ITEM 1. BUSINESS.
HISTORY
The Company was incorporated in Nevada on September 2004 under the name “
Global Electronic Recovery Corp.
” In February 2008, we changed our name to “
Marley Coffee Inc.
” when we merged our then newly-formed subsidiary, “
Marley Coffee Inc.
” into the Company. In July 2009, we changed our name to “
Jammin Java Corp.
” when we merged our newly-formed subsidiary, Jammin Java Corp., into our Company. Our common stock is quoted on the OTCQB maintained by the OTC Market (“
OTCQB
”), under the symbol “
JAMN.
”
CURRENT BUSINESS OPERATIONS
In July 2009, we decided to pursue the business of providing premium roasted coffee on a wholesale level to the service, hospitality, office coffee service and big box store market. We intended to gain a market share of the category by capitalizing on the global recognition of the “
Marley
” name. Since then, the Company has expanded and developed into a provider of specialty coffee for a variety of business channels.
We believe the key to our growth is a multichannel distribution and sales strategy. Since August 2011, we have been introducing a wide variety of coffee products through multiple distribution channels using the Marley Coffee brand name. The main channels of revenue for the Company are now and are expected to continue to be grocery retail, online retail, office coffee services (OCS), foodservice, green bean coffee sales and vending and automated retailing.
In order to market our products in these channels, we have developed a variety of coffee products in varying formats. The Company offers an entire line of coffee in whole bean and ground form with varying sizes including 2.5 ounce (oz), 8oz, 12oz and 2 pound (lbs) sizes. The Company also offers a “
single serve
” solution with its compostable Single-Serve Pods for Bunn® and other pod-based home and office brewers. The Company recently launched its Marley Coffee RealCup; compatible cartridges, for use in most models of Keurig®'s K-Cup brewing system.
License Agreement with Fifty-Six Hope Road
On September 13, 2012, the Company entered into a fifteen (15) year license agreement (renewable for two additional fifteen (15) year terms thereafter in the option of the Company) with an effective date of August 7, 2012 with Fifty-Six Hope Road Music Limited, a Bahamas international business company (“
Fifty-Six Hope Road
” and the “
FSHR License Agreement
”). Rohan Marley, our Chairman, owns an interest in and serves as a director of Fifty-Six Hope Road. Pursuant to the FSHR License Agreement, Fifty-Six Hope Road granted the Company a worldwide, exclusive, non-transferable license to utilize the “
Marley Coffee
” trademarks (the “
Trademarks
”) in connection with (i) the manufacturing, advertising, promotion, sale, offering for sale and distribution of coffee in all its forms and derivations, regardless of portions, sizes or packaging (the “
Exclusive Licensed Products
”) and (ii) coffee roasting services, coffee production services, and coffee sales, supply, distribution and support services, provided that the Company may not open retail coffee houses utilizing the Trademarks. Fifty-Six Hope Road owns and controls the intellectual property rights in and to the late reggae performer, Robert Nesta Marley, professionally known as Bob Marley, including the Trademarks. In addition, Fifty-Six Hope Road granted the Company the right to use the Trademarks on advertising and promotional materials that pertain solely to the sale of coffee cups, coffee mugs, coffee glasses, saucers, milk steamers, machines for brewing coffee, espresso and/or cappuccino, grinders, water treatment products, tea products, chocolate products, and ready-to-use (instant) coffee products (the “
Non-Exclusive Licensed Products
”, and together with the Exclusive Licensed Products, the “
Licensed Products
”). Licensed Products may be sold by the Company pursuant to the FSHR License Agreement through all channels of distribution, provided that, subject to certain exceptions, the Company cannot sell the Licensed Products by direct marketing methods (other than the Company’s website), including television, infomercials or direct mail without the prior written consent of Fifty-Six Hope Road. Additionally, FSHR has the right to approve all Licensed Products, all advertisements in connection therewith and all product designs and packaging. The agreement also provides that FSHR shall own all rights to any domain names (including marleycoffee.com), incorporating the Trademarks.
In consideration for the foregoing licenses, the Company agreed to pay royalties to Fifty-Six Hope Road in an amount equal to 3% of the net sales of all Licensed Products on a quarterly basis. In addition, such royalty payments are to be deferred during the first 20 months of the term of the FSHR License Agreement, and such deferred payments shall be paid on a quarterly-basis thereafter until paid in full. At January 31, 2014, $204,149 has been accrued for such royalty fees.
Sales and Marketing Agreement With National Coffee Service & Vending
On April 25, 2011, the Company entered into an Exclusive Sales and Marketing Agreement (the “
NCSV Agreement
”) with National Coffee Service & Vending (“
NCSV
”). Pursuant to the NCSV Agreement, we agreed to appoint NCSV as our exclusive agent and distributor of “
Jammin Java Coffee
” brand roasted coffee within the U.S. (the “
Products
”) in the office coffee vending, office products, water, and other industries featuring a “
break room,
” and divisions and offshoots thereof. Pursuant to the NCSV Agreement, we share net profits generated by this agreement with NCSV on a 60/40 basis (with 60% of such net profits being provided to the Company).
