JAMN Jammin Java Corp (PK)

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 b y 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:

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

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:

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

*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:

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.