohan Marley, and seeking that the court enter judgment in favor of the Company on all claims alleged by 56 Hope Road and HRM and further seeking economic damages, punitive and exemplary damages, pre-and-post judgment interest and court costs from 56 Hope Road, HRM and Rohan Marley.

 

 

The case was then removed to the United States District Court of California Western Division (Case No. 2:16-cv-05810-SVW-MRW). 56 Hope Road and HRM subsequently amended their complaint to seek damages for alleged breach of contract in connection with the License Agreement and Short-Term License, declaratory relief in connection with the License Agreement and Short-Term License (i.e., that such agreements have been effectively terminated by us), interference with prospective economic advantage, trademark infringement, accountings, fraud, and indemnity. The Company denied the allegations, asserted certain several affirmative defenses and filed counterclaims against Rohan Marley for breach of fiduciary duty and civil conspiracy, which claims 56 Hope Road, HRM and Rohan Marley have moved to be dismissed. Trial is currently set for March 2017. The Company believes that pending the outcome of the litigation, it is legally able to utilize the trademark through the term of the Short-Term License.

 

Subsequently, on February 17, 2017, we filed a motion, which has been approved by the court, to dismiss all of our claims against 56 Hope Road, HRM and Rohan Marley. The decision was made after we lost a motion for summary judgement against 56 Hope Road, which represented the most substantial legal claims for intellectual property and damages. Though we disagree with the court’s decision on granting the motion for summary judgement, given our resources at this point in time, we believe that it is not in our best business interests to continue contesting the remaining claims in the lawsuit. In our best estimation, the remaining claims were not enough to provide a return for the amount of resources required to prosecute the claims to judgment. We believe our limited resources are better spent to grow our business lines and not in pursuing the litigation.

 

On February 22, 2017, the court granted the plaintiff’s summary judgment against us in connection with the plaintiff’s termination of the Short-Term License and that such termination of the Short-Term License was valid July 21, 2016, and requires us to pay $371,324 in unpaid royalties. These royalties have been accrued and are included in liabilities of discontinued operations on the consolidated balance sheet as of october 31, 2016.

 

Notwithstanding the above, there are still some pending motions open relating to the case, of which we cannot predict the outcome. We are currently in negotiations with 56 Hope Road regarding a settlement structure that will allow us to move forward, though no assurances can be made on whether or not settlement terms can be reached, or if reached, whether they will be favorable to us.

 

Intangible assets primarily relate to our License Agreement with 56 Hope Road. The License Agreement had been amortized using a life of fifteen years since its inception. The Company believes that the license with 56 Hope Road is still currently valid and continues to operate as such. Management, in consultation with its legal team, do not believe the license is impaired until such time that the license has been evacuated from a legal perspective.

 

License agreement, net consists of the following:

 

		October 31, 2016				January 31, 2016
License Agreement		$	730,000			$	730,000
Accumulated amortization			(730,000	)			(170,332	)
License Agreement, net		$	—			$	559,668

 

The license agreement was fully amortized during the nine months ended October 31, 2016. Amortization expense consists of the following: 

 

		For the nine months ended October 31,
		2016				2015
License Agreement		$	(559,668	)		$	(24,333	)
Intangible assets			(31,556	)			(6,654	)
Total License Agreement Amortization Expense		$	(591,224	)		$	(30,987	)

 

 

Note 5. Discontinued Operations

 

On February 22, 2017, our license from 56 Hope Road to do business under the name Marley Coffee was terminated (See Note 4 above.). As a result the Company has discontinued Marley Coffee and all related operations. Pursuant to the reporting requirements of ASC 205-20, Presentation of Financial Statements – Discontinued Operations, the Company has determined that the Marley Coffee business qualifies for presentation as a discontinued operation because it represents a component of our entity and the discontinuance of Marley Coffee operations represents a strategic shift in our business plans. Therefore, the Company has reclassified the assets and liabilities of the Marley Coffee business as discontinued operations in the accompanying Consolidated Balance Sheets and presented the operating results of Marley Coffee as discontinued operations, net of tax, in the accompanying Consolidated Statements of Operations and Consolidated Statements of Cash Flows.

 

Financial information for Marley Coffee for the three months and nine months ended October 31, 2016 and 2015, are presented in the following table:

 

		Three Months Ended								Year Ended
		October 31,								October 31,
		2016				2015				2016				2015
Revenue		$	1,276,874			$	2,814,241			$	5,702,656			$	8,263,689
Cost of goods sold			373,258				2,247,271				3,554,946				6,091,132
Gross profit			903,616				566,970				2,147,710				2,172,557
Operating expenses:
Compensation and benefits			230,856				420,336				814,511				1,540,449
Selling and marketing			165,488				774,295				1,384,968				1,896,563
General and administrative			473,336				45,292				695,183				139,219
Total operating expenses			869,680				1,239,923				2,894,662				3,576,231
Other expense:
Other income (expense)			(87,760	)			—				(83,986	)			—
Total other income (expense)			(87,760	)			—				(83,986	)			—
Income (loss) on discontinued operations		$	(53,824	)		$	(672,953	)		$	(830,938	)		$	(1,403,674	)

 

Assets and liabilities of discontinued operations consist of the following as of October 31, 2016 and January 31, 2016:

 

		October 31,				January 31,
		2016				2016
Assets
Current Assets
Accounts receivable, net		$	636,587			$	1,415,559
Prepaid expenses			27,845				25,171
Total current assets of discontinued operations			664,432				1,440,730
Property and equipment, net			—				187,838
Intangible asset, net			—				593,325
Total noncurrent assets of discontinued operations			—				781,163
Total Assets		$	664,432			$	2,221,893
Liabilities
Current Liabilities
Accounts payable		$	3,091,298			$	3,445,811
Accrued expenses			—				497,431
Accrued royalty and other expenses - related party			—				84,174
Note payable - related party			297,324				—
Deferred revenue			198,395				—
Total current liabilities of discontinued operations		$	3,587,017			$	4,027,416

 

 

Note 6. Outstanding debt

 

Convertible notes payable are as follows as of October 31, 2016:

 

			Outstanding
			as of October 31,				Accrued				Debt				Net				Interest
			2016				Interest				Discount				Amount				Rate				Maturity
Colorado Medical Finance Services, LLC*			$	11,588			$	21,897			$	—			$	33,485				20.0	%			September 26, 2016
JSJ				256,952				4,000				(22,249	)			238,703				18.0	%			December 6, 2016
JMJ **				191,681				2,537				(94,448	)			99,770				12.0	%			September 16, 2017
Vis Vires				225,000				21,720				(39,375	)			207,345				22.0	%			December 9, 2016
Duck Duck Spruce				519,245				3,344				(75,383	)			447,206				10.0	%			December 15, 2016
Third party loan				247,484				126,134				—				373,618				32.0	%			December 1, 2016
			$	1,451,950			$	179,632			$	(231,455	)		$	1,400,127				—				—
Derivative liability			$	3,524,595				—				—				—				—				—

   

*Line of Credit.

 

**Noncurrent note.

 

Revolving Line of Credit – Colorado Medical Finance Services, LLC  

 

Effective on February 16, 2015, the Company entered into an unsecured Revolving Line of Credit Agreement with Colorado Medical Finance Services, LLC, dba Gold Gross Capital LLC. The line of credit allows the Company the right to borrow up to $500,000 from the lender from time to time. 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 as a reduction of accounts receivable related to coffee sales/services, at the option of the lender, with our consent. We have paid, and intend to continue to pay all related interest in cash. The line of credit expired, and all amounts were due under the line of credit on September 26, 2016. The Company has informally been granted a reduction of payments to them in the amount of $3,000 per month until the end of the trial in which case it will be re-evaluated where the note stands.  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 October 31, 2016 there was $33,485 outstanding which included $11,588 in principal and $21,897 in interest due.

 

Convertible Note Payable – JSJ

 

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. On March 1, 2016, we amended the JSJ Convertible Note through a side letter agreement. 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 due in December 2016 and currently is in default. 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 after September 9, 2016. As of October 31, 2016, the balance of the note was $260,952 of which $256,952 was principal and $4,000 was accrued interest. The conversion price of the JSJ Convertible Note is the greatest of a) 60% (a 40% discount) to the third lowest intra-day trading price of the market price of the Company’s common stock during the 10 trading days prior to any conversion date of the note or b) $0.00005. The variable conversion price was accounted for as a derivative liability. Upon initial issuance, the Company recorded a discount of approximately $197,680 relating to the derivative liability.

 

In September 2016, JSJ converted $31,311 of principal and interest owed on the JSJ Convertible Note into 24,733,056 shares of common stock.