Pursuant to the NCSV Agreement, NCSV is responsible for marketing and distributing Products and we agreed to refer all inquiries for purchase of the Products to NCSV (subject to small quantities of Products being referred to separate sub-agents). We also agreed not to compete with NCSV for sales and to refer to NCSV any sales relating to the Products and segments covered by the NCSV Agreement.
The NCSV Agreement remains in effect until April 25, 2014, and automatically renews for additional two year periods thereafter on a rolling basis, unless terminated by either party at least 30 days prior to the end of such applicable renewal term. The agreement was not terminated as of April 25, 2014, and therefore automatically renewed for an additional two year period. The NCSV Agreement can be terminated in the event of a breach of the NCSV Agreement (by the non-breaching party) or if the terminating party pays the non-terminating party a lump sum equal to the estimated net profit which would have been due to the non-terminating party if the NCSV Agreement had remained in effect for an additional 24 months from the termination date of the NCSV Agreement (based on the prior 12 months’ net profit).
Grocery Sales Process Agreements
On November 1, 2013, the Company hired Red Button Consulting, LLC to assist it with category management and marketing. The group is responsible for assisting the Company with developing a go-to-market retail plan and a promotional calendar for both distributor and retailer development. They are also responsible for helping execute the brand’s consumer value proposition to cultivate brand loyalty across a variety of retail channels and specified retail partners. The long-term objective is to help the Company establish its brand in the grocery retail sector while ensuring that its gross margins fall in line with its promotional activities. The contract is month to month unless terminated by either party at least 30 days prior to the end of such applicable renewal term.
In February 2014, the Company hired 2 national food brokerage companies to help it represent, market and merchandise its products at grocery retail on a store level. The Company engaged Alliance Sales & Marketing, a private food broker based in Charlotte, North Carolina, to help increase its new market penetration in the Eastern region in the grocery and natural foods retail sector. It also hired National Sales Associates, based in Stroudsburg, Pennsylvania, to act as its broker in the natural sector for the Western United States. The Company pays a total of 5% of revenues on accounts the brokers represent. The contracts are month to month unless terminated by either party at least 30 days prior to the end of such applicable renewal term.
Roasting Agreements
The Company primarily receives its coffee from two main suppliers; Mother Parkers Tea & Coffee Inc. and European Roasterie, Inc. The Company generally provides these suppliers with desired taste profiles for various Company products, as well as related packaging and marketing materials, and the suppliers are generally responsible for sourcing and supplying the roasted beans for those products in quantities the Company orders from time to time. We are responsible for carrying out sales and marketing for our products. Our suppliers handle shipping to our distributors and customers. We receive the gross proceeds from the sale of our products and then pay our suppliers for the cost of goods sold. Pricing is subject to change based on prevailing market prices, with 30 days’ written notice. We bear all of the cost of bad debts or uncollectable accounts.
Products and Revenue Channels
The Company’s objective is to position Marley Coffee as the premiere brand across all of the distribution channels for which we license the use of the “
Marley
” name and to capitalize on the likeness of our Chairman, Rohan Marley.
Within the U.S. grocery and specialty retail segment, the Company’s products are distributed through several distributors such as UNFI, Kehe and DPI and we also distribute directly to certain customers. We sell to retailers such as Safeway, Krogers, HEB, Market Basket, Whole Foods, Winn Dixie Bi-Lo, Ahold, Hannafords, Albertsons, Shaw’s and Fairways, Fresh and Easy. During the past year we have expanded our distributor relationships nationally in the United States. We expect our ongoing discussions with retailers will enable us to place our products in more chains throughout the year and we continue to seek to expand our product placement with grocery retailers and distributors throughout the United States and internationally.
We create and sell a variety of coffee products for almost every coffee distribution channel. We sell 8 ounce (oz) and 12oz ground and whole bean bagged coffee primarily to the retail grocery channel. We sell 2lb whole bean and 2.5oz fractional packs primarily to the food service and Office Coffee Service or Breakroom industry.
In late November, 2012 we launched our Marley Coffee RealCups; a single serve; compatible cartridge, for use in most models of Keurig®'s K-Cup brewing system. The coffee single serve segment is the fastest growing sector of the coffee industry and the fastest growing part of our business. We generate revenues in this category in two ways 1) by selling directly to retailers; and 2) through a licensing agreement with our roasters Mother Parkers Tea & Coffee Inc. For direct sales, we handle all aspects of selling, merchandising and marketing of the products to retailers. Through the licensing agreement, our brokers or Mother Parkers Tea & Coffee Inc., develops the relationships with retailers and handles everything from selling, merchandising, discounting, promoting and marketing and we receive a licensing fee of $0.04 per cup sold.
Additionally, during the year ended January 31, 2013, we added two additional revenue channels: Marley Coffee branded vending solutions and Marley Coffee branded Bike Cafés.
Branded Vending & Foodservice
. AVT, Inc. (“
AVT
”) is a leading developer of vending and self-service retail equipment and has created Marley Coffee branded coffee self-automated vending machines designed to target college campuses, traditional retail locations, high-density traffic areas such as theaters and hotels and traditional foodservice vendors.
