Marley Coffee reports FY results & conveys plans for FY 2016. Jammin Java (JAMN) d/b/a Marley Coffee reported financial results for the fiscal year ending January 31, 2015.
In fiscal 2015, net revenue increased 57.7% to $8.90 million versus $5.64 million in fiscal 2014, primarily due to expanded distribution into the retail grocery market and growth of other distribution channels.
Gross income increased 177% to $1,946,046 compared with $703,665; the gross profit margin expanded 940 basis points (bps) from 12.5% to 21.9%, reversing the 857 basis point contraction in fiscal 2014, which was attributable to lower initial margins on early sales as the company expanded into new markets.
During fiscal 2015, costs were better managed, and management expects the gross margin to expand during fiscal 2016 as less discounts and deductions are anticipated (since there will be less emphasis to gain initial shelf space) and as certain key customer accounts will be supplied directly (which will result in Marley Coffee capturing typical distributor’s 14% gross margin).
In an End-of-Year Letter to Shareholders issued in late February, management projected gross revenues would be approximately $10 million and gross profit approximately $2.4 million.
However, reported gross revenues were 4% below management’s forecast and gross profit 19% below the preliminary projection. Concerning the top-line gap, adherence to accounting principles moved approximately $300,000 of revenues from the fourth quarter of fiscal 2015 to the first quarter of fiscal 2016 since bad weather delayed the shipments of products in the Northeast.
Gross profit was impacted not only by the lower revenues, but also by lower gross margin product being sold in the fourth fiscal quarter.
Operating expenses increased $5.18 million (or 98.8%), which was driven by a $2.14 million increase (or 211%) in selling and marketing expenses principally from undertaking additional advertising campaigns in new markets.
Management again anticipates significant marketing expenses throughout fiscal 2016 in order to build brand awareness, to stimulate trial and to expand the customer base. Compensation and benefit expenses increased $2.17 million (or 94.3%) to $4.47 million with less than half being paid in cash and the remainder being paid with the issuance of stock and options d in consideration for services rendered by officers, directors, employees and consultants.
Jammin Java continues accrue salaries (or pay such salaries in common shares) in order to utilize cash on hand to fund the company’s operations and growth. General and administrative expenses increased $875 thousand to $2.81 million.
The 45.3% increase being less than the 57.7% net revenue increase indicates that economies of scale are starting to be observed in the G&A line.
The company’s net loss expanded from $6.70 million ($0.07 per diluted share) to $10.28 million ($0.09 per diluted share) to as average weighted shares outstanding increased 28.7% from 93.4 million to 120.2 million, primarily through the final settlement of the Ironridge Global Partners transactions (which extinguished $4.8 million of accounts payable and accrued expenses through the issuance of common shares), and secondarily from the equity purchase of 7,333,529 Units by Mother Parkers in April 2014. Shares outstanding increased by 20,606,538 shares (or 19.8%) from 104,085,210 to 124,691,748.
Working capital deteriorated to a deficit $1.23 million from a surplus of $1.61 million at the end of fiscal 2014. Total stockholders’ equity declined from$2,854,948 to a deficit of $93,847.
However, management anticipates that the company’s cash position, expected revenues and potential capital raises (debt, equity and/or bank financings) will be sufficient to meet Marley Coffee’s working capital needs for the next 24 months.
For the fourth fiscal quarter, gross revenue increased 90.1% to $2.51 million versus $1.32 million in the comparable fiscal quarter last year. Other comparative analysis for the fourth fiscal quarter are distorted by year-end adjustments that occurred in the fourth quarter in fiscal 2014, which were primarily related to aggregate adjustments made throughout the year for manufacturer allowances, discounts and promotions.
Management continues to anticipate that gross revenues during fiscal 2016 to approximate $17 million with most of the growth being expected to occur in the second half of the year.
The projection is based on several drivers: increasing average SKUs per store from the current 3 to 4, generating trial and repeat through marketing and sampling partnerships, and growing the international business. Marley Coffee has distribution reach into over 8,700 stores in North America (7,200 stores in the US and 1,500 in Canada).
This fiscal year, management plans to focus on existing accounts. Promotions and trial programs instituted during fiscal 2015 increased product velocity, especially at some larger accounts like Kroger, Safeway and HEB. Internationally, Marley Coffee continues to gain traction through the efforts of partners.
For example, last month, the company announced distribution expansion in Chile with two foodservice chains in Chile (Castaño with over 80 coffee shops and 44 of 53 Subway® sandwich stores in Chile), several major grocery retailers (including 100 Unimarc stores and 50 Tottus supermarkets) and Wal-Mart Stores (initially at over 30 locations with potential to expand to an additional 120 stores in Chile). In North America, the launch of Recyclable RealCups is anticipated with the first shipments expected in July, five years ahead of Keurig.
Financially, management’s goal is to generate positive EBITDA this fiscal year ending January 31, 2016. Though the first two quarters of fiscal 2016 are anticipated to have negative EBITDA, net income losses are expected to narrow as a result of the company’s focus on existing accounts. In the third and fourth fiscal quarters, management believes EBITDA will turn positive to such an extent that EBITDA for the year ending January 31, 2016 will also be positive. Obviously, the launch of Recyclable RealCups in July is expected to meaningfully contribute to management’s forecast. The gross profit margin is expected to be in the 25%-to-30% range.
The price target is based on price-to-sales (P/S) valuation methodology. Jammin Java is a small-capitalization company, currently with negative profitability, but with an expected sales profile that should continue to grow rapidly as the company’s coffee products begin to appear on more grocery shelves and the OCS channel increases brand awareness.
Price-to-sales valuation incorporates the company’s ability to generate revenues with the expectation that ultimately the growing revenue stream will manifest itself into positive earnings when the break-even point is surpassed.
Jammin Java’s revenue profile is expected to continue experiencing rapid growth. In the valuation process, it is important to incorporate a mechanism which takes into account that Jammin Java is experiencing solid double-digit revenue growth.
The P/S valuation range for comparable coffee-related companies with moderately growing sales profiles (relative to Jammin Java) is between 3.4 and 6.4 times TTM revenues with a mean P/S valuation of 4.7 times, namely Starbucks, Green Mountain Coffee Roasters and Dunkin Brands. Tim Hortons was recently acquired by Burger King Canada at 4.0 times TTM sales.
Since Jammin Java has the potential and is expected to generate meaningful increased revenues over the upcoming quarters, the price target is based on a price-to-sales ratio valuation using estimated forward revenues.
Given the company’s exposure to the attractive premium coffee industry, extremely strong revenue growth exhibited by reported financial results and this fiscal year’s plan to increase sales velocity, we are projecting TTM revenues of $14.4 million through October 2015.
Based on evaluating current price-to-sales multiples of comparable companies within the industry and an expectation that Jammin Java will be valued at 4.7 times projected TTM sales, our target for Jammin Java is $0.54