 

 

Convertible Promissory Notes Payable - with Typenex Co-Investment, LLC

 

On September 14, 2015 (the “Closing Date”), the Company entered into a Securities Purchase Agreement (the “Typenex SPA”) with Typenex Co-Investment, LLC (“Typenex”). Pursuant to the Typenex SPA, the Company issued to Typenex convertible promissory notes with a total principal amount of $1,005,000 in the form of: (a) an initial tranche of $255,000 in cash (the “Typenex Note”), and (b) three promissory notes of $250,000 each. 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 SPA were $1,005,000, in the form of: (a) an initial tranche of $250,000 in cash, and (b) three promissory notes of $250,000 each (collectively, the “Investor Notes”). Typenex and the Company must mutually agree to fund one or more of the three additional Investor Notes. As of October 31, 2016, none of the additional three tranches were funded and only $255,000 had been funded. Each of the Investor Notes accrue interest at the rate of 10% per annum until paid and are secured by a Membership Interest Pledge Agreement. Beginning in March 2016, and on the same day of each month thereafter until the maturity date, the Company is required to pay to Typenex monthly 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. Alternatively, Typenex or the Company may elect to convert an installment amount into Common Stock at the lower of (a) $0.30 per share, and (b) if the Company’s market capitalization falls below $3,000,000, the Market Price conversion price shall be adjusted to the market price as of the applicable date, applying a discount of 40%. 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. The Typenex Note also includes repricing features whereby if 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. The repricing feature of the conversion feature was considered to be derivative liabilities and accordingly, the Company recorded approximately a $178,000 discount to debt. During the quarter ended July 31, 2016, the outstanding balance was repaid in full.  

 

Convertible Promissory Note with JMJ Financial 

 

On September 16, 2015, we entered into a Convertible Promissory Note with JMJ Financial (“JMJ”) in the principal amount of up to $900,000 (the “JMJ Convertible Note”). Upon entering into this arrangement, the total face amount of the JMJ Convertible Note was initially $385,000 and we received $350,000 in cash, 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) if mutually agreed by both parties, 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 (a) $0.75 per share or (b) 65% (a 35% discount) of the market price for our common stock. The variable conversion term was considered to be a derivative liability and the Company recorded approximately $303,000 of debt discount upon issuance. 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. At October 31, 2016, the amount owed JMJ Financial was $194,218 of which $191,681 was principal and $2,537 was interest payable.

 

During the nine months ended October 31, 2016, JMJ converted $260,409 of principal and interest owed on the JMJ Convertible Note into 49,065,000 shares of common stock.

 

 

Convertible Notes Payable –Vis Vires

 

On September 24, 2015, we entered into a Convertible Promissory Note with Vis Vires Group, Inc. (“Vis Vires”) (with an issuance date of September 9, 2015) in the principal amount of $254,000 (the “Vis Vires Convertible Note”). The Vis Vires 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. The principal amount of the Vis Vires Convertible Note and all accrued interest is convertible at the option of the holder at the greater of (a) 65% (a 35% discount) multiplied by the market price of our stock and (b) $0.00009. The Vis Vires Convertible Note conversion price also includes price protection features 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, the conversion price of the Vis Vires Convertible Note is automatically reduced to such lower price. The variable conversion term was considered to be a derivative liability and the Company recorded approximately $224,000 of debt discount upon issuance. The prepayment amount ranges from 108% to 133% of the then outstanding balance, depending on when such prepayment is made. In March 2016, we paid $250,000 to satisfy the amount outstanding under the Vis Vires Convertible Note in full.

 

On March 16, 2016, we sold Vis Vires an additional Convertible Promissory Note in the principal amount of $225,000 (the “New Vis Vires Convertible Note”). The New Vis Vires Convertible Note bears interest at the rate of 8% per annum (22% upon an event of default) and was due and payable on December 2016. The note is currently in default. The principal amount of the New Vis Vires Convertible Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time after September 2016. The conversion price of the New Vis Vires Convertible Note is equal to the greater of a) 65% (a 35% discount) to the market value of our common stock and (b) $0.00009. We may prepay in full the unpaid principal and interest on the New Vis Vires Convertible Note, upon notice, any time after September 2016. Any prepayment is subject to payment of a prepayment amount ranging from 108% to 133% of the then outstanding balance on the New Vis Vires Convertible Note, depending on when such prepayment is made. At October 31, 2016, the amount owed Vis Vires was $246,720 of which $225,000 was principal and $21,720 was interest payable. The New Vis Vires Convertible Note conversion price also includes price 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 New Vis Vires Convertible Note, the conversion price of the New Vis Vires Convertible Note is automatically reduced to such lower price. The repricing feature of the conversion feature was considered to be derivative liabilities and accordingly, the Company recorded approximately $152,120 of discount to debt. In addition, the Company recognized an original issue discount of $3,000 in accordance with the terms of the note.

 

Convertible Promissory Convertible Promissory Notes with Duck Duck Spruce 

 

In March 2016, we sold Duck Duck Spruce, LLC (“Duck Duck”) two 5% Convertible Promissory Notes with a total principal face amounts of $550,000 and received $500,000 in cash, with the difference representing an original issue discount (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 was due on December 15, 2016. The note is currently in default. The amounts owed under the Duck Duck Notes are convertible into shares of our common stock at a 35% discount to the market price of our common stock, subject to a floor of $0.05 per share. At October 31, 2016 the balance of these loans total $522,589 of which $519,245 is principal and $3,344 is interest payable. The variable conversion terms of the note were accounted for as derivative liabilities and the Company recorded a discount to the note of approximately $319,177.

 

During the nine months ended October 31, 2016, Duck Duck converted $46,820 of principal and interest owed on the March 8, 2016 Convertible Promissory Note due to Duck Duck into 26,296,581 shares of common stock.

 

The second 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) the conversion price also includes price 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, the conversion price is automatically reduced to such lower price. The Company recorded a debt discount associated with this note, which was considered a derivative liability, totaling approximately $346,677.

 

 

Third Party Loans

 

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 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. The balance of the note was $373,115 as of October 31, 2016.

 

Note 7. Related Party Transactions

 

Transactions with Marley Coffee Ltd.

 

During the nine months ended October 31, 2016 and 2015, the Company made purchases of $1,311 and $562,019, respectively, from Marley Coffee Ltd. (“MC”) a producer of Jamaican Blue Mountain (“JBM”) 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. MC was created in order to have a license to buy and sell JBM coffee. The Company’s former Chairman and significant shareholder, Rohan Marley, is an owner of approximately 25% of the equity of MC.

 

The Company also received $0 and $52,596 in rebates from MC during the nine months ended October 31, 2016 and 2015, respectively, on the Jamaican green coffee purchased. The Company directs these purchases to third-party roasters for fulfillment of sales orders. 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. 

 

License with Fifty-Six Hope Rd

 

For the nine months ended October 31, 2016 and 2015, the Company incurred license fees payable to Fifty-Six Hope Road Music Limited (“56 Hope Road”) of $151,489 and $200,941, respectively. As of October 31, 2016 and January 31, 2016, there were licensing fees accrued and payable of $72,990 and $260,496, respectively, to 56 Hope Road, for the license to use the name “Marley Coffee”. In addition, the Company had a short term note payable to 56 Hope Road in the amount of $297,324 as of October 31, 2016 (see Note 4).

 

Other Related Party Transactions

 

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 nine months ended October 31, 2016 and 2015, the Company made net purchases of $835, and $11,142, respectively, from House of Marley. House of Marley produces headphones and speakers that the Company uses for promotions and trade shows. During the nine months ended October 31, 2016 and 2015, the Company made purchases of $0 and $5,244, respectively from Zion Rootswear. The purchases from 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 nine months ended October 31, 2016 of $4,314 to Lions of Marley, $420 to Delivery Agent (for product that is sold on the Bob Marley Website). The Company has made sales to related parties for the nine months ended October 31, 2015 of $0 to Lions of Marley, $779 to Delivery Agent (for product that is sold on the Bob Marley Website). The companies above are licensees of Hope Road Merchandising, LLC, a company in which Rohan Marley is a beneficiary.

 

During the nine months ended October 31, 2016, the Company paid Rohan Marley Enterprises $127,226 of which $112,510 was paid through stock compensation for director’s fees and bonus and $14,716 was paid in cash. During the nine months ended October 31, 2015, the Company paid Rohan Marley Enterprises $135,447 for directors consulting 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 owed to Mother Parkers at October 31, 2016 and January 31, 2016 was $1,771,003 and $2,053,296, respectively, for coffee purchases. The total accounts receivable due from Mother Parkers as of October 31, 2016 and January 31, 2016 was $268,248 and $318,934, respectively.

 

During the nine months ended October 31, 2016 and 2015, the Company paid Sondra Toevs, $1,862 and $5,386, respectively and Ellie Toevs, $1,922 and $2,629, respectively, for part-time employment. Sondra Toevs is the wife of the Company’s CEO, Brent Toevs, and Ellie Toevs is the daughter of Mr. Toevs.

 

Note 8. Stockholders’ Equity

 

Common stock issued

 

During the nine months ended October 31, 2016, the Company issued 3,312,307 share of common stock in settlement of accounts payable in the amount of $319,218. The shares were valued at $347,735 based on the market value of the shares on the date of issuance. As a result, the Company recognized a loss of $28,516 on the settlement of accounts payable.

 

During the nine months ended October 31, 2016, the Company issued 455,709 shares of common stock for services. The shares were valued at $46,180 based on the market value of the shares on the date of issuance.

 

During the nine months ended October 31, 2016, the Company issued 250,000 shares of common stock for financing costs. The shares were valued at $27,500 based on the market value of the shares on the date of issuance.

 

During the nine months ended October 31, 2016, the Company issued 100,094,637 shares of common stock for the conversion of principal and interest on convertible notes payable in the amount of $338,540.