Marley Coffee BikeCaffe Concept
. Marley Coffee BikeCaffe Coffee Bikes, can be found in Denver, Colorado and are a new approach to serving coffee to customers. These three-wheeled, geared bikes are environmentally-friendly, full-service cafes that roll from location to location.
Additionally, subsequent to the end of fiscal 2013, we affected three transactions with Ironridge, defined and described in greater detail below under “
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
” – “
Liquidity and Capital Resources
” – “
Funding and Financing Agreements
” – “
Ironridge Transaction
”, pursuant to which $4,795,802 in accounts payable and accrued expenses owed by us to various parties, which was purchased by Ironridge, will be satisfied by the issuance of shares of our common stock, and came off our balance sheet significantly improving our liquidity. In July and August 2013, we also raised $246,000 through the sale of units (described in greater detail below under “
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
” – “
Liquidity and Capital Resources
” – “
Funding and Financing Agreements
” – “
Private Placement
”).
Sales and Distribution Agreements and Understandings
The Company has entered into informal sales arrangements, not documented by definitive agreements, with several coffee distributors, beverage services and retailers around the world.
In Canada, the Company has distribution channels directly to certain retailers such as London Drugs and Best Buy, and Mother Parkers Tea & Coffee Inc. is the Company’s distributor for the food service segment. Mother Parkers Tea & Coffee also brings the Company’s products into retailers such as Loblaw’s, Sobey’s, ID Foods, COOP and Metro.
In the United States, for the commercial break room segment, the Company uses its national sales representatives, National Coffee Service & Vending (NCS&V), to distribute to various retailers and distributors.
In addition to distributions through NCS&V, the Company conducts sales directly to retailers as well as to distributors. In order to get in front of retail and distributor accounts, we rely on the experience and relationships of our staff to acquire both groups. Our marketing efforts are comprised of in store promotions, in store demos, external marketing programs, public relations, social media, tradeshows and general advertising.
Within the U.S. grocery and specialty retail segment, the Company utilizes two national brokerage companies to represent, market and merchandise its products. The Company works with Alliance Sales & Marketing, a private food broker based in Charlotte, North Carolina, to increase its new market penetration in the Eastern region in the grocery and natural foods retail sector. The Company also works with National Sales Associates, based in Stroudsburg, Pennsylvania, to act as its broker in the natural sector for the Western United States.
Within the U.S. grocery and specialty retail segment, the Company’s products are distributed through several distributors such as UNFI, Kehe and DPI and we also distribute directly to certain retailers.
The Company has strengthened its online presence by selling through a multitude of online retailers such as Amazon.com, Cooking.com, coffeeicon.com, ecscoffee.com, officedepot.com and coffeewiz.com.
Recent Transactions
Effective in August 2013, the Company entered into and affected the transactions contemplated by an Asset Purchase Agreement with Black Rock Beverage Services, LLC (“
BRB
”). Pursuant to the agreement, the Company acquired substantially all of the assets of BRB in consideration for $10,000 in cash and 158,040 shares of the Company’s restricted common stock (which were physically issued in February 2014), valued at $71,118. Additionally, a required term and condition of the acquisition was that the Company enter into an employment agreement with the principal of BRB. Included in the acquisition was all of BRB’s goodwill, intellectual property, inventory, equipment and a truck. The Company also absorbed all of BRB’s employees. The acquisition was accounted for using the purchase method of accounting.
Effective December 4, 2013, the Company entered into and closed an Asset Purchase Agreement with BikeCaffe Franchising Inc. (“
BikeCaffe Franchising
”), a franchisor of the BikeCaffe mobile coffee carts in the United States and throughout the world. Prior to us entering into the Asset Purchase Agreement, we were a brand partner of BikeCaffe Franchising. Pursuant to the Asset Purchase Agreement we purchased all of the assets of BikeCaffe Franchising (including the rights to the design of the BikeCaffe carts, intellectual property relating to the operation of BikeCaffe Franchising, and five Marley Coffee Branded BikeCaffe carts) in consideration for $140,000, of which $40,000 was paid in cash and $100,000 was paid through the issuance of 250,000 shares of our restricted common stock valued based on the closing price of the Company’s common stock on the effective date of the agreement ($0.40 per share). BikeCaffe Franchising and its owners agreed to indemnify us against various claims resulting from the operations of the assets acquired prior to closing. The Asset Purchase Agreement also required Pedal Power Supply, LLC, which is under common control with BikeCaffe Franchising, to build and sell BikeCaffe units to the Company for 12 months at the current sales price of such carts and for an additional 12 months thereafter (24 months in total) at no more than 110% of the current sales price. BikeCaffe and its owners agreed to a non-compete provision prohibiting them from competing against us in connection with any line of business similar to ours for a period of three years from the closing date. The acquisition was accounted for using the purchase method of accounting.
Additionally, effective on the same date, we entered into a Supplier Business Relationship Agreement with Ralph Massetti / The Franchise Builders (“
Supplier
”)(President and CEO of BikeCaffe Franchising), pursuant to which the Supplier agreed to provide 150 hours of franchise consulting services to the Company, which services are to be rendered prior to January 31, 2015. We agreed to provide the Supplier consideration of (a) 8% of the annual net profits derived from the BikeCaffe related assets and opportunities for five years following the closing; and (b) 8% of the purchase value attributable to any sale of the BikeCaffe assets which occurs during the five year years following the closing. The first annual net profits payment is due 90 days following the end of the Company’s January 31, 2015 fiscal year. The Company has the right to pay the annual net profits payment in cash or stock. We also agreed to make a one-time payment to the supplier in consideration for the 150 hours of consulting services to be provided to the Company in the amount of $115,000, which we agreed to pay in common stock valued based on the closing price of our common stock on the date the agreement was entered into (which stock had a closing price of $0.40 per share), which totals 287,500 shares of common stock.
Patents, Trademarks and Licenses
As described above, pursuant to the September 13, 2012, FSHR License Agreement, Fifty-Six Hope Road granted the Company a worldwide, exclusive, non-transferable license to utilize the “
Marley Coffee
” trademarks (the “
Trademarks
”) in connection with (i) the manufacturing, advertising, promotion, sale, offering for sale and distribution of coffee in all its forms and derivations, regardless of portions, sizes or packaging (the “
Exclusive Licensed Products
”) and (ii) coffee roasting services, coffee production services, and coffee sales, supply, distribution and support services, provided that the Company may not open retail coffee houses utilizing the Trademarks.
Additionally, the Company currently does business under the name “
Marley Coffee
”, the rights to which name is owned by Fifty-Six Hope Road.
The Company also maintains websites at
http://www.marleycoffee.com
(the rights to which domain name are owned by FSHR) and
http://www.jamminjavacoffee.com
. The information on, or that may be accessed through, our website is not incorporated by reference into this report and should not be considered a part of this report.
Competition
Competition in the market for coffee and coffee related products is intense and we expect it to increase. Our most significant competitors, include premium coffee companies such as Starbucks, Peet’s Coffee, Keurig Green Mountain (formerly Green Mountain Coffee Roasters), Farmer’s Brothers and other national, local and regional companies in the grocery retail and office coffee service and hospitality industry market, many of which have substantially greater financial, sales, marketing and human resources than we do.
We believe that our customers choose among coffee brands based on the total value proposition that includes quality, variety, convenience, personal taste preference, price and social/sustainable consciousness. We believe that our market share in the category is driven by the quality of our product and the sustainable message we convey while being competitively priced in the premium category.
Product Research and Development
We did not expend any significant funds on research and development activities for the fiscal years ending January 31, 2014 or January 31, 2013.
Employees
As of April 30, 2014, we had sixteen full-time and ten part-time employees. We also utilize independent contractors and consultants to assist us with key functions. Our agreements with these independent contractors and consultants are usually short-term. We believe that our relations with our employees, independent contractors and consultants are good. None of our employees are represented by a union or covered by a collective bargaining agreement.
AVAILABLE INFORMATION
We are subject to the information and reporting requirements of the Exchange Act, under which we file periodic reports, proxy and information statements and other information with the United States Securities and Exchange Commission, or SEC. Copies of the reports, proxy statements and other information may be examined without charge at the Public Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, or on the Internet at http://www.sec.gov. Copies of all or a portion of such materials can be obtained from the Public Reference Room of the SEC upon payment of prescribed fees. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room.
ITEM 1A. RISK FACTORS.
RISK FACTORS
An investment in our common stock is highly speculative, and should only be made by persons who can afford to lose their entire investment in us. You should carefully consider the following risk factors and other information in this annual report before deciding to become a holder of our common stock. If any of the following risks actually occur, our business and financial results could be negatively affected to a significant extent.
We have had negative cash flows from operations and there is substantial doubt about our ability to continue as a going concern and if we are not able to generate positive cash flow, our business operations may fail.
The Company has incurred a net loss of $6,704,030 and $4,017,953 for the years ended January 31, 2014 and 2013, respectively and has an accumulated deficit of $13,762,848 at January 31, 2014.
In addition, the Company has a history of losses and has only recently begun to generate revenue as part of its principal operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The operations of the Company have primarily been funded by the issuance of its common stock. The Company’s ability to meet its obligations in the ordinary course of business is dependent upon its ability to sell its products directly to end-users and through distributors, establish profitable operations through increased sales and decreased expenses, and obtain additional funds when needed. There can be no assurance that the Company will be able to increase sales or reduce expenses to a level necessary to meet its 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, 2014 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.
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common stock.
Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock or where shares are to be issued to our officers, directors and applicable consultants, free trading shares pursuant to our Form S-8 registration statements. Our Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing shareholders, may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.
We rely upon key personnel and if they leave us, our business plan and results of operations could be adversely affected.
We rely heavily on our Chief Executive Officer, Brent Toevs, our President, Chief Operating Officer, Secretary and Treasurer, Anh Tran, and the Chairman of our Board of Directors, Rohan Marley, for our success. Their experience and input create the foundation for our business and are responsible for the directorship and control over our activities. Moving forward, should we lose the services of these individuals for any reason, we will incur costs associated with recruiting a replacement and delays in our operations. If we are unable to replace such principal with another suitably trained individual or individuals, we may be forced to scale back or curtail our business plan and activities. As a result of this, your investment in us could become devalued or worthless. We currently have an aggregate of $3 million in Directors’ and Officers’ liability insurance in place covering our officers and directors.