 

During the nine months ended October 31, 2016, the Company authorized the issuance of 7,449,109 shares of common stock for services. The shares were valued at $54,712 based on the market value on the date they were authorized. These shares had not been issued as of the date of this report and are included in common stock payable on the consolidated balance sheet.

 

Share-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 October 31, 2016. A total of 19,000,000 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 October 31, 2016, a total of 8,700,000 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 October 31, 2016, a total of 7,530,000 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 October 31, 2016, a total of 13,500,000 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 stock options during the nine month period ended October 31, 2016 and related balances outstanding as of that date are set forth below:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term
Outstanding, beginning balance			17,650,000			$	0.27
Granted			6,000,000				0.12
Exercised			—				—
Forfeited			(60,000	)			0.47
Expired			—				—
Outstanding, ending balance			23,590,000			$	0.23				2.18
Exercisable			16,720,000			$	0.27				1.54

 

During the nine months ended October 31, 2016, the Company recognized stock compensation expense of $840,471 related to the amortization of stock option expense.

 

 

Note 9. Commitments and Contingencies 

 

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 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.

 

On or around May 31, 2016, the Company entered into a ‘Consent of Defendant Jammin Java Corp.’ (the “Consent”), in connection with the SEC’s complaint (the “Complaint”). Pursuant to the Consent, without admitting or denying the allegations of the Complaint (except as specifically set forth in such Consent mainly relating to personal and subject matter jurisdiction, which we admitted), we consented to the entry of a final judgment (the “Final Judgment”), which, among other things: (a) permanently restrains and enjoins us from violating Section 5 of the Securities Act, and (b) orders us to pay disgorgement in the amount of $605,330, plus prejudgment interest thereon in the amount of $94,670, totaling an aggregate of $700,000, of which (1) $200,000 was due within 14 days of the entry of the Final Judgment (which Final Judgment was entered July 6, 2016, and which payment was due July 20, 2016, and has not been paid or requested by the SEC to date); and (2) $500,000 was due within 90 days of the entry of the Final Judgment (which amount was due by October 4, 2016, and which amount has not been paid or requested by the SEC to date).

 

The Final Judgment was approved by the SEC on or around May 31, 2016 and approved by the court on July 6, 2016, which is anticipated by the end of June 2016. The Company has accrued $700,000 for estimated settlement expense in the quarter ended October 31, 2016.

 

The Company believes that the Final Judgment is a positive outcome for the Company as it settles the SEC’s outstanding action against the Company and removes the uncertainty surrounding such action moving forward. The Company continues to take action in the best interests of the shareholders to create shareholder value which includes assisting the SEC in its continued investigation.

 

On August 1, 2016, Fifty-Six Hope Road Music Limited (“56 Hope Road”) and Hope Road Merchandising, LLC (“HRM”) filed a complaint against us in the Superior Court of the State of California, County of Los Angeles, Central Division (Case No. BC628981). The complaint (a) sought a declaratory judgment relating to the termination by 56 Hope Road and HRM of the licenses which owned to use certain “Marley Coffee” trademarks, (b) sought damages for our alleged (i) breaches of the licenses, (ii) tortious interference with 56 Hope Road’s and HRM’s economic relationships with licenses and prospective licensees, and (iii) trademark infringement; (c) requested an accounting of our books and records; and (d) requested punitive and exemplary damages in connection with allegations of fraud and misrepresentation.

 

 

On August 4, 2016, we filed (a) a notice of removal with the court, requesting the case be removed from state court to the United States District Court for the Central District of California; (b) a request for a temporary restraining order requesting the court to reinstate the short-term license until a final decision on the pending lawsuit is determined; and (c) an answer to the complaint denying the allegations of 56 Hope Road and HRM, including certain affirmative defenses, and pleading counterclaims against (i) 56 Hope Road for breach of contract and breach of implied covenants of good faith and fair dealing, (ii) 56 Hope Road and HRM for intentional and negligent interference with prospective economic advantage and intentional and negligent misrepresentation, and (iii) breach of fiduciary duty against Rohan Marley, our former Chairman, and seeking that the court enter judgment in favor of us on all claims alleged by 56 Hope Road and HRM and further seeking economic damages, punitive and exemplary damages, pre-and-post judgment interest and court costs from 56 Hope Road, HRM and Mr. Marley.

 

The case was then removed to the United States District Court of California Western Division (Case No. 2:16-cv-05810-SVW-MRW). 56 Hope Road and HRM subsequently amended their Complaint to seek damages for alleged breach of contract in connection with the licenses, declaratory relief in connection with the licenses (i.e., that such agreements had been effectively terminated by us), interference with prospective economic advantage, trademark infringement, accountings, fraud, and indemnity. We denied the allegations, asserted certain several affirmative defenses and filed counterclaims against Rohan Marley, our former director, for breach of fiduciary duty and civil conspiracy, which claims 56 Hope Road, HRM and Mr. Marley moved to be dismissed.

 

Subsequently, on February 17, 2017, we filed a motion, which has been approved by the court, to dismiss all of our claims against 56 Hope Road, HRM and Rohan Marley. The decision was made after we lost a motion for summary judgement against 56 Hope Road, which represented the most substantial legal claims for intellectual property and damages. Though we vigorously disagree with the court’s decision on granting the motion for summary judgement, given our resources at this point in time, we believe that it is not in our best business interests to continue contesting the remaining claims in the lawsuit. In our best estimation, the remaining claims were not enough to provide a return for the amount of resources required to prosecute the claims to judgment. We believe our limited resources are better spent to grow our business lines and not in pursuing the litigation.

 

Notwithstanding the above, there are still some pending motions open relating to the case, of which we cannot predict the outcome. We are currently in negotiations with 56 Hope Road regarding a settlement structure that will allow us to move forward, though no assurances can be made on whether or not settlement terms can be reached, or if reached, whether they will be favorable to us. 

 

Note 10. Concentrations

 

As a result of the litigation discussed in Note 9, we have discontinued doing business as Marley Coffee. The Company no longer as a source of revenue after February 17, 2017.

 

A significant portion of our revenue is derived from our relationships with a limited number of vendors and distributors. The loss of one or more of our significant vendors or distributors would have a material impact on our revenues and results of operations. During the nine months ended October 31, 2016, three customers accounted for 27.6%, 14.1% and 10.1% of net revenues. During the nine months ended October 31, 2015, two customers accounted for 16.0% and 12.1% of net revenues.

 

During the nine months ended October 31, 2016, two vendors accounted for 55.1% and 44.8% of purchases. During the nine months ended October 31, 2015, two vendors accounted for 50.6% and 36.4% of purchases.

 

For the nine month periods ended October 31, 2016 and 2015, total sales in Canada totaled $448,214 and $612,585, respectively.

 

For the nine month periods ended October 31, 2016 and 2015, sales in South Korea totaled $0 and $7,951, respectively.

 

 

For the nine month periods ended October 31, 2016 and 2015, sales in Chile totaled $786,755 and $670,868, respectively.

 

Note 11. Subsequent Events

 

November 2016 - Convertible Notes Payable –Vis Vires

 

On December 13, 2016, and effective November 15, 2016, we entered into a Convertible Promissory Note with Vis Vires in the principal amount of $14,000 (the “December 2016 Vis Vires Note”). The December 2016 Vis Vires Note bears interest at the rate of 8% per annum (22% upon an event of default) and is due and payable on August 15, 2017. The principal amount of the December 2016 Vis Vires Note and all accrued interest is convertible at the option of the holder at 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 December 2016 Vis Vires 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. The December 2016 Vis Vires 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 December 2016 Vis Vires Note in effect on the date of such issuance or deemed issuance, the conversion price of the December 2016 Vis Vires Note is automatically reduced to such lower price, subject to certain exceptions in the note.

 

At no time may the December 2016 Vis Vires 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 December 2016 Vis Vires Note, upon notice, any time prior to the 180^th 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 December 2016 Vis Vires Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.

 

The December 2016 Vis Vires Note also contains customary positive and negative covenants.

 

10% Convertible Promissory Note 

 

On November 23, 2016 and effective November 14, 2016, we sold an accredited investor (the “10% Note Investor”) a 10% Convertible Promissory Note with a face amount of $110,000, representing $24,000 borrowed from the 10% Note Investor and a 10% original issue discount ($2,400), and up to $83,600 of potential future borrowings which may be made to use by the 10% Note Investor in its sole discretion (the “10% Investor Note”). The 10% Investor Note accrues interest at the rate of 10% per annum (the lesser of 20% per annum and the highest rate allowed per law upon an event of default), and is due on November 14, 2017.

 

The 10% Investor Note can be repaid by us prior to the 180^th day after the issuance date thereof along with a prepayment penalty, depending on when repaid, of between 100% and 150% of the principal amount owed thereunder, plus interest (provided that any repayment of principal requires that we also repay the total amount of interest which would have accrued through maturity). After the 180^th day after the issuance date the note cannot be repaid without the written consent of 10% Note Investor.

 

The 10% Investor Note provides for standard and customary events of default such as failing to timely make payments under the 10% Investor Note when due and the failure of the Company to timely comply with Exchange Act reporting requirements, provided that this Quarterly Report and our next Quarterly Report are excluded from such requirement. In the event the repayment of the note is accelerated due to the occurrence of an event of default we are required to pay the 10% Note Investor 150% of the outstanding principal amount of the note.

 

 

The amount owed under the 10% Investor Note is convertible into shares of our common stock from time to time after the 180^th day after the issuance date of thereof at the option of the 10% Note Investor, 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 10% upon the occurrence of any event of default under the note) to the average of the lowest trading price of our common stock during the 25 trading days prior to the date of conversion.

 

At no time may the 10% Investor Note be converted into shares of our common stock if such conversion would result in the 10% Note Investor and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.

 

Additionally, if at any time while the Note is outstanding, we receive any written or oral proposal (the “Proposal”) containing one or more offers to provide additional capital or equity or debt financing, we are required to provide a copy of all documents received relating to the Proposal together with a complete and accurate description of the Proposal to the 10% Note Investor and, subject to the terms of the note, the 10% Note Investor is provided the right of first refusal to provide such financing on the terms set forth in the Proposal.

 

We hope to repay the 10% Investor Note prior to any conversion. In the event that the 10% Investor Note is not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the 10% Investor Note is converted into common stock.

 

Additional JMJ Borrowing

 

On November 28, 2016, the Company borrowed an additional $8,500 from JMJ which was evidenced by the JMJ Convertible Note described above.

 

December 2016 JSJ Convertible Note

 

On December 5, 2016, we entered into a 12% Convertible Note with JSJ (the “December 2016 JSJ Convertible Note”) in the amount of $15,500. The December 2016 JSJ Convertible Note accrues interest at the rate of 12% per annum (18% upon the occurrence of an event of default) through maturity, September 5, 2017. We have the right to prepay the note prior to maturity provided we pay 150% of the amount due.

 

The December 2016 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 after the 180^th day following the date of the note. The conversion price of the December 2016 JSJ Convertible Note is the greatest of a) 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, or b) $0.00005. In the event that the 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.

 

Cancellation Agreement

 

Effective December 30, 2016, we entered into a Cancellation Agreement with Brent Toevs, our former director and Chief Executive Officer, who agreed to return an aggregate of 1,261,457 shares of common stock which were previously issued to him in consideration for services rendered (and as a bonus), to us for cancellation, which shares were cancelled on January 18, 2017. Instead, we agreed to accrue the bonus and compensation and pay them at such time as the Company has sufficient cash flow, in the reasonable determination of the Board of Directors, to pay such.

 

Consulting Agreement

 

On January 2, 2017, the Company entered into a consulting agreement with SEB Coffee (“SEB”), which is beneficially owned by Brent Toevs, the Company’s former director and Chief Executive Officer, pursuant to which SEB agreed to provide consulting services to the Company until July 1, 2017, in consideration for $23,473 per month or $140,840 in aggregate. We agreed to accrue the compensation due and to only pay such compensation at such time as the Company has sufficient cash flow, in the reasonable determination of the Board of Directors, to pay such amounts.

 

 

Amendment to 10% Note Investor Note

 

In January 2017, the Company and the 10% Investor amended the 10% Investor Note to provide for an additional loan by the 10% Investor of $19,800 ($18,000 in principal and $1,800 as an original issue discount) which the Company received on January 18, 2017.

 

Additional JMJ Borrowing

 

On January 25, 2017, the Company borrowed an additional $6,375 from JMJ which was evidenced by the JMJ Convertible Note described above.

 

January 2017 JSJ Convertible Note

 

On January 23, 2017, we entered into a 12% Convertible Note with JSJ (the “January 2017 JSJ Convertible Note”) in the amount of $10,125. The January 2017 JSJ Convertible Note accrues interest at the rate of 12% per annum (18% upon the occurrence of an event of default) through maturity, October 23, 2017. We have the right to prepay the note prior to maturity provided we pay 150% of the amount due.

 

The January 2017 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 after the 180^th day following the date of the note. The conversion price of the January 2017 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 that the 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.

 

February 2017 - Convertible Notes Payable – Power Up

 

On February 23, 2017, we entered into a Convertible Promissory Note with Power Up Lending Group Ltd. (“Power Up”) in the principal amount of $10,500 (the “February 2017 Power Up Note”). The February 2017 Power Up Note bears interest at the rate of 12% per annum (22% upon an event of default) and is due and payable on November 17, 2017. The principal amount of the February 2017 Power Up Note and all accrued interest is convertible at the option of the holder at the greater of 65% (a 35% discount) multiplied by the average of the lowest three closing bid prices of our common stock during the ten trading days immediately prior to the date of any conversion, provided that the conversion price during major announcements (as described in the February 2017 Power Up 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. The February 2017 Power Up 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 February 2017 Power Up Note in effect on the date of such issuance or deemed issuance, the conversion price of the February 2017 Power Up Note is automatically reduced to such lower price, subject to certain exceptions in the note.

 

At no time may the February 2017 Power Up Note be converted into shares of our common stock if such conversion would result in Power Up 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 February 2017 Power Up Note, upon notice, any time prior to the 180^th day after the issuance date. Any prepayment is subject to payment of a prepayment amount ranging from 120% to 145% of the then outstanding balance on the February 2017 Power Up Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.

 

The February 2017 Power Up Note also contains customary positive and negative covenants.

 

 

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

 

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

 

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

 

●	“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
●	“SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and
●	“Securities Act” refers to the Securities Act of 1933, as amended.

 

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

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

 

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

 

Overview

 

We provide premium roasted coffee and specialty coffee on a wholesale level to the service, hospitality, office coffee service and big box store markets, as well as to a variety of other business channels. Specifically, we currently provide award winning sustainably grown, ethically-farmed and artisan roasted gourmet coffee through multiple United States and international distribution channels.

 

As of February 2017, our management has decided to explore possibilities of using its coffee brand and entering into the legalized cannabis industry with coffee and coffee related products. We have hired a California based consulting company that will assist in exporting these possibilities. The Company will consult with legal experts in this area to ensure that all legalities are satisfied in each state the company conducts cannabis related business.

 

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. Until the termination of the 56 Hope Road License, described below, such coffee products were mainly sold under the Marley Coffee brand name. Because of the termination of the Marley Coffee license, described below, the main channels we will be seeking to sell our Jammin Java Coffee brand products in will 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 plans to launch by the end of March 2017, a Jammin Java Coffee recyclable RealCup; compatible cartridges, for use in most models of Keurig®’s K-Cup brewing system.

 

We have also started to develop a suite of products under the Jammin Java Coffee brand to complement our existing lines of coffee.

 

License Agreement with Fifty-Six Hope Road Music Limited

 

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

 

 

In consideration for the foregoing licenses, the Company agreed to pay royalties to 56 Hope Road in an amount equal to 3% of the net sales of all Licensed Products on a quarterly basis. In addition, such royalty payments were deferred during the first 20 months of the term of the Long-Term License, and such deferred payments were to be paid on a quarterly-basis thereafter until paid in full. For the nine months ended October 31, 2016 and 2015, the Company incurred license fees payable to 56 Hope Road of $151,489 and $200,941, respectively. As of October 31, 2016 and January 31, 2016, there were licensing fees accrued and payable of $72,990 and $260,496, respectively, to 56 Hope Road, for the license to use the name “Marley Coffee”. In addition, the Company had a short term note payable to 56 Hope Road in the amount of $297,324 as of October 31, 2016.

 

Short Term License Agreement and Promissory Note

 

On June 27, 2016, and effective June 24, 2016, 56 Hope Road provided us notice of the termination of the Long-Term License. 56 Hope Road terminated the Long-Term License due to our alleged breach of certain of the terms of the Long-Term License agreement, including, but not limited to, our failure to deliver quarterly statements in a timely manner, our failure to timely make licensing payments, our failure to deliver audited financial statements in a timely manner, and the Securities and Exchange Commission’s complaint against us. Some of these breaches were due to cash flow issues and corporate governance matters.

 

The immediate effect of the termination of the Long-Term License was minimal, as effective immediately thereafter we entered into the Short-Term License described below.

 

On July 6, 2016, (1) we and Hope Road Merchandising, LLC (“HRM”), which exclusively controls all licensing of 56 Hope Road’s intellectual property rights, entered into a Short Term License Agreement (the “Short-Term License”); (2) we entered into a Secured Promissory Note in favor of 56 Hope Road (the “Secured Note”); and (3) we and 56 Hope Road entered into a Security Agreement to secure amounts owed under the Secured Note, each as described in greater detail below.

 

The Short-Term License provided us the right to use the Trademarks from June 27, 2016 until December 27, 2016 (a term of six months)(subject to HRM’s right to terminate the license in the event we breached the terms thereof or any of the terms of the Secured Note or Security Agreement), provided that the Short-Term License could be extended in the sole discretion of HRM (at our request) for an additional six month term after expiration thereof. Other than the term of the agreement, the Short-Term License had substantially similar terms as the Long-Term License (except as discussed above), with the addition of requiring us to provide customer and vendor lists to HRM and providing HRM an irrevocable license to use such information. Additional requirements associated with our entry into the Short-Term License with HRM were that (i) we immediately provide all deficient quarterly and annual statements due; and (ii) we agreed to allow 56 Hope Road or its affiliates to have discussions with our current and potential business partners relating to whether there is a basis for a continued relationship with us, and to have discussions with unrelated third parties that 56 Hope Road may have an interest in once the Short-Term License expires.