We rely on our License Agreement with Fifty-Six Hope Road Music Limited, our Roasting Agreement with Mother Parkers Tea & Coffee Inc., and various other agreements and understandings for our operations and revenues.
As described above under “
Item 1. Business
” – “
Current Business Operations
”, (a) on September 13, 2012, the Company entered into a license agreement with an effective date of August 7, 2012 with Fifty-Six Hope Road Music Limited, pursuant to which Fifty-Six Hope Road granted the Company a worldwide, exclusive, non-transferable license to utilize the “
Marley Coffee
” Trademarks in connection with Licensed Products; and (b) we also have an agreement in place with Mother Parkers Tea & Coffee Inc., pursuant to which we provide that entity the exclusive right to market and sell our Marley Coffee RealCups. We also have numerous informal sale arrangements and distribution understandings, not documented by definitive agreements, in place with several coffee distributors, beverage services and retailers.
We anticipate generating revenue moving forward solely as a result of the sale of coffee bearing the Trademarks, which we source primarily under our Agreement with Mother Parkers Tea & Coffee Inc. and our agreement with European Roasterie, Inc. and which we distribute primarily through the Mother Parkers Tea & Coffee Inc. Agreement and through other various distribution understandings. As a result, if the RSHR License Agreement was to be terminated, the Roasting Agreement, or the Mother Parkers Tea & Coffee Inc. Agreement were to be terminated or not renewed, or to a lesser extent, if our various informal sale arrangements were to be terminated, our operations could be adversely effected, our revenues (if any), could be adversely affected and we could be forced to curtail or abandon our operations, causing any investment in the Company to decline in value or become worthless.
FSHR can terminate the FSHR License Agreement under certain circumstances.
Pursuant to the terms and conditions of the FSHR License Agreement, FSHR can terminate that agreement under certain circumstances, subject where applicable and as described in the agreement, our right to cure such breaches and other events, including: if we manufacture and sell inferior quality products using the Trademarks; we breach the FSHR License Agreement; we are deemed to have performed gross negligence or wanton misconduct under the FSHR License Agreement; we enter into bankruptcy proceedings; or the Securities and Exchange Commission or any similar government agency in any country, territory or possession makes any negative or unlawful finding regarding our activities. The termination of the FSHR License Agreement would have a material adverse effect on our results of operations and assets, could force us to scale back and/or abandon our business operations and could cause the value of our common stock to decline in value or become worthless.
Our revenues are significantly dependent on sales to a small number of customers and if we lose those customers our revenues will be adversely affected.
A significant portion of our revenue is derived from a limited number of customers. The loss of one or more of our significant customers would have a material impact on our revenues and results of operations.
During the year ended January 31, 2014, of the customers that provided 10% or more of our revenue, three provided approximately 57% of total revenue. During the year ended January 31, 2014, three vendors accounted for 93% of purchases. During the year ended January 31, 2013, two vendors accounted for 87% of purchases. As such, if we were to lose any of our significant customers and were unable to replace such customer with an equally sized replacement, our revenues and results of operations would be materially adversely affected.
Competition for coffee products and coffee brands is intense and could affect our future sales and profitability.
The coffee industry is highly fragmented. Competition in coffee products and brands are increasingly intense as relatively low barriers to entry encourage new competitors to enter the marketplace. In addition, we believe that maintaining and developing our brands is important to our success and the importance of brand recognition may increase to the extent that competitors offer products similar to ours. Many of our current and potential competitors have substantially greater financial, marketing and operating resources and access to capital than we do. Our primary competitors include Starbucks, Tully’s, Seattle’s Best, Peet’s Coffee, Keurig Green Mountain (formerly Green Mountain Coffee Roasters), Farmer’s Brothers and other companies in the office coffee service and hospitality industry market. If we do not succeed in effectively differentiating ourselves from our competitors in the coffee industry, including by developing and maintaining our brands, or our competitors adopt our strategies, then our competitive position may be weakened and our sales of coffee, and accordingly our future revenues (if any), may be materially adversely affected.
The adjustable number of shares of common stock we are required to issue Ironridge pursuant to the Stipulation could require us to issue a substantially greater number of shares, which may adversely affect the market price of our common stock and cause dilution to our existing stockholders
.
Pursuant to the terms of the Order and the Stipulation (described below under “
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
” – “
Liquidity and Capital Resources
” – “
Funding and Financing Agreements
” – “
Ironridge Transaction
”), the Company was required to issue and deliver to Ironridge certain shares of the Company’s common stock, in settlement of the Claim which shares are subject to adjustment as described above. The issuance of additional shares to Ironridge could cause immediate and substantial dilution to our existing shareholders and adversely affect the trading price of our common stock. Additionally, we believe that Ironridge may be selling the shares they were issued by the Company during certain calculation periods, which could reduce the trading price of our common stock and affect the number of shares they are ultimately able to receive as a result of such transaction.
Our business is dependent on sales of coffee, and if demand for coffee decreases, our business would suffer.
All of our revenues are planned to be generated through the sale of coffee. Demand for coffee is affected by many factors, including:
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Changes in consumer tastes and preferences;
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Changes in consumer lifestyles;
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National, regional and local economic and political conditions;
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Perceptions or concerns about the environmental impact of our products;
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Demographic trends; and
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Perceived or actual health benefits or risks.