 

The Secured Note evidences $297,324 due to 56 Hope Road pursuant to the terms of the Long-Term License, which amount accrues interest until paid at 0.71% per annum (7.5% per annum if not paid in full at maturity) and was due and payable on August 31, 2016, but has not been repaid to date and is currently in default. Amounts due under the Secured Note are secured by the Security Agreement. The Secured Note contains customary representations and events of default.

 

The Security Agreement provides 56 Hope Road a security interest in substantially all of our assets to secure our payment of the Secured Note.

 

 

56 Hope Road/HRM License Termination and Lawsuit

 

On July 21, 2016, HRM and 56 Hope Road provided us notice of the termination of the Short-Term License, and demanded that all use of the Trademarks cease immediately.

 

56 Hope Road terminated the Short-Term License, due to our alleged breach of certain of the terms of the Short-Term License, including, but not limited to, our failure to deliver quarterly statements and annual audited financial statements in a timely manner, and issues raised regarding security interests alleged to have been granted by us in connection with the licenses, to various third parties in alleged violation of the licenses, which we were alleged to have not timely cured.

 

We believe that the termination notice received on July 21, 2016 as well as the termination of the Long-Term License, was without merit and that 56 Hope Road had no reasonable basis for such terminations.

 

After we received the July 21, 2016, notice of termination, both sides worked to resolve the termination and to negotiate a forbearance of the alleged defaults. Notwithstanding our attempt to work in good faith through the issues raised with HRM in the termination notice, and without prior notice, on August 1, 2016, 56 Hope Road and HRM filed a complaint against us in the Superior Court of the State of California, County of Los Angeles, Central Division (Case No. BC628981). The complaint (a) sought a declaratory judgment relating to the termination of the licenses, (b) sought damages for our alleged (i) breaches of the Long-Term License and Short-Term License, (ii) tortious interference with 56 Hope Road’s and HRM’s economic relationships with licenses and prospective licensees, and (iii) trademark infringement; (c) requested an accounting of our books and records; and (d) requested punitive and exemplary damages in connection with allegations of fraud and misrepresentation.

 

On August 4, 2016, we filed (a) a notice of removal with the court, requesting the case be removed from state court to the United States District Court for the Central District of California; (b) a request for a temporary restraining order requesting the court to reinstate the Short-Term License until a final decision on the pending lawsuit is determined; and (c) an answer to the complaint denying the allegations of 56 Hope Road and HRM, including certain affirmative defenses, and pleading counterclaims against (i) 56 Hope Road for breach of contract and breach of implied covenants of good faith and fair dealing, (ii) 56 Hope Road and HRM for intentional and negligent interference with prospective economic advantage and intentional and negligent misrepresentation, and (iii) breach of fiduciary duty against Rohan Marley, our former Chairman, and seeking that the court enter judgment in favor of us on all claims alleged by 56 Hope Road and HRM and further seeking economic damages, punitive and exemplary damages, pre-and-post judgment interest and court costs from 56 Hope Road, HRM and Mr. Marley.

 

The case was then removed to the United States District Court of California Western Division (Case No. 2:16-cv-05810-SVW-MRW). 56 Hope Road and HRM subsequently amended their Complaint to seek damages for alleged breach of contract in connection with the Long-Term License and Short-Term License, declaratory relief in connection with the Long-Term License and Short-Term License (i.e., that such agreements have been effectively terminated by us), interference with prospective economic advantage, trademark infringement, accountings, fraud, and indemnity. We denied the allegations, asserted certain several affirmative defenses and filed counterclaims against Rohan Marley, our former director, for breach of fiduciary duty and civil conspiracy, which claims 56 Hope Road, HRM and Mr. Marley have moved to be dismissed.

 

Subsequently, on February 17, 2017, we filed a motion, which has been approved by the court, to dismiss all of our claims against 56 Hope Road, HRM and Rohan Marley. The decision was made after we lost a motion for summary judgement against 56 Hope Road, which represented the most substantial legal claims for intellectual property and damages. Though we disagree with the court’s decision on granting the motion for summary judgement, given our resources at this point in time, we believe that it is not in our best business interests to continue contesting the remaining claims in the lawsuit. In our best estimation, the remaining claims were not enough to provide a return for the amount of resources required to prosecute the claims to judgment. We believe our limited resources are better spent to grow our business lines and not in pursuing the litigation.

 

On February 22, 2017, the court granted the plaintiff’s summary judgment against us in connection with the plaintiff’s termination of the Short-Term License and that such termination of the Short-Term License was valid July 21, 2016, and requires us to pay $371,324 in unpaid royalties.

 

 

Notwithstanding the above, there are still some pending motions open relating to the case, of which we cannot predict the outcome. We are currently in negotiations with 56 Hope Road regarding a settlement structure that will allow us to move forward, though no assurances can be made on whether or not settlement terms can be reached, or if reached, whether they will be favorable to us.

 

Current Status of Business Operations

 

As described above, we were in litigation with 56 Hope Road and HRM during the quarter ending October 31, 2016, provided that until February 2017, we were using the Trademarks in the sale of our products. Additionally, since the date of our last filing, we have attempted to streamline our business and cut costs while maintaining as many accounts as possible. Additionally, we’ve been working on expanding our operations outside of the “Marley Coffee” name, which we ceased using in February 2017.

 

Since the litigation began, we have worked to both maintain and restructure our business. We have cut costs across the board, closed our main office and reduced our employee head count significantly. Our focus was primarily on the maintenance of existing accounts while beginning to introduce a new complimentary brand. We believed that this would help ensure we have sufficient cash flow to keep the business afloat while seeking alternative growth options. We have also raised significant funding through the sale of convertible notes as described herein.

 

Despite the dismissal of the 56 Hope Road lawsuit and our termination of the use of the Trademarks (i.e., the termination of the use of the Marley Coffee brand name), we are not looking at bankruptcy restructuring as an option at the moment, as we are trying to sustain our business and grow a new division. We have worked with our two largest debt holders in an effort to restructure our debt. Specifically, Mother Parkers has previously agreed that all profits and licensing fees from coffee which we sell through Mother Parkers will go to pay down debt which we owe to Mother Parkers, provided that since we no longer have the ability to generate revenue with Mother Parker’s through the Marley Coffee brand, we will need to re-negotiate how our debt is paid down and we cannot guarantee what that will look like, or that it will be on favorable terms. Our other significant creditor, ERI, is providing us credit to ship products to our customers for all bagged coffee; however, we are allocating 30% of the profits of such orders back to ERI to pay down our debt owed to them. This is also inclusive of our new Jammin Java Coffee line. We also have several other smaller debt holders that we have structured a payment plan with, and some we have not. We cannot guarantee that a debt holder will not try to put us into involuntary bankruptcy, but we currently have no intention at this time of filing for any type of bankruptcy protection.

   

As described above, we are developing a line of non-’Marley Coffee’ related products under the Jammin Java name, which we plan to distribute through our existing channels with a planned launch date around the end of March 2017. This line of products will feature premium coffee in a number of formats, including ground, whole bean, and Keurig® and Nespresso®compatible single serve capsules.

 

We have already discussed our new brand with current and potential customers and have received positive feedback and commitments to order once we launch. These products will not require us to pay licensing fees. We anticipate beginning to generate revenues from these sales starting around the end of March 2017.

 

As of February 2017, we have decided to explore the possibility of using our Jammin Java coffee brand and entering into the legalized cannabis industry with coffee and coffee related products. We have hired a California based consulting company that will assist in exporting these possibilities. The Company will consult with legal experts in this area to ensure that all legalities are satisfied in each state the company conducts cannabis related business.

 

Shortly after the filing of this Report, our President and director, Anh Tran, plans to resign as an officer and director of the Company. 

 

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended October 31, 2016 and 2015

 

Compensation and benefits expenses. Compensation and benefits expenses for the three months ended October 31, 2016 and 2015 were $42,407 and $304,798. Compensation and benefits expenses decreased as a result of the decrease in staff.

 

General and administrative expenses. General and administrative expenses were $221,483 and $342,176, respectively, for the three months ended October 31, 2016 and 2015. General and administrative expenses increased as a result of increased legal fees related to the SEC complaint and the litigation with 56 Hope Road.

 

Other expense. Other expense for the three months ended October 31, 2016 and 2015 was $0 and $17,165, respectively.

 

Change in Derivative liability. Change in fair value of derivative liability for the three months ended October 31, 2016 and 2015 was a loss of $2,338,989 and $118,370, respectively, as a result of increases in the increase in the fair value of the derivative liability.

 

Loss on Settlement of Accounts Payable. During the three months ended October 31, 2016, the company recognized a loss on settlement of accounts payable of $28,516. During that time period, the Company settled certain outstanding accounts payable through the issuance of common stock which had a fair value in excess of the amount of the accounts payable.

 

Interest expense. Interest expense increased from $41,367 for the three months ended October 31, 2015 to $731,144 for the three months ended October 31, 2016. Interest expense increased as a result of a higher amount of notes payable and increased amortization of discounts on convertible notes payable.

 

Net loss from continuing operations. Net loss from continuing operations was $3,362,539 and $823,876 for the three months ended October 31, 2016 and 2015, respectively, as a result of the losses discussed above.

 

Income (loss) on discontinued operations. Income (loss) on discontinued operations was loss of $53,824 and loss of $672,953 for the three months ended October 31, 2016 and 2015, respectively, as a result of reclassifying our Marley Coffee business as discontinued operations.  

 

Net loss. Net loss was $3,416,343 and $1,496,829 for the three months ended October 31, 2016 and 2015, respectively. The increase in the net loss was caused by the changes in income and expense discussed above. 

 

 

Comparison of the Nine Months Ended October 31, 2016 and 2015

 

Compensation and benefits expenses. Compensation and benefits expenses for the nine months ended October 31, 2016 and 2015 were $1,258,144 and $935,452, respectively. Compensation and benefits expenses decreased as a result of decreased staff levels.

 

General and administrative expenses. general and administrative expenses were $1,141,568 and $1,104,422 for the nine months ended October 31, 2016 and 2015, respectively. General and administrative expenses increased this period as a result of litigation issues regarding the license with 56 Hope Road.

 

Other expense. Other expense for the nine months ended October 31, 2016 and 2015 was $0 and $49,702, respectively.

 

Change in fair value of derivative liability. Change in fair value of derivative liability for the nine months ended October 31, 2016 and 2015 was $2,983,972 and $118,370, respectively, as a result of increases in the increase in the fair value of the derivative liability.

 

Loss on Settlement of Accounts Payable. During the nine months ended October 31, 2016, the company recognized a loss on settlement of accounts payable of $28,516. During that time period, the Company settled certain outstanding accounts payable through the issuance of common stock which had a fair value in excess of the amount of the accounts payable.

 

Gain on extinguishment of debt. Gain on extinguishment of debt for the nine months ended October 31, 2016 and 2015 was $362,506 and $0, respectively, as the result of the settlement of outstanding convertible notes payable.

 

Interest expense. Interest expense for the nine months ended October 31, 2016 and 2015 was $1,917,519 and $50,940, respectively. Interest expense increased as a result of a higher amount of notes payable and increased amortization of discounts on convertible notes payable.

 

Net loss from continuing operations. Net loss from continuing operations was $6,967,213 and $2,258,886 for the nince months ended October 31, 2016 and 2015, respectively as a result of the expenses described above.

 

Loss on discontinued operations. Loss on discontinued operations was $830,938 and $1,403,674 for the nine months ended October 31, 2016 and 2015, respectively, as a result of reclassifying our Marley Coffee business as discontinued operations.

 

Net loss. Net loss for the nine months ended October 31, 2016 and 2013 was $7,798,151 and $3,662,560, respectively. Net Loss increased as a result of reasons described above.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Since our inception, we have financed our operations primarily through the sale of convertible and other debt securities.

 

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

 

		October 31, 2016				January 31, 2016				Increase / (Decrease)
Working Capital		$	(5,111,413	)		$	(4,232,446	)		$	(878,967	)
Cash and Cash Equivalents		$	10,277			$	231,021			$	(220,744	)

 

Our current sources of liquidity include our existing cash and cash equivalents, limited cash from operations and borrowings under convertible promissory notes and other loans. For the nine months ended October 31, 2016, we generated net sales of $5,702,656 and we had a net loss of $7,798,151. Our existing cash and cash equivalents are not adequate to satisfy our current liabilities.

 

 

We source coffee that we sell to our roaster, Mother Parkers, a related party and shareholder of the Company, who in turn sells it to its own customers. This is especially the case with Jamaican Blue Mountain coffee secured by us. At October 31, 2016, we are owed $268,248 by Mother Parkers. We also utilize the services of Mother Parkers, to roast coffee to our specifications for sale to the Company’s customers. As a result, at October 31, 2016, we owed $1,771,003 to Mother Parkers for roasting services.

 

The Company incurred a net loss of $7,798,151 and $3,662,560 for the nine months ended October 31, 2016 and 2015, respectively and had an accumulated deficit of $37,043,901 at October 31, 2016. In addition, the Company has a history of losses and has not generated net income from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The operations of the Company have primarily been funded by the sale of common stock and debt financing. The Company’s ability to meet its obligations in the ordinary course of business is dependent upon its ability to sell its products directly to end-users and through distributors, establish profitable operations through increased sales and decreased expenses, and obtain additional funds when needed. We may not be able to increase sales or reduce expenses to a level necessary to meet our current obligations or continue as a going concern. As a result, the opinion the Company received from its independent registered public accounting firm on its January 31, 2016 financial statements contains an explanatory paragraph stating that there is substantial doubt regarding the Company’s ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and may realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock. The accompanying financial statements do not contain any adjustments for this uncertainty.

 

Cash Flows

 

		Nine months ended October 31,
		2016				2015
Net cash used in operating activities - continuing operations		$	(444,130	)		$	(1,051,483	)
Net cash provided by investing activities - continuing operations		$	—			$	—
Net cash provided by financing activities		$	152,344			$	1,464,523

 

Operating Activities

 

For the nine months ended October 31, 2016, net cash used in operating activities - continuing operations was $444,130, compared to $1,051,483 for the nine months ended October 31, 2015.

 

Financing Activities

 

Net cash used by financing activities was solely due to proceeds from the sale of notes payable, offset by payments on notes payable, for the nine months ended October 31, 2016 and 2015.

 

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

 

 

Funding and Financing Agreements

 

Mother Parker’s Investment

 

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

 

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

 

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

 

At October 31, 2016, we are owed $598,953 by Mother Parkers. We also utilize the services of Mother Parkers, to roast coffee to our specifications for sale to the Company’s customers. As a result, at October 31, 2016, we owed $2,169,533 to Mother Parkers for roasting services.

 

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 were due on September 26, 2016, and have not been paid to date. The line of credit contains customary events of default, and upon the occurrence of an event of default the lender can suspend further advances and require the Company to declare the entire amount then owed immediately due, subject to a 10 day period pursuant to which we have the right to cure any default. Upon the occurrence of an event of default the amounts owed under the line of credit bear interest at the rate of 20% per annum. Proceeds from the line of credit can be solely used for working capital purposes. The lender has no relationship with the Company or its affiliates. The total due on the third party loans as of October 31, 2016 was $33,484. The Company has not made any payments in connection with this loan since November 2016. We are currently negotiating with Colorado Medical Finance Services on how to restructure the debt long term.

 

 

Convertible Promissory Notes

 

As described in greater detail in Notes 5 and 10, to the financial statements included herein and under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” – “Liquidity and Capital Resources” - “Funding and Financing Agreements” in our Annual Report on Form 10-K for the year ended January 31, 2016, as filed with the Securities and Exchange Commission on May 6, 2016, we have sold various convertible notes to date, which allow the holders thereof, subject to the terms thereof, to convert the amount owed into shares of our common stock at a discount to the then trading prices of our common stock. The total amount of the Convertible Promissory Notes is $1 million as of October 31, 2016.

 

Third Party Loan

 

In October 2015, we borrowed $150,000 from a third-party lender. The October 2015 loan has a seven-month term, a total payback amount of $202,500 and is payable by way of 147 daily payments of $1,378. In November 2015, we borrowed $65,000 from the same lender. The November 2015 loan has a term of six months, a total payable amount of $89,700 and is payable by way of 126 daily payments of $712. In January 2016, we borrowed $220,000 from the same lender (of which $91,887.70 was new lending and $128,112.30 was used to repay the balance on the October 2015 loan). The January 2016 loan has a term of ten months, a total payback amount of $290,400 and is payable by way of 210 daily payments of $1,383. There was $215,173 outstanding as of January 31, 2016. In February 2016, we borrowed $100,000 from the same lender which has a six-month term, a total payback amount of $130,000 and is payable by way of 126 daily payments of $1,032. In April 2016, we borrowed $115,000 from the same lender (of which $90,000 was new lending and the remainder was used to pay back the balance on the November 2015 loan). The April 2016 loan had a term of eight months, a total payable amount of $158,700 and is payable by way of 168 daily payments of $945. The loans are secured by a security interest in all of our accounts, equipment, inventory and investment property. We have the right to repay the loans within the first 30 days after the effective date of each loan at the rate of 85% of the applicable repayment amount and between 31 and 90 days after the effective date of each loan at the rate of 90% of the applicable repayment amount. The interest rate on these loans range from 30-38% per annum. As of October 31, 2016, $373,115 is payable under the outstanding loans.

 

Factoring Agreement

 

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

 

Off-Balance Sheet Arrangements

 

As part of our on-going business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of October 31, 2016, we are not involved in any unconsolidated SPEs.

 

Critical Accounting Policies

 

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

 

 

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

 

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

 

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

 

Impairment of Long-Lived Assets. Long-lived assets include a license agreement that was recorded at the estimated cost to acquire the asset (See Note 4 to the financial statements included in this report). The license agreement is reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Management evaluated the carrying value of the license and determined that no impairment existed at October 31, 2016 or 2015.

 

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

 

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

 

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

 

 

Recent Accounting Pronouncements

 

For the nine months ended October 31, 2016 and 2015, there were no accounting standards or interpretations issued that are expected to have a material impact on our financial position, operations or cash flows.

 

Accounting standards that have been issued by the FASB or other standards setting bodies that do not require adoption until a future date are being evaluated by the Company to determine whether adoption will have a material impact on the Company’s financial statements. Such pronouncements include the 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.