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Because we are highly dependent on consumer demand for coffee, a shift in consumer preferences away from coffee would harm our business more than if we had more diversified product offerings. If customer demand for our coffee decreases, our sales, if any, would decrease and we would be materially adversely affected.
If we fail to continue to develop and maintain our brand, our business could suffer
.
We believe that maintaining and developing our brand is critical to our success and that the importance of brand recognition may increase as a result of competitors offering products similar to ours. Our brand building initiative involves increasing the availability of our products on the Internet, in grocery stores, licensed locations and foodservice locations to increase awareness of our brand and create and maintain brand loyalty. If our brand building initiative is unsuccessful, we may never recover the expenses incurred in connection with these efforts and we may be unable to increase our future revenue or implement our business strategy. As part of our brand building initiative, we may revise our packaging or make other changes from time to time. If these changes are not accepted by customers, our business could suffer.
Our success in promoting and enhancing our brand will also depend on our ability to provide customers with high quality products and customer service. Although we take measures to ensure that we sell only high-quality coffee, we have no control over our coffee products once purchased by customers. Accordingly, customers may prepare coffee from our products in a manner inconsistent with our standards, store our coffee for long periods of time or resell our coffee without our consent, which in each case, potentially affects the quality of the coffee prepared from our products. If customers do not perceive our products to be of high quality, then our reputation and the value of our brand may be diminished and, consequently, our ability to implement our business strategy may be adversely affected.
Coffee costs have been very volatile over the last several years and increases in the cost of high-quality coffee beans could impact the profitability of our business
.
In the past several years, we have experienced a dramatic increase in the price volatility of Arabica coffee traded on the New York Board of Trade. While we do not purchase coffee on the commodity markets, price movements in the commodity trading of Arabica coffee beans impact the prices we pay. We expect the coffee commodity market to continue to be challenging as it continues to be influenced by worldwide supply and demand, the relative strength of the United States Dollar and speculative trading. Coffee prices can also be affected by multiple factors in the producing countries, including weather, natural disasters, political and economic conditions, export quotas or similar factors.
Decreases in the availability of high-quality coffee beans could impact the profitability and growth of our business
.
One of our main concerns for fiscal 2015 is a shortage in Jamaican Blue Mountain (JBM) beans and products. Hurricane Sandy and coffee leaf rust has impacted the production output of JBM by about 40 percent for 2014. Jamaica and the industry expect a slow recovery in 2015 and to be back in full production by 2016. We are diligently working to secure more JBM as the market we created for it continues to expand. Limited JBM supply hampered our growth in fiscal 2014.
If we are not able to purchase sufficient quantities of high-quality coffee beans, we may not be able to fulfill the demand for our coffee, our revenue may decrease and our ability to expand our business may be negatively impacted.
Besides coffee, we face exposure to other commodity cost fluctuations, which could impair our profitability
.
In addition to the increase in coffee costs discussed above, we are exposed to cost fluctuation in other commodities, including milk and fuel. For example, an increase in the cost of fuel could indirectly lead to higher electricity costs, transportation costs and other commodity costs. An increase in the cost of milk or other products, including sugar and other sweeteners, which coffee drinkers use to flavor and season their coffee could also lead to a decrease in the demand for our products. Much like coffee costs, the costs of these commodities depend on various factors beyond our control, including economic and political conditions, foreign currency fluctuations and global weather patterns. To the extent that we are unable to pass along such costs to our customers through price increases, our margins and profitability will decrease.
Our financial performance is highly dependent upon the sales of Marley Coffee RealCup, Keurig® K-Cups.
A significant percentage of our total revenue (approximately half of our revenue for fiscal 2014) is attributable to sales of Marley Coffee RealCups for use with Keurig® Brewing systems. Any substantial or sustained decline in the sale of Keurig® Brewing systems or sales of Marley Coffee RealCups would materially adversely affect us. Keurig® Brewing systems compete against all sellers of coffeemakers. These companies include Bunn-O-Matic Corporation, Mars, Inc. (through its FLAVIA® unit), Conair, Inc., Hamilton Beach / Proctor-Silex, Inc., Jarden Corporation, Nestle S.A. (including the Nescafe Dolce-Gusto® beverage system), Phillips Electronics NV (including the SENSEO® brewing system, in cooperation with Sara Lee Corporation) and Robert Bosch GmbH (including the TASSIMO® beverage system, in cooperation with Kraft Foods, Inc.), Stanley Black & Decker, Inc., Starbucks Corporation (including its Verismo® brewing system), Whirlpool Corporation, as well as a number of additional brewing systems and brands. If
Keurig Green Mountain (formerly Green Mountain Coffee Roasters)
does not succeed in effectively differentiating the Keurig® Brewing systems from its competitors, then our ability to sell, and the market for, Marley Coffee RealCups may be limited and our revenues may be materially adversely affected.
Changes in the coffee environment and retail landscape could impact our financial results.