 

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

 

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

 

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

 

Item 3. Quantitative and Qualitative Disclosures 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).

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Principal Executive Officer and Principal Accounting and Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

 

Based on our evaluation, our Principal Executive Officer and Financial Officer concluded that our disclosure controls and procedures were 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.

 

Internal Control Over Financial Reporting

 

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.

 

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.

 

Management believes that the material weaknesses set forth in items (1) and (2) above did not have an effect on the Company’s financial reporting during the three months ended October 31, 2016.

 

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 reporting company, 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; and
	●	involve and retain to a greater degree outside counsel and accountants in the above activities.

 

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.

 

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.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the three months ended October 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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 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.

  

On or around May 31, 2016, the Company entered into a ‘Consent of Defendant Jammin Java Corp.’ (the “Consent”), in connection with the SEC’s complaint (the “Complaint”). Pursuant to the Consent, without admitting or denying the allegations of the Complaint (except as specifically set forth in such Consent mainly relating to personal and subject matter jurisdiction, which we admitted), we consented to the entry of a final judgment (the “Final Judgment”), which, among other things: (a) permanently restrains and enjoins us from violating Section 5 of the Securities Act, and (b) orders us to pay disgorgement in the amount of $605,330, plus prejudgment interest thereon in the amount of $94,670, totaling an aggregate of $700,000, of which (1) $200,000 was due within 14 days of the entry of the Final Judgment (which Final Judgment was entered July 6, 2016, and which payment was due July 20, 2016, and has not been paid or requested by the SEC to date); and (2) $500,000 was due within 90 days of the entry of the Final Judgment (which amount was due by October 4, 2016, and which amount has not been paid or requested by the SEC to date).

 

The Final Judgment was approved by the SEC on or around May 31, 2016 and approved by the court on July 6, 2016, which is anticipated by the end of June 2016. The Company has accrued $700,000 for estimated settlement expense in the quarter ended July 31, 2016.

 

The Company believes that the Final Judgment is a positive outcome for the Company as it settles the SEC’s outstanding action against the Company and removes the uncertainty surrounding such action moving forward. The Company continues to take action in the best interests of the shareholders to create shareholder value which includes assisting the SEC in its continued investigation.

 

On August 1, 2016, Fifty-Six Hope Road Music Limited (“56 Hope Road”) and Hope Road Merchandising, LLC (“HRM”) filed a complaint against us in the Superior Court of the State of California, County of Los Angeles, Central Division (Case No. BC628981). The complaint (a) sought a declaratory judgment relating to the termination by 56 Hope Road and HRM of the licenses which owned to use certain “Marley Coffee” trademarks, (b) sought damages for our alleged (i) breaches of the licenses, (ii) tortious interference with 56 Hope Road’s and HRM’s economic relationships with licenses and prospective licensees, and (iii) trademark infringement; (c) requested an accounting of our books and records; and (d) requested punitive and exemplary damages in connection with allegations of fraud and misrepresentation.

 

 

On August 4, 2016, we filed (a) a notice of removal with the court, requesting the case be removed from state court to the United States District Court for the Central District of California; (b) a request for a temporary restraining order requesting the court to reinstate the short-term license until a final decision on the pending lawsuit is determined; and (c) an answer to the complaint denying the allegations of 56 Hope Road and HRM, including certain affirmative defenses, and pleading counterclaims against (i) 56 Hope Road for breach of contract and breach of implied covenants of good faith and fair dealing, (ii) 56 Hope Road and HRM for intentional and negligent interference with prospective economic advantage and intentional and negligent misrepresentation, and (iii) breach of fiduciary duty against Rohan Marley, our former Chairman, and seeking that the court enter judgment in favor of us on all claims alleged by 56 Hope Road and HRM and further seeking economic damages, punitive and exemplary damages, pre-and-post judgment interest and court costs from 56 Hope Road, HRM and Mr. Marley.

 

The case was then removed to the United States District Court of California Western Division (Case No. 2:16-cv-05810-SVW-MRW). 56 Hope Road and HRM subsequently amended their Complaint to seek damages for alleged breach of contract in connection with the licenses, declaratory relief in connection with the licenses (i.e., that such agreements had been effectively terminated by us), interference with prospective economic advantage, trademark infringement, accountings, fraud, and indemnity. We denied the allegations, asserted certain several affirmative defenses and filed counterclaims against Rohan Marley, our former director, for breach of fiduciary duty and civil conspiracy, which claims 56 Hope Road, HRM and Mr. Marley moved to be dismissed.

 

Subsequently, on February 17, 2017, we filed a motion, which has been approved by the court, to dismiss all of our claims against 56 Hope Road, HRM and Rohan Marley. The decision was made after we lost a motion for summary judgement against 56 Hope Road, which represented the most substantial legal claims for intellectual property and damages. Though we vigorously disagree with the court’s decision on granting the motion for summary judgement, given our resources at this point in time, we believe that it is not in our best business interests to continue contesting the remaining claims in the lawsuit. In our best estimation, the remaining claims were not enough to provide a return for the amount of resources required to prosecute the claims to judgment. We believe our limited resources are better spent to grow our business lines and not in pursuing the litigation.

 

On February 22, 2017, the court granted the plaintiff’s summary judgment against us in connection with the plaintiff’s termination of the Short-Term License and that such termination of the Short-Term License was valid July 21, 2016, and requires us to pay $371,324 in unpaid royalties.

 

Notwithstanding the above, there are still some pending motions open relating to the case, of which we cannot predict the outcome. We are currently in negotiations with 56 Hope Road regarding a settlement structure that will allow us to move forward, though no assurances can be made on whether or not settlement terms can be reached, or if reached, whether they will be favorable to us.

 

Item 1A. Risk Factors.

 

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended January 31, 2016, filed with the Commission on May 6, 2016, except as discussed below, and investors are encouraged to review such risk factors prior to making an investment in the Company.

 

The Long-Term License and Short-Term License are currently terminated, as is our ability to use the Trademarks, which to date, have been where substantially all of our revenues have come from.

 

As described above, we agreed to settle certain claims in our lawsuit with 56 Hope Road, including confirming that the Long-Term License and Short-Term License are terminated, which also terminated our ability to use the Trademarks. Furthermore, on February 22, 2017, the court granted the plaintiff’s summary judgment against us in connection with HRM’s termination of the Short-Term License and that such termination of the Short-Term License was valid July 21, 2016, and requires us to pay $371,324 in unpaid royalties. Historically substantially all of our revenues have come from the sale of products using the Trademarks and our entire business has been built around our use of the Trademarks. Moving forward we will be forced to build new brand recognition not using the Trademarks and sell and market products without built-in brand recognition (i.e., the global recognition of the Marley name), which will likely make it harder for us to sell our products, make it more expensive for us to market our products and reduce the demand for future products. Additionally, we could be forced to pay significant damages and fees to 56 Hope Road and HRM in the lawsuit, which could force us to seek bankruptcy protection. We do not currently have the funds required to pay the unpaid royalties due to HRM. The termination of the licenses and the lawsuit will likely have a material adverse effect on our results of operations and assets, and our ability to generate revenues and 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.

 

 

The Company owes a significant amount of money to Mother Parkers and other creditors.

 

At October 31, 2016, we are owed $598,953 by Mother Parkers. We also utilize the services of Mother Parkers, to roast coffee to our specifications for sale to the Company’s customers. As a result, at October 31, 2016, we owed $2,169,533 to Mother Parkers for roasting services. As described above, Mother Parkers is one of our largest distributors, representing over half of our revenues for the year ended January 31, 2016 and the three months ended October 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 also owe an additional $1.2 million to other creditors in accounts payable, which funds we do not have and which we may not be able to raise on favorable terms, if at all. We also owe a significant amount of money under convertible promissory notes, which we do not have funds to repay, and which we may not be able to raise on favorable terms, if at all. In the event we are unable to pay our creditors, we may be forced to seek bankruptcy protection or may be forced into involuntary bankruptcy, which could cause the value of our securities to decline in value or become worthless.

 

The Final Judgment could have a material adverse effect on our ability to raise funding and create additional liability for us.

 

Pursuant to the Final Judgment, described above under “Legal Proceedings”, we agreed to a permanent enjoinment from violating the Securities Act in future, which once accepted by the court, will cause us to be deemed to be a ‘bad actor’ under Rule 506 of the Securities Act and disqualified by the requirements of Rule 262 of Regulation A, which will prevent us from relying on an exemption from registration for the sale and issuance of securities under Regulation D and A, respectively. This could make it harder for us to sell shares privately and negatively affect our ability to raise capital. Additionally, for the three years following the court’s acceptance of the Final Judgment, we will 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.

 

Additionally, we were required to pay $700,000 to the Securities and Exchange Commission pursuant to the terms of the Final Judgment on October 4, 2016, which amount has not been paid and which funds we do not currently have. In the event the Securities and Exchange Commission takes action against us to enforce the payment of the $700,000 owed, it may force us to seek bankruptcy protection.

 

We may cease filing reports with the Securities and Exchange Commission.