The coffee environment is rapidly evolving as a result of, among other things, changes in consumer preferences; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive product and pricing pressures. In addition, the beverage retail landscape is very dynamic and constantly evolving, not only in emerging and developing marketplaces, where modern trade is growing at a faster pace than traditional trade outlets, but also in developed marketplaces, where discounters and value stores, as well as the volume of transactions through e-commerce, are growing at a rapid pace. If we are unable to successfully adapt to the rapidly changing environment and retail landscape, our share of sales, volume growth and overall financial results could be negatively affected.
Consolidation in the retail channel or the loss of key retail or grocery customers could adversely affect our financial performance.
Our industry is being affected by the trend toward consolidation in the retail channel. Larger retailers may seek lower prices from us and may demand increased marketing or promotional expenditures, any of which could negatively affect the Company's profitability. In addition, our success depends in part on our ability to maintain good relationships with key retail and grocery customers. The loss of one or more of our key customers could have an adverse effect on our financial performance.
In addition, because of the competitive environment facing retailers, many of our customers have increasingly sought to improve their profitability through increased promotional programs, pricing concessions, more favorable trade terms and increased emphasis on private label products. To the extent we provide concessions or trade terms that are favorable to customers, our margins would be reduced. Further, if we are unable to continue to offer terms that are acceptable to our significant customers or our customers determine that they need fewer inventories to service consumers; these customers could reduce purchases of our products or may increase purchases of products from our competitors, which would harm our sales and profitability.
Climate change may have a long-term adverse impact on our business and results of operations.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Decreased agricultural productivity in certain regions of the world as a result of changing weather patterns may limit availability or increase the cost of key agricultural commodities, such as coffee and tea, which are important sources of ingredients for our products, and could impact the food security of communities around the world. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.
We cannot predict the impact that the following may have on our business: (i) new or improved technologies, (ii) alternative methods of delivery, or (iii) changes in consumer behavior facilitated by these technologies and alternative methods of delivery.
Advances in technologies or alternative methods of delivery, including advances in vending machine technology and home coffee makers, or certain changes in consumer behavior driven by these or other technologies and methods of delivery could have a negative effect on our business. Moreover, technology and consumer offerings continue to develop, and we expect that new or enhanced technologies and consumer offerings will be available in the future. We may pursue certain of those technologies and consumer offerings if we believe they offer a sustainable customer proposition and can be successfully integrated into our business model. However, we cannot predict consumer acceptance of these delivery channels or their impact on our business. In addition, our competitors, many of whom have greater resources than us, may be able to benefit from changes in technologies or consumer acceptance of alternative methods of delivery, which could harm our competitive position. There can be no assurance that we will be able to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery, or to effectively adjust our product mix, service offerings, and marketing and merchandising initiatives for products and services that address, and anticipate advances in, technology and market trends. If we are not able to successfully respond to these challenges, our business, financial condition, and operating results could be harmed.
Adverse public or medical opinion about caffeine may harm our business
.
Our coffee contains significant amounts of caffeine and other active compounds, the health effects of some of which are not fully understood. A number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased heart rate, nausea and vomiting, restlessness and anxiety, depression, headaches, tremors, sleeplessness and other adverse health effects. An unfavorable report on the health effects of caffeine or other compounds present in coffee could significantly reduce the demand for coffee, which could harm our business and reduce our sales and profits. Also, we could become subject to litigation relating to the existence of such compounds in our coffee; any such litigation could be costly and could divert management attention.
Adverse publicity regarding product quality or food and beverage safety, whether or not accurate, may harm our business
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We may be the subject of complaints or litigation from customers alleging beverage and food-related illnesses or other quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect us, regardless of whether such allegations are true or whether we are ultimately held liable. In addition, any litigation relating to such allegations could be costly and could divert management attention.
We face a risk of a change in control due to the fact that our current officers and directors do not own a majority of our outstanding voting stock.
Our current officers and our directors do not hold voting control over the Company. As a result, our shareholders who are not officers and directors of us may be able to obtain a sufficient number of votes to choose who serves on our Board of Directors and/or to remove our current directors from the Board of Directors. Because of this, the current composition of our Board of Directors may change in the future, which could in turn have an effect on those individuals who currently serve in management positions with us. If that were to happen, our new management could affect a change in our business focus and/or curtail or abandon our business operations, which in turn could cause the value of our securities, if any, to decline or become worthless.
Failure to comply with applicable laws and regulations could harm our business and financial results.
Our policies and procedures are designed to comply with all applicable laws, accounting and reporting requirements, tax rules and other regulations and requirements, including those imposed by the SEC, as well as applicable trade, labor, healthcare, privacy, food, anti-bribery and corruption and merchandise laws. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to additional or changing legal and regulatory requirements, our ongoing expansion into new markets and new channels, together with the fact that foreign laws occasionally conflict with domestic laws. In addition to potential damage to our reputation and brand, failure to comply with the various laws and regulations as well as changes in laws and regulations or the manner in which they are interpreted or applied, may result in civil and criminal liability, damages, fines and penalties, increased cost of regulatory compliance and restatements of our financial statements. Future laws or regulations (or the cost of complying with such laws, regulations or requirements) could also adversely affect our business and results of operations.
Adverse changes in global and domestic economic conditions or a worsening of the United States economy could materially adversely affect us.