 

We may not have sufficient available funding moving forward to continue to prepare and file our periodic and current reports with the Securities and Exchange Commission and may be forced to cease such filings, either temporarily or permanently. In the event that we cease filing reports with the Securities and Exchange Commission, our common stock would likely be quoted on the pinksheets and would likely have less liquidity on such market and may trade at a lower share price than on the OTCQB market. Additionally, if we cease our filings with the Securities and Exchange Commission, investors may have less information regarding our operations, financial condition and future plans, and as such the value of our securities may be adversely effected. If we fail to officially terminate our filing obligations with the Securities and Exchange Commission, the Securities and Exchange Commission may, in the future, terminate the registration of our common stock, and prevent trading/quotation of our common stock on any market.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

In August 2016, JMJ converted $190,628 of principal and interest owed on the JMJ Convertible Note into 24,670,000 shares of common stock.

 

In September 2016, JMJ converted $68,962 of principal and interest owed on the JMJ Convertible Note into 24,395,000 shares of common stock.

 

In September 2016, JSJ converted $38,320 of principal and interest owed on the JSJ Convertible Note into 24,733,056 shares of common stock.

 

In September 2016, Duck Duck converted $46,820 of principal and interest owed on the March 8, 2016 Convertible Promissory Note due to Duck Duck into 26,296,581 shares of common stock.

 

We claim an exemption from registration provided by Section 3(a)(9) of the Securities Act, as the securities above were exchanged by us with our existing security holders in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

 

As described above under “Part I - Financial Information” – “Item 1. Financial Statements.” – “Note 10. Subsequent Events”, on November 23, 2016, we sold Vis Vires the December, 2016 Vis Vires Note, on November 23, 2016, we sold the 10% Note Investor the 10% Investor Note, on November 28, 2016, we borrowed an additional $8,500 from JMJ under the JMJ Convertible Note and on December 5, 2016, we sold JSJ the December 2016 JSJ Convertible Note. 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 claim an exemption from registration for the offers, 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 (i) “accredited investors”; and/or (ii) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act, and 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 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.

 

Effective December 30, 2016, we entered into a Cancellation Agreement with Brent Toevs, our former director and Chief Executive Officer, who agreed to return an aggregate of 1,261,457 shares of common stock which were previously issued to him in consideration for services rendered (and as a bonus), to us for cancellation, which shares were cancelled on January 18, 2017. Instead, we agreed to accrue the bonus and compensation and pay them at such time as the Company has sufficient cash flow, in the reasonable determination of the Board of Directors, to pay such.

 

As described above under “Part I - Financial Information” – “Item 1. Financial Statements.” – “Note 10. Subsequent Events”, on February 23, 2017, we sold Power Up the February 2017 Power Up Note, on January 18, 2017, we borrowed an additional $19,800 ($18,000 in principal and $1,800 as an original issue discount) from the 10% Note Investor under the 10% Investor Note, on January 25, 2017, we borrowed an additional $6,375 from JMJ under the JMJ Convertible Note and on January 23, 2017, we sold JSJ the January 2017 JSJ Convertible Note. 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 claim an exemption from registration for the offers, 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 (i) “accredited investors”; and/or (ii) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act, and 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 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.

 

 

Use of Proceeds From Sale of Registered Securities

 

None.

 

Issuer Purchases of Equity Securities

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Cancellation Agreement

 

Effective December 30, 2016, we entered into a Cancellation Agreement with Brent Toevs, our former director and Chief Executive Officer, who agreed to return an aggregate of 1,261,457 shares of common stock which were previously issued to him in consideration for services rendered (and as a bonus), to us for cancellation, which shares were cancelled on January 18, 2017. Instead, we agreed to accrue the bonus and compensation and pay them at such time as the Company has sufficient cash flow, in the reasonable determination of the Board of Directors, to pay such.

 

Consulting Agreement

 

On January 2, 2017, the Company entered into a consulting agreement with SEB Coffee (“SEB”), which is beneficially owned by Brent Toevs, the Company’s former director and Chief Executive Officer, pursuant to which SEB agreed to provide consulting services to the Company until July 1, 2017, in consideration for $23,473 per month or $140,840 in aggregate. We agreed to accrue the compensation due and to only pay such compensation at such time as the Company has sufficient cash flow, in the reasonable determination of the Board of Directors, to pay such amounts.

 

Amendment to 10% Note Investor Note

 

In January 2017, the Company and the 10% Investor amended the 10% Investor Note to provide for an additional loan by the 10% Investor of $19,800 ($18,000 in principal and $1,800 as an original issue discount) which the Company received on January 18, 2017.

 

 

Additional JMJ Borrowing

 

On January 25, 2017, the Company borrowed an additional $6,375 from JMJ which was evidenced by the JMJ Convertible Note described above.

 

January 2017 JSJ Convertible Note

 

On January 23, 2017, we entered into a 12% Convertible Note with JSJ (the “January 2017 JSJ Convertible Note”) in the amount of $10,125. The January 2017 JSJ Convertible Note accrues interest at the rate of 12% per annum (18% upon the occurrence of an event of default) through maturity, October 23, 2017. We have the right to prepay the note prior to maturity provided we pay 150% of the amount due.

 

The January 2017 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 after the 180^th day following the date of the note. The conversion price of the January 2017 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 that the 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.

 

February 2017 - Convertible Notes Payable – Power Up

 

On February 23, 2017, we entered into a Convertible Promissory Note with Power Up Lending Group Ltd. (“Power Up”), in the principal amount of $10,500 (the “February 2017 Power Up Note”). The February 2017 Power Up Note bears interest at the rate of 12% per annum (22% upon an event of default) and is due and payable on November 17, 2017. The principal amount of the February 2017 Power Up Note and all accrued interest is convertible at the option of the holder at the greater of 65% (a 35% discount) multiplied by the average of the lowest three closing bid prices of our common stock during the ten trading days immediately prior to the date of any conversion, provided that the conversion price during major announcements (as described in the February 2017 Power Up 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. The February 2017 Power Up 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 February 2017 Power Up Note in effect on the date of such issuance or deemed issuance, the conversion price of the February 2017 Power Up Note is automatically reduced to such lower price, subject to certain exceptions in the note.

 

At no time may the February 2017 Power Up Note be converted into shares of our common stock if such conversion would result in Power Up 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 February 2017 Power Up Note, upon notice, any time prior to the 180^th day after the issuance date. Any prepayment is subject to payment of a prepayment amount ranging from 120% to 145% of the then outstanding balance on the February 2017 Power Up Note (inclusive of accrued and unpaid interest and any default amounts then owing), depending on when such prepayment is made.

 

The February 2017 Power Up Note also contains customary positive and negative covenants.

 

Item 6. Exhibits.

 

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

 

 

SIGNATURES

 

Pursuant to the requirements 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.
Dated: April 7, 2017	By:	/s/ Anh Tran
		Anh Tran
		Interim Chief Executive Officer, President, Chief Operating Officer, Secretary and Treasurer
		(Principal Executive and Principal Financial and Accounting Officer)

  

 

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)
10.44		Short Term License Agreement effective June 27, 2016, by and between Jammin Java Corp. and Hope Road Merchandising, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed July 7, 2016)
10.45		Secured Promissory Note ($247,324) by Jammin Java Corp. in favor of Fifty-Six Hope Road Music Limited (June 27, 2016) (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed July 7, 2016)
10.46		Security Agreement by Jammin Java Corp. in favor of Fifty-Six Hope Road Music Limited (June 27, 2016) (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed July 7, 2016)
10.47		Securities Purchase Agreement dated November 15, 2016, by and between Jammin Java Corp. and Vis Vires Group, Inc. (incorporated by reference to Exhibit 10.47 of the Company’s Quarterly Report on Form 10-Q for the three months ended July 31, 2016)
10.48		$14,000 Convertible Promissory Note dated November 15, 2016, by Jammin Java Corp. in favor of Vis Vires Group, Inc. (incorporated by reference to Exhibit 10.48 of the Company’s Quarterly Report on Form 10-Q for the three months ended July 31, 2016)
10.49		10% Convertible Promissory Note in the amount of $110,000, dated November 14, 2016 (incorporated by reference to Exhibit 10.49 of the Company’s Quarterly Report on Form 10-Q for the three months ended July 31, 2016)
10.50		12% Convertible Promissory Note dated December 5, 2016 with JSJ Investments Inc. (incorporated by reference to Exhibit 10.50 of the Company’s Quarterly Report on Form 10-Q for the three months ended July 31, 2016)
10.51*		Cancellation Agreement with Brent Toevs dated December 30, 2016
10.52*		Consulting Agreement with SEB Coffee dated January 2, 2017
10.53*		Securities Purchase Agreement dated February 13, 2017, by and between Jammin Java Corp. and Power Up Lending Group Ltd.
10.53*		$10,500 Convertible Promissory Note dated February 13, 2017, by Jammin Java Corp. in favor of Power Up Lending Group Ltd.
10.54*		Amendment #1 to 10% Convertible Promissory Note in the amount of $110,000, dated November 14, 2016
10.55*		12% Convertible Promissory Note dated January 23, 2017 with JSJ Investments Inc.
16.1		Letter dated April 4, 2017 From Squar Milner LLP (incorporated by reference to Exhibit 16.1 of the Company’s Current Report on Form 8-K filed April 7, 2017)
31*		Certification of the Principal Executive Officer and Principal Accounting and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32****		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.

 

 

**** Furnished herewith.

 

+ Indicates management contract or compensatory plan or arrangement.