Our sales and performance depend significantly on consumer confidence and discretionary spending, which are still under pressure from United States and global economic conditions. A worsening of the economic downturn and decrease in consumer spending may adversely impact our sales, ability to market our products, build customer loyalty, or otherwise implement our business strategy and further diversify the geographical concentration of our operations. For example, we are highly dependent on consumer demand for specialty coffee and a shift in consumer demand away from specialty coffee due to economic or other consumer preferences would harm our business.
We believe that our future success will depend in part on our ability to obtain and maintain protection of our intellectual property and brand names.
Our success will depend in part on our ability to maintain and enforce the Trademarks we license through the FSHR License Agreement (described above) and additional trademarks and service marks we may obtain in the future (together with the Trademarks, the “
Marks
”) registered by the Company. In the future, competitors or other third parties could claim that the Marks infringe on their rights, which could force us to defend infringement actions or challenge the validity of the third parties’ trademarks in court. Furthermore, we may have to take action, file lawsuits and expend significant resources in the future to protect the Marks and stop other parties from infringing on the use of such Marks and we cannot assure you that we will have sufficient resources to pursue such litigation or actions. Any expenses we are forced to expend in defending our Marks or stopping third parties from infringing on such Marks will decrease the amount of working capital we have available for our business activities and could cause us to curtail or abandon our operations.
We may incur additional indebtedness which could reduce our financial flexibility, increase interest expense and adversely impact our operations.
In the future, we may incur significant amounts of additional indebtedness in order to make acquisitions or continue our business plan. Our level of indebtedness could affect our operations in several ways, including the following:
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a significant portion of our cash flows could be used to service our indebtedness;
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a high level of debt would increase our vulnerability to general adverse economic and industry conditions;
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any covenants contained in the agreements governing our outstanding indebtedness could limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments;
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a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, may be able to take advantage of opportunities that our indebtedness may prevent us from pursuing; and
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debt covenants to which we may agree may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry.
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A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flows to pay the principal or interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. If we do not have sufficient funds and are otherwise unable to arrange financing, we may have to sell significant assets or have a portion of our assets foreclosed upon which could have a material adverse effect on our business, financial condition and results of operations.
There is currently a volatile, sporadic and illiquid market for our common stock.
Our securities are currently quoted on the OTCQB under the symbol “
JAMN,
” however, we currently have a volatile, sporadic and illiquid market for our common stock, which is subject to wide fluctuations in response to several factors, including, but not limited to:
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actual or anticipated variations in our results of operations;
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our ability or inability to generate new revenues;
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increased competition; and
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conditions and trends in the market for coffee and coffee related products.
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Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price and liquidity of our common stock.
Investors may face significant restrictions on the resale of our common stock due to federal regulations of “
penny stocks.
”
We are subject to the requirements of Rule 15(g)9, promulgated under the Exchange Act, as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the SEC defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protections against interested director transactions, conflicts of interest and similar matters.
The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and NYSE MKT Exchanges and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures.
Because our Directors are not independent directors, we do not currently have independent audit or compensation committees. As a result, our Directors have the ability to, among other things, determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and any potential investors may be reluctant to provide us with funds necessary to expand our operations.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, Directors and members of board committees required to provide for our effective management as a result of the Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of Directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.
We have reported several material weaknesses in the effectiveness of our internal controls over financial reporting, and if we cannot maintain effective internal controls or provide reliable financial and other information, investors may lose confidence in our SEC reports.
We reported material weaknesses in the effectiveness of our internal controls over financial reporting related to the lack of segregation of duties and the need for a stronger internal control environment. In addition, we concluded that our disclosure controls and procedures were ineffective and that material weaknesses existed in connection with such internal controls. Specifically, management identified the following control deficiencies that represent material weaknesses at January 31, 2014:
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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;
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inadequate segregation of duties due to limited number of personnel, which makes the reporting process susceptible to management override;
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insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements;
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ineffective controls over period end financial disclosure and reporting processes; and
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ineffective controls over the recordation of certain revenue transactions.
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Internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of our financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles, or GAAP. Disclosure controls generally include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Effective internal controls over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial and other reports and effectively prevent fraud. If we cannot maintain effective internal controls or provide reliable financial or SEC reports or prevent fraud, investors may lose confidence in our SEC reports, our operating results and the trading price of our common stock could suffer and we might become subject to litigation.
Because we are a small company, the requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Act, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company with listed equity securities, we must comply with the federal securities laws, rules and regulations, including certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act and the Dodd-Frank Act, related rules and regulations of the SEC, with which a private company is not required to comply. Complying with these laws, rules and regulations will occupy a significant amount of time of our sole director and management and will significantly increase our costs and expenses, which we cannot estimate accurately at this time. Among other things, we must:
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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;
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prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;
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maintain various internal compliance and disclosures policies, such as those relating to disclosure controls and procedures and insider trading in our common stock;
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involve and retain to a greater degree outside counsel and accountants in the above activities;
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maintain a comprehensive internal audit function; and
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maintain an investor relations function.
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In addition, being a public company subject to these rules and regulations may require us to accept less director and officer liability insurance coverage than we desire or to incur substantial costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors.