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EX-31.1 - EXHIBIT 31.1 - JAVA DETOUR INC. | ex311.htm |
EX-32.1 - EXHIBIT 32.1 - JAVA DETOUR INC. | ex321.htm |
EX-31.2 - EXHIBIT 31.2 - JAVA DETOUR INC. | ex312.htm |
EX-32.2 - EXHIBIT 32.2 - JAVA DETOUR INC. | ex322.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
þ
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the fiscal year ended December 31, 2008
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
Commission
file number: 000-52357
JAVA
DETOUR, INC.
(Exact
name of small business issuer as specified in its charter)
Delaware
|
20-5968895
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Identification No.)
|
1550
Bryant Street Suite 725
San
Francisco, CA
|
94103
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(415)
241-8020
(Issuer’s
telephone number, including area code)
Securities
registered pursuant to Section 12(g) of the Exchange Act:
Common
Stock, par value $0.001 per share
(Title of
Class)
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o No x.
Indicate
by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes o No x
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and no
disclosure will be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definition of “accelerated filer,” “large accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one)
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer
o
Smaller reporting
company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x
The
aggregate market value of the registrant’s shares of voting and non-voting stock
held by non-affiliates of the registrant at June 30, 2008 was $5,049,448; for
purposes of this calculation only, “affiliates” of the registrant include its
directors, officers, and any beneficial holder of 10% or more of the
registrant’s outstanding common stock. Such value was computed by reference to
the bid price of the registrant’s shares of common stock at June 30, 2008. The
registrant’s shares of common stock are quoted in the Pink Sheets under the
symbol “JVDT.” No established trading market for the registrant’s common stock
has developed and management believes that the bid and ask price of the shares
may not accurately reflect the value of the registrant.
The
number of shares outstanding of the registrant’s common equity as of March 31,
2009 was 33,768,823.
Documents
incorporated by reference: None
TABLE
OF CONTENTS
Page
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PART
I
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1
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||||||
ITEM
1.
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DESCRIPTION
OF BUSINESS
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1
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|||||
ITEM
2.
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DESCRIPTION
OF PROPERTIES
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14
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|||||
ITEM
3.
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LEGAL
PROCEEDINGS
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14
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|||||
ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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15
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PART
II
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15
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||||||
ITEM
5.
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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15
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
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18
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ITEM
8.
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FINANCIAL
STATEMENTS
|
26
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
27
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|||||
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
28
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PART
III
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29
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||||||
ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSON AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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29
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ITEM
11.
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EXECUTIVE
COMPENSATION
|
31
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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34
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
35
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ITEM 14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
36
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|||||
PART
IV
|
|||||||
ITEM
15.
|
EXHIBITS
|
37
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|||||
SIGNATURES
|
39
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form
10-K contains “forward-looking” statements including statements regarding our
expectations of our future operations. For this purpose, any statements
contained in this Form 10-K that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, words
such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” or
“continue” or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially depending on a variety
of factors, many of which are not within our control. These factors include, but
are not limited to, economic conditions generally and in the industry and areas
in which we compete, including competition from much larger competitors, and the
failure by us to raise additional capital to fund our operations and satisfy
creditors. In addition, these forward-looking statements are subject, among
other things, to our successful addition of stores and franchises; successful
advancement of joint ventures with other companies. Except as required by law,
we undertake no obligation to announce publicly revisions we make to these
forward-looking statements to reflect the effect of events or circumstances that
may arise after the date of this report. All written and oral forward-looking
statements made subsequent to the date of this report and attributable to us or
persons acting on our behalf are expressly qualified in their entirety by this
section.
ADDITIONAL
INFORMATION
We are
subject to the information and periodic reporting requirements of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) and in accordance with the
Exchange Act, we file annual, quarterly and special reports, and other
information with the Securities and Exchange Commission (the “SEC”). These
periodic reports and other information are available for inspection and copying
at the regional offices, public reference facilities and website of the SEC
referred to below.
Statements
contained in this Annual Report about the contents of any contract or any other
document that is filed as an exhibit are not necessarily complete, and we refer
you to the full text of the contract or other document filed as an exhibit. A
copy of annual, quarterly and special reports and related exhibits and schedules
may be inspected without charge at the Public Reference Room maintained by the
Board of Directors at 100 F Street, N.E., Washington, D.C. 20549, and copies of
such reports may be obtained from the Board of Directors upon payment of the
prescribed fee. Information regarding the operation of the Public Reference Room
may be obtained by calling the Board of Directors at 1-800-SEC-0330. The Board
of Directors maintains a web site that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the SEC. The address of the site is
www.sec.gov.
PART
I
ITEM
1. DESCRIPTION OF BUSINESS
History
Java
Detour, Inc. (the Company) is a Delaware corporation with its common stock
listed on the Pink Sheets and publicly traded under the symbol (JVDT). The
Company owns, operates, and franchises Java Detour gourmet retail coffee stores
through its wholly owned subsidiaries JDCO, Inc., a California corporation
(“JDCO”), and Java Detour Franchise Corp., a California corporation (“JDCO
Subsidiary”) a wholly owned subsidiary of JDCO, and franchisor of Java Detour
stores. The Company currently holds class 30 and 42 trademarks on its name, Java
Detour, and logo domestically as well as a variety of class 30 and 43
registrations in multiple international markets.
Java
Detour stores specialize in providing fast and convenient customer service and
sell high quality gourmet coffees, whole leaf teas, cold blended beverages,
fresh fruit smoothies and select food in uniquely designed retail stores. The
first Java Detour store opened in California in 1995. The Company
currently has 23 retail stores- 9 company-owned and 14 franchised
stores.
Java
Detour’s business also includes buying, blending and overseeing the roasting of
high quality coffee beans. We currently license a third party to perform these
functions. We have worked for over 15 years to find the perfect blend of unique
coffee beans and the
roasting techniques to create some of the best tasting coffees in the world with
perfectly balanced acidity, aroma, body and flavor. Java Detour’s
Roast Masters source beans worldwide from the best known coffee growing regions
including Yirgacheffe Ethiopia, Sumatra, Brazil, Columbia, and
Guatemala. All Java Detour coffees are micro-batch roasted which is
generally accepted as the highest quality roasting technique. Batch roasting
captures the distinct characteristics of each coffee growing region to ensure
unique and delicious coffee. Java Detour’s delicious coffees can only
be found in Java Detour stores.
1
After
operating privately since 1995, on November 30, 2006, Java Detour, its
wholly-owned subsidiary Java Acquisition Co., Inc. (“Merger Sub”) and JDCO
entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant
to which JDCO would be acquired by Java Detour in a reverse merger transaction
wherein Merger Sub would merge with and into JDCO, with JDCO being the surviving
corporation, and the shareholders of JDCO would exchange their shares of JDCO
common stock for shares of Java Detour common stock (the “Merger”) on a 2.962
for 1 basis. On November 30, 2006, the Merger closed and JDCO became
a wholly−owned subsidiary of the Company. The Company changed its
name from Media USA.com, Inc. to Java Detour, Inc. and reincorporated in the
state of Delaware further to an 8-for-1 exchange ratio. The Company’s executive
offices are located at 1550 Bryant St. Suite 725, San Francisco, CA
94103. The Company telephone number is (415)-241-8020. The
Company also maintains a website at www.javadetour.com
As the
economic conditions in the United States, particularly in California, has
broadened and intensified, many sectors of the economy have been adversely
impacted. As a retailer that is dependent upon consumer discretionary spending,
we endured an extremely challenging fiscal 2009 year because our customers had
less money for discretionary purchases as a result of job losses, foreclosures,
bankruptcies, reduced access to credit and sharply falling home prices. The
resulting decreases in customer traffic, or average value per transaction,
negatively affected our financial performance as reduced
revenues.
We are
reorganizing the Company’s business, including restructuring its balance sheet,
reducing costs and implementing a revised strategic plan. These initiatives may
include restructuring actions, a business combination or merger with a strategic
or financial investor and the divestiture of certain assets and
operations. We cannot predict the form or our reorganization, if we
will be successful in our reorganization or if we will achieve profitability in
the future.
Unless
the context otherwise requires, the terms, “Company,” “we,” “us,” “our,” and
“Java Detour” as used throughout this Annual Report refer to Java Detour,
Inc.
Overview
In a very
competitive industry, we believe Java Detour stores successfully compete with
other coffee retailers by continuing to offer premium coffees and excellent
proprietary frozen beverages, fast friendly service, superior convenience,
affordable, turn-key franchise opportunities, and distinct and proprietary menu
offerings. As a boutique brand preparing for national and international
expansion, we believe we have to address our competition with efficient and
consistent execution of our core competencies including consistent preparation
of excellent quality products, high speed drink preparation, specialized
training procedures, and excellent customer service.
Java
Detour also has significant expansion opportunity and possible competitive
advantage with its recently signed Co-Branding and Reciprocal Development
Agreements with Mrs. Fields Famous Brands, franchisor of over 1,200 franchised
and licensed stores throughout the U.S. and internationally under the names Mrs.
Fields Cookies and TCBY Yogurt. The Java Detour/ Mrs. Fields Famous
Brands Reciprocal Development Agreement allows current and future franchisees of
Java Detour, Mrs. Fields and TCBY to open franchise stores that promote and sell
all three brands in the same location. The partnership also provides
Java Detour the potential to sell its coffee products to existing and future
Mrs. Fields and TCBY franchisees.
Java
Detour, Mrs. Fields and TCBY have begun opening co- and tri-branded
stores. The first tri-brand store opened October 3rd
2009, in the main lobby of the Flamingo Hotel and Casino in Las Vegas,
Nevada. The second co-branded Java Detour/Mrs. Fields store opened in New
York City on December 9, 2009. Additional multi-branded stores are
planned to open in early 2010.
2
Retail
Stores
As of
December 31, 2008, our total number of stores includes 11 company-owned and 9
franchised retail outlets. As of December 31, 2009, our total number
of stores includes 9 company-owned and 14 franchised retail outlets at the
following locations:
Company
Store Locations
|
Franchise
Store Locations
|
|||
1.
|
Auburn,
CA
|
1.
|
Rochester
(#1), MN
|
|
2.
|
Bakersfield,
CA
|
2.
|
Rochester
(#2), MN
|
|
3.
|
Chico
(#1), CA
|
3.
|
La
Crosse (#1), WI
|
|
4.
|
Chico
(#2), CA
|
4.
|
La
Crosse (#2), WI
|
|
5.
|
Citrus
Heights, CA
|
5.
|
Madison,
WI
|
|
6.
|
Red
Bluff, CA
|
6.
|
Las
Vegas (Molasky), NV
|
|
7.
|
Redding,
CA
|
7.
|
Las
Vegas (Pecos), NV
|
|
8.
|
San
Francisco, CA
|
8.
|
Las
Vegas (Flamingo), NV
|
|
9.
|
San
Rafael, CA
|
9.
|
Marysville
(#1), CA
|
|
10.
|
Marysville
(#2), CA
|
|||
11.
|
Yuba
City, CA
|
|||
12.
|
West
Hollywood, CA
|
|||
13.
|
New
York, NY
|
|||
14.
|
Dublin,
Ireland
|
The
following table sets forth our revenues for the years ended December 31, 2008
and 2007 in U.S. dollars:
Year
ended
December 31, 2008
|
Year ended
December 31, 2007
|
|||||||
Company-owned
Store Revenues*
|
$ | 6,592,312 | $ | 6,127,951 | ||||
Franchise
Fees and Royalties
|
1,049,230 | 342,176 | ||||||
Total
|
$ | 7,641,542 | $ | 6,470,127 |
*Company-owned store revenues include
the revenues of stores open for less than a year.
3
Company-Owned
Stores
Our first
Java Detour drive-through gourmet beverage store opened in California in 1995.
As of December 31, 2009, we owned and operated 9 corporate stores. We believe
that with each new Java Detour store opening, brand awareness and customer
loyalty will continue to grow.
Strategic
Partnership
The
Company has executed a Co-Branding Agreement and a Reciprocal Development
Agreement with Mrs. Fields Famous Brands, LLC, franchisor of over 1,200 Mrs.
Fields Cookies and TCBY yogurt stores. The agreement allows current
and future franchisees of Mrs. Fields, TCBY and Java Detour to open franchise
stores that promote and sell all three brands in the same
location. The first tri-branded store offering Java Detour coffees,
Mrs. Fields cookies and TCBY yogurts opened at the Flamingo Hotel and Casino in
Las Vegas, Nevada on October 3, 2009. A second Java Detour/Mrs. Fields store
opened on December 9, 2009 at 39th
Street and 3rd
Avenue in New York, New York. We cannot predict whether or not we
will open any additional stores with Mrs. Fields or TCBY yogurt
stores.
Franchised
Stores
The Java
Detour® franchise opportunity attracts individuals seeking single store
ownership, larger area developments and multi-unit operators interested in
co-branding opportunities or brand portfolio expansion. We sold our first
franchise Area Development Agreement in Minnesota and Wisconsin in 2000. In
September 2006, we sold our first international Area Development Agreement for
the rights to franchise Java Detour® stores throughout Ireland with additional
options to franchise in the United Kingdom pursuant to a master licensing
agreement. Since then, we have also sold development agreement rights to
franchisees in Colorado, Kuwait, Dubai, China and other Middle Eastern
countries.. As of December 31, 2009, we have 14 franchised stores in
operation. The China Area Development Agreement has been
terminated.
We
evaluate and develop franchising opportunities based upon specific criteria,
including demographics, traffic counts, competition, branding and marketing
opportunities, and financial considerations. Franchisees must have sufficient
financial and operating experience and abilities and their stores must
consistently maintain our high brand standards and professional business
practices. Franchising also offers challenges, including additional regulatory
burdens, sharing of financial rewards with the franchisees and maintaining brand
and operating standards in stores that are not operated by our corporate
employees. Certain real estate may not fit the profile of a company-owned store
location but may be appropriate for a franchised location. Further, certain
geographic markets may not be targeted for new company-owned stores in the near
future, but may be good markets for immediate franchising. The Company is
currently updating its FDD (Franchise Disclosure Document). Until the
Company files an updated FDD we cannot sell additional franchises.
Pursuant
to our franchise agreements, we assist franchisees in areas such as support
services, seasonal marketing programs, product sourcing, operations training and
basic business consultation. We are required to provide our franchisees with an
operation manual, site selection support, proprietary products and supplies, and
guidelines for store build out requirements. We have established an
intensive in-house training program for our franchisees which includes two weeks
of hands-on in store training on operations, coffee knowledge, merchandising,
buying, inventory controls and accounting procedures. We work closely with
franchisees on store operations; we also monitor franchise customer feedback on
product quality and customer service to ensure that franchisees maintain our
high brand standards.
4
Growth
Strategy
Our
business objective is to establish the Java Detour® brand as a successful
nationally and internationally recognized retail and wholesale gourmet coffee
concept. We plan continued strategic expansion of our retail operations while
simultaneously working to create other outlets and distribution points for sales
of our freshly roasted whole bean coffees and other related proprietary
products.
The
Company has significant growth opportunities that we intend to pursue by
implementing the following strategies:
Accelerate
franchise store openings. The
Company intends to accelerate new franchise store openings, focusing on the
multi-branded store concept with Mrs. Fields and TCBY yogurt. The
tri-branded store concept (Java Detour, Mrs. Fields and TCBY) offers
complimentary products that drive sales from early morning to late evening. The
Company plans to open tri-branded stores both domestically and
internationally.
Implement our
improved site selection process. Substantial management resources have
been devoted to improving our site selection process. New franchise store
openings will primarily target markets where there is currently either Java
Detour, Mrs. Fields or TCBY stores already open to capitalize on existing market
share and support resources. Further, we will only target new markets
where customers will welcome and routinely purchase from the co and tri-branded
stores. Additionally, our site selection strategy will target high-traffic urban
and suburban locations with a new emphasis on non-traditional captured audience
locations such as casinos, hotels, airports, sports arenas and college
campuses. We will target franchise growth on existing Mrs. Fields and
TCBY stores where the existing franchisee can add Java Detour to their current
operation.
Drive comparable
store sales growth by executing on our fundamental core competencies. We
intend to drive comparable store sales and average unit sales volumes by
focusing on our core competencies of excellent products, excellent customer
service and fast drink preparations. In addition, the Company will
continue to add new products both seasonally and permanently, possibly including
Mrs. Fields and TCBY products to create a competitive advantage and also to
increase average transaction rates. Over the past year, the Company implemented
a set of core improvements to our retail operations.
Leverage the Mrs.
Fields partnership and our existing infrastructure to drive margin
improvement. We believe that new economies of scale resulting from the
Mrs. Fields agreements will allow our stores to show better operating margins,
infrastructure and operating cost improvements, as well as reduced management
and administrative infrastructure, production costs, and franchise support
costs.
Expand our
wholesale coffee business . We intend to expand our geographic reach and
wholesale coffee beans sales. We also plan to sell Java Detour premium coffees
to other wholesale accounts such as casinos and hotels.
Expand
international franchise operations and opportunities. Our international
growth strategy emphasizes franchising, joint ventures and licensing
relationships with companies situated in promising foreign
markets. To further expand the Java Detour brand, the Company will
also increase its international franchise operations. Java Detour currently has
in place Area Development Agreements in Ireland, Kuwait and Dubai. These two
franchisees may, under their contract, open up to 18 stores in the next 3
years.
Target regional
and national acquisitions of existing cafes and small coffee chains. The
company will also pursue acquisitions of single owner operator cafes and also
small chains of coffee shops that are profitable and well located.
Marketing
We
believe that consumer interest in our segment and industry continues to
increase, and incremental sales occur, when customers are informed about new
Java Detour products, special offers, and the premium quality of our products.
Accordingly, our strategies include advertising and marketing at the
point-of-sale at our stores and outside of our stores. We have developed a
successful strategy of using product photos and well designed point of sales
pieces to help direct customers into the most profitable drinks and into
purchasing drinks that can only be purchased at Java Detour®
stores.
5
We employ
targeted marketing strategies to increase brand awareness and encourage trial
and repeat purchases by educating potential customers about the distinctive
qualities of Java Detour® products. Our marketing efforts also promote repeat
business by reinforcing positive experiences with our fast and friendly service.
We rely on a mixture of marketing efforts that are tailored to the specific
needs of particular markets or retail stores, including:
·
|
point-of-purchase
marketing, which encourages existing customers to try new products or
services;
|
|
·
|
direct
marketing, which includes mailings and email distributions which are
cost-effective methods to reach new customers and encourage repeat visits
from existing customers;
|
|
·
|
promotions
and local retail store marketing, which allow us to alert customers to new
products, seasonal merchandise and coupon programs; and
|
|
·
|
print
advertising, which includes advertising in newspapers and other
publications to attract new customers within a particular
market.
|
In
addition, we receive free marketing through word-of-mouth communication from our
current customers who tell their friends and colleagues about their enjoyable
Java Detour® experiences, our quality products and our fast
service.
Competition
The
retail segment of the gourmet coffee industry remains highly fragmented and,
with the exception of a small number of national competitors, contains few
companies with strong brand loyalty or a substantial national presence. In
addition to Starbucks, our primary competitors in whole bean gourmet coffee
sales are primarily regional or local market coffeehouses, such as Peet’s Coffee
and Tea, Coffee Bean & Tea Leaf in the California market. As we continue to
expand geographically, we expect to encounter additional regional and local
competitors including McDonalds and Dunkin Donuts.
Premium
coffee brands may serve as substitutes for our whole bean coffee and we also
compete indirectly against all other coffee brands on the market. In
addition to competing with other distributors of whole bean coffee, we compete
with retailers of prepared beverages, including other coffeehouse chains,
numerous convenience stores, restaurants, coffee shops and street
vendors.
Despite
competing in a fragmented market, consumer demand has continued to rise and, as
a result, gourmet coffee brands continue to develop across multiple distribution
channels. Several competitors are aggressive in obtaining distribution in
specialty grocery and gourmet food stores, and in office, restaurant and food
service locations.
We
believe that our customers choose among gourmet coffee brands based upon the
quality and variety of the coffee and other products, atmosphere, convenience,
customer service and, to a lesser extent, price. We believe that our market
share in the gourmet coffee market is based on a differentiated position built
on our specific proprietary menu offerings, superior quality, convenience and
consistently fast customer service.
Coffee
Beans
Our whole
coffee beans come from various coffee-producing regions around the world. We
purchase our coffee beans from a roaster who is directly responsible for
selecting the supplier, purchasing, roasting, packaging and distributing coffee
beans directly to our Java Detour® stores. While we typically do not enter into
exclusive supply contracts to purchase coffee beans, we do enter oral agreements
committing to purchase up to 80,000 pounds of whole bean coffee at fixed pricing
several times per year. Currently, we purchase all of our coffee beans from
Landgrove Coffee Co., a company co-owned by Jon Binninger, a brother of both
Michael (current President and Chief Operating officer) and Steven Binninger (a
Director). Michael and Steven Binninger are both acting Board
members.
Dairy
Products
We obtain
our dairy products from regional dairy suppliers. In our established markets, we
generally have arrangements with a dairy supplier under which we purchase
products for fixed prices based upon the commodity price plus a
percentage.
Other
Non-Coffee Products
We obtain
the majority of our other non-coffee products, including specialty teas, paper
and plastic goods and food items, from regional or national vendors such as
Sysco Foods Inc.
6
Government
Regulation
Each of
our retail locations and our roaster’s facility is and will be subject to
licensing and reporting requirements by a number of governmental authorities.
These governmental authorities include federal, state and local health,
environmental, labor relations, sanitation, building, zoning, fire, safety and
other departments that have jurisdiction over the development and operation of
these locations. Our activities are also subject to the Americans with
Disabilities Act and related regulations, which prohibit discrimination on the
basis of disability in public accommodations and employment. Changes in any of
these laws or regulations could have a material adverse affect on our
operations, sales, and profitability. Delays or failures in obtaining or
maintaining required construction and operating licenses, permits or approvals
could delay or prevent the opening of new retail locations, or could materially
and adversely affect the operation of existing retail locations. In addition, we
may not be able to obtain necessary variances or amendments to required
licenses, permits or other approvals on a cost-effective or timely basis in
order to construct and develop store locations in the future.
We
believe that we are in compliance in all material respects with all such laws
and regulations and that we have obtained all material licenses that are
required for the operation of the business. We are not aware of any
environmental regulations that have or that we believe will have a material
adverse effect on our operations. The Company is currently updating its FDD
(Franchise Disclosure Document). Until the Company files an updated FDD we
cannot sell additional franchises.
Intellectual
Property
Intellectual
property and other proprietary rights are considered an important part of our
success. We place high value on our Java Detour® trade name, and we own several
trademarks and service marks that have been registered with the United States
Patent and Trademark Office, including Java Detour®, “Cold Rush,” “Feel the Cold
Rush,” and “Changing the way America buys Coffee.”
The
company holds class 30 and 42 trademarks on its name, Java Detour, and logo
domestically as well as a variety of class 30 and 43 registrations in 20
international markets.
In
addition to registered and pending trademarks, we consider the packaging for our
gourmet coffee beans and the ergonomic design of our stores to be strong
identifiers of our brand. Although we consider our packaging and store design to
be essential to our brand identity, we have not applied to register these
trademarks and trade dress, and thus cannot rely on the legal protections
afforded by trademark registration, although we have substantial protection
under the existing family of marks that we have registered.
Our
ability to differentiate our brand from those of our competitors depends, in
part, on the strength and enforcement of our trademarks. We must constantly
protect against any infringement by competitors. If a competitor infringes on
our trademark rights, we may have to litigate to protect our rights, in which
case, we may incur significant expenses and divert significant attention from
our business operations.
Employees
As of
December 15, 2009, we employed 88 employees, 32 of whom are employed full-time.
Our retail stores employed 81 of our employees with the remainder in our
corporate offices, and store and franchise development and operations. None of
our employees are represented by a labor union and management believes our
relations with employees are good.
ITEM
1A RISK FACTORS
Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in this report before deciding whether to purchase our common stock.
Our business, financial condition or results of operations could be materially
adversely affected by these risks if any of them actually occur. Some of these
factors have affected our financial condition and operating results in the past
or are currently affecting us. This report also contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced by us described below and
elsewhere in this report.
7
RISKS
RELATED TO OUR OPERATIONS
We
have a history of net losses and may incur losses in the
future.
We have
incurred net losses since our inception. Our net losses were $4.4 million and
$5.9 million for the years ended December 31, 2008 and 2007, respectively.
We will incur losses in 2009 and we cannot guarantee that we will be profitable
in future periods, and, even if we become profitable, we may not be able to
sustain profitability.
We
are undergoing changes in our business.
We are
reorganizing the Company’s business, including restructuring its balance sheet,
reducing costs and implementing a revised strategic plan. These initiatives may
include restructuring actions, a business combination or merger with a strategic
or financial investor and the divestiture of certain assets and
operations. We cannot predict the form or our reorganization, if we
will be successful in our reorganization or if we will achieve profitability in
the future. If we are not successful, we could declare bankruptcy or
be forced into bankruptcy by our creditors and our shares would be
worthless.
Because
our California retail stores account for a substantial portion of our net
revenue, we are susceptible to adverse trends and economic conditions in
California.
Our
California retail stores generated 76.8% of our net revenue for the year ended
December 31, 2008. We expect that our California operations will continue to
generate the substantial portion of our revenue for the foreseeable future. In
addition, our California retail stores provide us with means for increasing
brand awareness, building customer loyalty and creating a premium gourmet coffee
brand.
As the
economic conditions in the United States, particularly in California, has
broadened and intensified, many sectors of the economy have been adversely
impacted. As a retailer that is dependent upon consumer discretionary spending,
we endured an extremely challenging fiscal 2009 year because our customers had
less money for discretionary purchases as a result of job losses, foreclosures,
bankruptcies, reduced access to credit and sharply falling home prices. The
resulting decreases in customer traffic, or average value per transaction,
negatively affected our financial performance as reduced revenues.
As a
result, a worsening of economic conditions or a decrease in consumer spending in
California may not only lead to a substantial decrease in revenue, but may also
adversely impact our ability to market our brand, build customer loyalty, or
otherwise implement our business strategy.
Because
our business is highly dependent on a single product, gourmet coffee, we are
vulnerable to changes in consumer preferences and economic conditions that could
harm our financial results.
Our
business is not diversified and primarily consists of operating, and franchising
Java Detour gourmet retail coffee stores. Consumer preferences often change
rapidly and without warning, moving from one trend to another among many product
or retail concepts. Shifts in consumer preferences away from the gourmet coffee
industry would have a material adverse effect on our results of operations. Our
continued success will depend in part on our ability to anticipate, identify and
respond quickly to changing consumer preferences and economic
conditions.
We
compete with a number of companies for customers. Our business would be
adversely affected by the success of these competitors.
The
retail segment of the gourmet coffee industry remains highly fragmented and,
with the exception of Starbucks, contains few companies with strong brands. Our
primary competitors for gourmet coffee sales are other gourmet coffeehouses and
restaurants. In all markets in which we do business, there are numerous
competitors in the gourmet coffee industry, and we expect this situation to
continue. Starbucks is the gourmet coffeehouse segment leader. We also compete
with numerous convenience stores, restaurants and coffee shops and we must spend
significant resources to differentiate our customer experience (which is defined
by convenient store locations, customer service and ergonomic store design and
convenience) from the offerings of our competitors. Despite these efforts, our
competitors still may be successful in attracting our customers.
Aside
from Starbucks and McDonalds, our primary competitors in whole bean gourmet
coffee sales are primarily regional or local market coffeehouses and grocery
stores. As we continue to expand geographically, we expect to encounter
additional regional and local competitors.
Competition
in the gourmet coffee industry is becoming increasingly intense as relatively
low barriers to entry encourage new competitors to enter the market. The
financial, marketing and operating resources of these new market entrants may be
greater than our resources. In addition, some of our existing competitors have
substantially greater financial, marketing and operating resources. Our failure
to compete successfully against current or future competitors could have an
adverse effect on our business, including loss of customers, declining net sales
and loss of market share.
8
We
may need to record additional losses in the future if our stores’ operating
performances do not improve.
We are
actively managing our portfolio of stores and closing those underperforming
stores where we have been able to negotiate an appropriate termination or
sublease the locations to third parties. Further, our landlords may terminate
leases if we do not have funds to pay current and past due rental
payments. We may not be able to negotiate favorable lease termination
terms or find third parties who desire to sublease these locations. As a result,
we may incur losses as we close store locations.
Our
new retail locations may not achieve market acceptance or the same levels of
profitability in the geographic regions we enter or be profitable in existing
markets, therefore placing a significant strain on our financial resources and
potentially limiting our ability to further expand our business.
Our
expansion plans depend in large part on opening retail locations in new markets
where we may have little or no operating experience. We also intend
to accelerate new franchise store openings, focusing on the multi-branded store
concept with Mrs. Fields and TCBY, which may or may not be
successful. The success of these new locations will be affected by
the different competitive conditions, consumer tastes and discretionary spending
patterns of the new markets we enter, as well as our ability to generate market
awareness of the Java Detour® brand. Although we have opened and franchised
stores in locations in markets outside California and expect to continue to do
so, we may not achieve the same levels of profitability at these other locations
as we have with those located in California.
Our
expansion plans also depend on opening and franchising new locations in existing
markets. New locations may take longer to reach profitability, thereby affecting
our overall profitability and results of operations. Moreover, we may not
be successful in operating and franchising our new locations on a profitable
basis. In addition, our failure to achieve market acceptance or profitability at
one or more of our new retail locations could put a significant strain on our
financial resources and could limit our ability to further expand our
business.
If
we are unable to continue leasing our retail locations or obtain leases for new
stores, our existing operations and our ability to expand may be adversely
affected.
All but
two of our retail locations are presently located on leased premises. If we are
unable to renew these leases, which average between 5 to 15 years remaining on
the leases, our revenues and profits could suffer. At the end of the term of the
lease, we may be forced to find a new location to lease or close the store. Any
of these events could adversely affect our profitability. Additionally, we
intend to lease other premises in connection with the planned expansion of our
retail locations. We compete with numerous other retailers and restaurants for
coffeehouse sites in the highly competitive market for retail real
estate.
Landlords
typically evaluate the creditworthiness of a tenant and the expected sales
volume of the store location in connection with the negotiation of lease terms.
Weakening of our financial performance or financial profile, could ultimately
lead landlords to conclude that we do not meet their criteria for risk and
return, and result in our inability to negotiate leases on reasonable terms or
renew leases. As a result, we may not be able to obtain new leases, or renew
existing ones, on acceptable terms, This could adversely impact our revenue
growth and brand building initiatives in some localized markets.
Our
growth through franchising may not occur as rapidly as we currently anticipate
and may be subject to additional risks related to our lack of control over the
quality and timing of our franchised operations.
As part
of our growth strategy, we intend to continue to seek franchisees to operate
retail locations under the Java Detour® brand in selected geographic markets. We
believe that our ability to recruit, retain and contract with qualified
franchises will be increasingly important to our operations as we expand. Our
franchisees are dependent upon the availability of adequate sources of financing
in order to meet their development obligations. Such financing may not be
available to our franchisees, or only available upon disadvantageous terms. Our
franchise strategy may not enhance our results of operations. In addition,
retail store openings contemplated under our existing franchise agreements or
any future franchise agreement may not open on the anticipated development
schedule or at all.
Expanding
through franchising exposes our business and brand to risks because the quality
of franchised operations will be beyond our immediate control. Even if we have
contractual remedies to cause franchisees to maintain operational standards,
enforcing those remedies may require litigation and therefore our image and
reputation may suffer, unless and until such litigation is successfully
concluded.
The
Company is currently updating its FDD (Franchise Disclosure Document). Until the
Company files an updated FDD we cannot sell additional franchises.
9
A
significant interruption in the operation of our distribution facility or in our
coffee roaster’s operations could potentially disrupt our
operations.
We have
only one distribution facility and currently rely on only one coffee roaster to
provide roasting services to us. A significant interruption in the operation of
these facilities, whether as a result of broken equipment, a natural disaster or
other causes, could significantly impair our ability to operate the business on
a day-to-day basis.
Our
roasting methods are not proprietary, so competitors may be able to duplicate
them, which could harm our competitive position.
We
consider our roasting methods essential to the flavor and richness of our
roasted whole bean coffee and, therefore, essential to our brand. Because we do
not hold any patents for our roasting methods, it may be difficult for us to
prevent competitors from copying our roasting methods. If our competitors copy
our roasting methods, the value of the Java Detour® brand may be diminished, and
we may lose customers to our competitors. Additionally, competitors may be able
to develop roasting methods that are more advanced than our roasting methods,
which may also harm our competitive position.
Compliance
with health, environmental, safety and other governmental regulations applicable
to us could increase cost and affect profitability.
Each of
our retail locations and our roaster’s facility is and will be subject to
licensing and reporting requirements by a number of governmental authorities.
These governmental authorities include federal, state and local health,
environmental, labor relations, sanitation, building, zoning, fire, safety and
other departments that have jurisdiction over the development and operation of
these locations. Our activities are also subject to the Americans with
Disabilities Act and related regulations, which prohibit discrimination on the
basis of disability in public accommodations and employment. Changes in any of
these laws or regulations could have a material adverse affect on our
operations, sales, and profitability. Delays or failures in obtaining or
maintaining required construction and operating licenses, permits or approvals
could delay or prevent the opening of new retail locations, or could materially
and adversely affect the operation of existing retail locations. In addition, we
may not be able to obtain necessary variances or amendments to required
licenses, permits or other approvals on a cost-effective or timely basis in
order to construct and develop store locations in the future.
We
may not be able to adequately protect our intellectual property, which could
harm the value of our brand and adversely affect our sales and
profitability.
The
success of our retail locations depends in part on the Java Detour® brand,
logos, branded merchandise and other intellectual property. We rely on a
combination of trademarks, copyrights, service marks, trade secrets and similar
rights to protect our intellectual property. The success of our growth strategy
depends on our continued ability to use our existing trademarks and service
marks in order to increase brand awareness and further develop our brand in both
domestic and international markets. We also use our trademarks and other
intellectual property on the Internet. If our efforts to protect our
intellectual property are not adequate, or if any third party misappropriates or
infringes on our intellectual property, either in print or on the Internet, the
value of the Java Detour® brand may be harmed, which could have a material
adverse effect on our business. We may become engaged in litigation to protect
our intellectual property, which could result in substantial costs to us as well
as diversion of management attention.
We
will need to raise significant additional capital in order to continue and grow
our business, which subjects us to the risks that we may be unable to maintain
or grow our business as planned or that our shareholders may be subject to
substantial additional dilution.
We will
need to raise additional capital in the future to fund our working capital needs
and to continue and expand our business. We may also require additional capital
to make acquisitions of stores and complementary businesses.
We have
negative working capital of approximately $3.0 million at December 31,
2008. Further, our secured creditors hold a security interest in
substantially all of our assets. We are engaged in discussions with
our secured and unsecured creditors to design a voluntary recapitalization plan.
The goal is to continue operations and ultimately include an opportunity for our
unsecured creditors to receive some tangible consideration in settlement of
their claims, including the issuance of common stock. Certain of our
creditors have judgments against us and could attempt to enforce their judgments
and attempt to attach or levy our assets.
We do not
know if we will be able to raise additional financing or financing on terms
favorable to us. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our operations, develop and expand our
business or otherwise respond to competitive pressures would be significantly
impaired. In such a case, our stock price would likely be materially and
adversely impacted. If we do not raise the
additional capital, we may need to declare bankruptcy or we may be forced
into bankruptcy by our creditors and our shares would be worthless.
10
In
addition, if we raise additional funds through the issuance of equity or
convertible or exchangeable securities, the percentage ownership of our existing
shareholders will be reduced. These newly issued securities may have rights,
preferences and privileges senior to those of existing
shareholders.
Future
growth may make it difficult to effectively allocate our resources and manage
our business.
As we
continue to develop additional retail locations and investigate licensing
opportunities, we will need to allocate our resources effectively. Our growth
has and will continue to increase our operating complexity and the level of
responsibility for new and existing management. Our anticipated growth could
place a strain on our management, production, financial and other resources. We
cannot assure you that we will be able to manage any future growth effectively.
Any failure to manage our growth effectively could have an adverse effect on our
business, financial condition and results of operations. Our ability to compete
effectively and to manage our recent and future growth effectively will depend
on our ability to implement and improve financial and management information
systems on a timely basis and to effect changes in our business, such as
implementing internal controls to handle the increased size of our operations
and hiring, training, developing and managing an increasing number of
experienced management-level and other employees. Unexpected difficulties during
expansion, the failure to attract and retain qualified employees or our
inability to respond effectively to recent growth or plan for future growth
could adversely affect our ability to implement our business strategy or our
results of operations.
We
depend on key members of our management and will need to add and retain
additional management and other personnel in order to effectively compete in our
industry.
The
success of our business to date has been, and our continuing success will be, to
a large degree dependent on the continued services of our executive officers,
including Michael Binninger, and other key personnel who have extensive
experience in the gourmet coffee industry. If we lose the services of any of
these integral personnel and fail to manage a smooth transition to new
personnel, our business would suffer. The Company currently does carry key
person life insurance on one of its executive officers.
The
success of our business also depends on our ability to attract and retain highly
motivated, well-qualified management and other personnel, including technical
personnel and retail employees. We face significant competition in the
recruitment of qualified employees and there can be no assurance that we will be
able to retain our existing personnel or attract additional qualified employees.
The loss of key personnel or the inability to hire and retain additional
qualified management and other personnel in the future could have a material
adverse effect on our business, financial condition and results of
operation.
RISKS
RELATED TO OUR INDUSTRY
A
shortage in the supply, or an increase in the price, of coffee beans could
adversely affect our net sales.
The
supply and price of whole coffee beans are subject to significant volatility.
Although most coffee beans are traded in the commodity market, the green coffee
beans we buy tend to trade on a negotiated basis at a substantial premium above
commodity coffee prices, depending upon the supply and demand at the time of
purchase. Supply
and price can be affected by multiple factors in the producing countries,
including weather, natural disasters, political and economic conditions or civil
unrest or strikes due to the poor conditions imposed on many coffee farmers. In
addition, coffee bean prices have been affected in the past, and may be affected
in the future, by the actions of certain organizations and associations that
have historically attempted to influence commodity prices of coffee beans
through agreements establishing export quotas or restricting coffee supplies
worldwide. Our ability to raise sales prices in response to rising coffee bean
prices may be limited, and our profitability could be adversely affected if
coffee bean prices were to rise substantially. Moreover, passing price increases
on to our customers could result in losses in sales volume or margins in the
future. Similarly, rapid sharp decreases in the cost of coffee beans could also
force us to lower sales prices before we have realized cost reductions in our
coffee bean inventory.
Adverse
publicity regarding customer complaints may negatively impact our brand image
and therefore harm our business.
We may be
the subject of complaints or litigation from customers alleging beverage and
food-related illnesses, injuries suffered on the premises 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.
11
Shortages or interruptions in the
delivery of food products could adversely affect our operating
results.
We, and
our franchisees, are dependent on frequent deliveries of food products that meet
our specifications. Interruptions in the delivery of food products caused by
unanticipated demand, problems in production or distribution, disputes with our
suppliers, or our distribution service providers, inclement weather (including
hurricanes and other natural disasters) or other conditions. Any of
these factors could adversely affect the availability, quality and cost of
ingredients, which would adversely affect our operating results.
RISKS
RELATED TO OUR CAPITAL STRUCTURE
There
is no assurance of an established public trading market, which would adversely
affect the ability of investors to sell their securities in the public
market.
Although
our common stock is quoted in the Pink Sheets, a regular trading market for the
securities may not be sustained in the future. Quotes for stocks listed on the
Pink Sheets are not listed in the financial sections of newspapers and
newspapers generally have very little coverage of stocks listed solely on the
Pink Sheets. Accordingly, prices for and coverage of securities traded solely on
the Pink Sheets may be difficult to obtain. In addition, stock traded solely on
the Pink Sheets tend to have a limited number of market makers and a larger
spread between the bid and ask prices than those listed on the NYSE, AMEX or
NASDAQ exchanges, or the OTC.BB. All of these factors may cause holders of our
common stock to be unable to resell their securities at or near their original
offering price or at any price.
Market
prices for our common stock will be influenced by a number of factors,
including:
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changes
in interest rates;
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competitive
developments, including announcements by competitors of new products of
services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments;
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variations
in quarterly operating results;
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changes
in financial estimates by securities analysts;
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the
depth and liquidity of the market for our common stock;
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investor
perceptions of our company; and
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general
economic and other national
conditions.
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The
market price for our common stock may be volatile.
Our stock
price has been, and is expected to continue to be, highly volatile. There could
be an immediate adverse impact on our stock price as a result of any future
sales of our common stock or other securities; a decline in any quarter of our
net sales or earnings; or changes in market valuation of other companies in the
same or similar markets. Furthermore, future market fluctuations may
cause our stock price to fall regardless of our performance. Such volatility may
limit our future ability to raise additional capital.
Our
principal shareholders have significant influence over our company and their
interests may differ from the interests of our other stockholders.
Our board
of directors, Michael Binninger, Ronald Sands, and Steven Binninger, and their
respective affiliates, beneficially own, in the aggregate, 27.3% of our
outstanding shares. As a result, these principal shareholders possess
significant influence over the election of the Board of Directors and to the
approval of significant corporate transactions. Such share ownership and control
may also have the effect of delaying or preventing a future change in control,
impeding a merger, consolidation, takeover or other business combination or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company. The interests of these principal
shareholders may differ from the interests of our other
shareholders.
12
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
Our
internal control over financial reporting or disclosure controls and procedures
may have weaknesses and conditions that need to be addressed, the disclosure of
which may have an adverse impact on the price of our common stock. We are
required to establish and maintain appropriate internal controls over financial
reporting and disclosure controls and procedures. Failure to establish those
controls, or any failure of those controls once established, could adversely
impact our public disclosures regarding our business, financial condition or
results of operations. In addition, management’s assessment of internal controls
over financial reporting or disclosure controls and procedures may identify
weaknesses and conditions that need to be addressed in our internal controls
over financial reporting, disclosure controls and procedures or other matters
that may raise concerns for investors. Any actual or perceived weaknesses and
conditions that need to be addressed in our internal control over financial
reporting, disclosure controls and procedures may have an adverse impact on the
price of our common stock.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the United States public
markets and related public reporting obligations. Our management team will need
to invest significant management time and financial resources to comply with
both existing and evolving standards for public companies, which will lead to
increased general and administrative expenses and a diversion of management time
and attention from revenue generating activities to compliance
activities.
Our
disclosure controls and procedures and internal control pursuant to
Section 404 of the Sarbanes-Oxley Act over financial reporting may not be
effective in future periods, as a result of weaknesses in internal
controls.
In
preparing our financial statements in prior years, management identified
weaknesses in our internal control over financial reporting that adversely
affected our ability to initiate, authorize, record, process, or report external
financial data reliably in accordance with generally accepted accounting
principles. If we fail to identify or are unable to adequately remediate future
weaknesses, or if reductions in workforce create new weaknesses due to under
staffing, investors could lose confidence in the accuracy and reliability of our
financial statements, which would cause the market price of our stock to decline
and could lead to stockholder litigation.
Our
common stock is considered a “penny stock,” and is thereby subject to additional
sale and trading regulations that may make it more difficult to
sell.
Our
common stock is considered to be a “penny stock” because it does not qualify for
one of the exemptions from the definition of “penny stock” under Section 3a51-1
of the Exchange Act. Our common stock may be a “penny stock” if it meets one or
more of the following conditions (i) the stock trades at a price less than $5.00
per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it
is not quoted on the Nasdaq Capital Market, or even if so, has a price less than
$5.00 per share; or (iv) is issued by a company that has been in business less
than three years with net tangible assets less than $5.0 million.
The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor’s account. Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
13
We
do not foresee paying cash dividends in the foreseeable future.
We
currently intend to retain any future earnings for funding growth, and do not
anticipate paying any dividends in the foreseeable future. As a result,
investors should not rely on an investment in our securities if they require
dividend income. Capital appreciation, if any, of our shares may be investors’
sole source of gain for the foreseeable future. Moreover, stockholders may not
be able to resell their shares in our company at or above the price paid for
them.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
Substantial
sales of our common stock in the public market, or the perception that such
sales could occur, could result in the drop in the market price of our
securities and make it more difficult for us to complete future equity
financings on acceptable terms, if at all, by introducing a large number of
sellers to the market. As of December 31, 2008, we had 33,768,823 shares of our
common stock outstanding.
From time
to time, certain of our stockholders may be eligible to sell all or some of our
shares of common stock by means of ordinary brokerage transactions in the open
market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”),
subject to certain limitations. In general, pursuant to Rule 144, a stockholder
(or stockholders whose shares are aggregated) who has satisfied a six-month
holding period may, under certain circumstances, sell within any three-month
period a number of securities which does not exceed the greater of 1% of the
then outstanding shares of common stock or the average weekly trading volume of
the class during the four calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of securities, without any
limitations, by a non-affiliate that has satisfied a one-year holding period.
Any substantial sale of common stock pursuant to any resale prospectus or Rule
144 may have an adverse effect on the market price of our common stock by
creating an excessive supply.
ITEM
2. DESCRIPTION OF PROPERTIES
Our
executive offices and franchise training facility is located in San Francisco,
California, in a leased facility consisting of approximately 1,843 square feet.
Pursuant to our lease agreement expiring on April 30, 2012, we pay a base rent
of $4,800 per month, subject to adjustment pursuant to the terms of the lease
agreement, to lease our offices.
We also
lease all but two of our company-owned store facilities. All of our existing
leases for such facilities are for 2 to 15 years with none
of such leases scheduled to expire before 2009 and the majority of those leases,
including tenant options, do not expire for at least 10 years.
Additionally, we have the option to renew all but two of the leases for a
significant renewal term. One of these leases is currently operating on a month
to month basis while new terms are negotiated. We regularly evaluate the
economic performance of our company-owned stores and, when feasible, close or
sell ones that do not meet our expectations. In reviewing economic performance,
we typically review profitability and sales growth of each of our company-owned
stores on a continuous basis. In conjunction with this review, we also analyze
cash flows from operations to determine the impact of a particular store’s cash
contribution on our overall financial health. We also consider certain
intangible variables such as the consumer brand recognition generated by a
particular store before making the decision to sell an otherwise underperforming
store. In the event that we determine that a particular store location is not,
and cannot be, managed to provide an economic benefit to us, then we close or
sell such store. To date, we have sold one underperforming store and closed four
others. As of December 15, 2009 we are in default on all of our leases as a
result of delinquent lease payments. Management is working with our landlords on
lease amendments, lease extensions and lease terminations and will become
current on its rental payments if and when funds become available.
ITEM
3. LEGAL PROCEEDINGS
The
Company is in default on three notes due to secured parties totaling $1,364,226
including accrued interest at December 31, 2008. The amount of these notes is
due on demand. The three creditors have entered into a stipulated judgment with
the Company for the amount due (see Note 6).
Since
December 31, 2008 five of the Company’s creditors have been granted default
judgments against the Company for $643,273. All of these judgments have been
accrued by the Company in accounts payable in the financial statements. They are
comprised of:
On June
30, 2009 a suit claimed damages against the Company of $165,336. The full amount
is recorded as a long-term note payable as of December 31, 2008 (see Note 7).
The Company entered into a stipulated judgment with the plaintiff in 2009. The
Company is in default of the stipulated judgment.
On
September 9, 2009 a suit claimed damages against the Company of $300,000 for
reimbursement of funds advanced to the Company. On December 30, 2009 a default
judgment was granted for $363,173, which includes penalty interest and legal
fees.
14
On
November 24, 2009 the Labor Commissioner of the State of California ordered
payment of $21,427, including penalties, to a former employee of the
Company.
In 2008 a
suit claimed damages against the company of $90,000 for unpaid bills related to
professional services. A default judgment was granted.
In 2008 a
suit claimed damages against the company for unpaid bills related to
professional services. A default judgment was filed January 28, 2009 for
$8,337.
As of
December 31, 2009, the Company is delinquent in each of its leases.
Management is working with our landlords on lease amendments, lease extensions
and lease terminations and will become current on its rental payments as soon as
funds are available. Since December 31, 2008, four of the Company’s landlords
had filed suit against the company for unpaid rent amounts. As of December 31,
2009 two of these claims had been dismissed or resolved and two are pending
resolution. Their combined claim amount is $58,499.
The
Company is party to various other legal proceedings arising in the ordinary
course of its business and for collection of past due payables, but it is not
currently a party to any legal proceeding that management believes would have a
material adverse effect on its consolidated financial position.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
shares of common stock are currently quoted for trading on Pink Sheets under the
symbol “JVDT.” The following table shows the high and low bid prices for our
common stock on Pink Sheets for each quarter over the last two fiscal years. The
following quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions:
2007
|
|||||||
High
|
Low
|
||||||
Quarter
ended:
|
|||||||
March 31,
2007
|
2.50
|
2.00
|
|||||
June 30,
2007
|
2.90
|
2.50
|
|||||
September 30,
2007
|
$
|
3.90
|
$
|
2.00
|
|||
December 31,
2007
|
$
|
2.80
|
$
|
1.01
|
|||
2008
|
|||||||
High
|
Low
|
||||||
Quarter
ended:
|
|||||||
March 31,
2008
|
$
|
2.00
|
$
|
0.25
|
|||
June 30,
2008
|
$
|
0.55
|
$
|
0.10
|
|||
September 30,
2008
|
$
|
1.65
|
$
|
0.11
|
|||
December 31,
2008
|
$
|
1.01
|
$
|
0.22
|
|||
2009
|
|||||||
High
|
Low
|
||||||
Quarter
ended:
|
|||||||
March 31,
2009
|
$
|
1.25
|
$
|
0.001
|
|||
June 30,
2009
|
$
|
0.07
|
$
|
0.03
|
|||
September 30,
2009
|
$
|
0.07
|
$
|
0.016
|
|||
December 31,
2009
|
$
|
0.23
|
$
|
0.02
|
15
On
December 31, 2008, the closing bid price for our common stock in the Pink Sheets
was $0.94 per share; the price will likely fluctuate in the future. The stock
market in general has experienced extreme stock price fluctuations in the past
few years. In some cases, these fluctuations have been unrelated to the
operating performance of the affected companies. Many companies have experienced
dramatic volatility in the market prices of their common stock. We believe that
a number of factors, both within and outside our control, could cause the price
of our common stock to fluctuate, perhaps substantially. Factors such as the
following could have a significant adverse impact on the market price of our
common stock:
·
|
Our
ability to obtain additional financing and, if available, the terms and
conditions of the financing;
|
|
·
|
Our
financial position and results of operations;
|
|
·
|
Our
ability to execute our business plan;
|
|
·
|
The
development of litigation against our company;
|
|
·
|
Period-to-period
fluctuations in our operating results;
|
|
·
|
Changes
in estimates of our performance by any securities
analysts;
|
|
·
|
The
issuance of new equity securities pursuant to a future offering or
acquisition;
|
|
·
|
Changes
in interest rates;
|
|
·
|
Competitive
developments, including announcements by competitors of new products or
services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments;
|
|
·
|
Investor
perceptions of our company; and
|
|
·
|
General
economic and other national and international
conditions.
|
We may
need to declare bankruptcy or we may be forced into bankruptcy by our creditors
and our shares would be worthless.
Our
common stock is considered to be a “penny stock” because it does not qualify for
one of the exemptions from the definition of “penny stock” under Section 3a51-1
of the Exchange Act. Our common stock may be a “penny stock” if it meets one or
more of the following conditions (i) the stock trades at a price less than $5.00
per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it
is not quoted on the Nasdaq Capital Market, or even if so, has a price less than
$5.00 per share; or (iv) is issued by a company that has been in business less
than three years with net tangible assets less than $5.0 million.
The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor’s account. Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
Holders
of our Common Stock
As of
December 31, 2008, we had 33,768,823 shares of our common stock issued and
outstanding, which are held by approximately 67 shareholders.
Dividend
Policy
The
decision whether to pay cash dividends on our common stock will be made by our
Board of Directors, in their discretion, and will depend on our financial
condition, operating results, capital requirements and other factors that the
Board of Directors considers significant. The Company has not declared or paid
any cash dividends on its common stock, and currently intends to retain its
earnings for funding growth. Therefore, the Company does not expect to pay any
dividends in the foreseeable future.
16
Equity
Compensation Plan
The
following is a summary of our Equity Compensation Plan at December 31,
2008:
# of securities to be issued
upon
exercise of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
# of securities remaining
available
for future
issuance
under equity
compensation
plans
(excluding
securities
reflected
in column (a))
|
||||||||
Equity
compensation plans approved by security holders
|
984,055
|
$
|
1.02
|
3,265,112
|
||||||
Equity
compensation plans not approved by securities holders
|
-
|
-
|
-
|
|||||||
Total
|
984,055
|
$
|
1.02
|
3,265,112
|
On
November 30, 2006, the Board of Directors and our shareholders approved the 2006
Java Detour, Inc. Equity Incentive Plan (the “Equity Incentive Plan”). The
Equity Incentive Plan authorizes the issuance of options to purchase shares of
common stock and the grant of stock awards. Administration of the Equity
Incentive Plan is carried out by our Board of Directors or any committee of the
Board of Directors to which the Board of Directors has delegated all or a
portion of responsibility for the implementation, interpretation or
administration of the Equity Incentive Plan. Our employees, officers and
directors (including employees, officers and directors of our affiliates) are
eligible to participate in the Equity Incentive Plan. The administrator of the
Equity Incentive Plan will select the participants who are granted stock options
or stock awards and, consistent with the terms of the Equity Incentive Plan,
will establish the terms of each stock option or stock award. The maximum period
in which a stock option may be exercised will be fixed by the administrator.
Under the Equity Incentive Plan, the maximum number of shares of common stock
that may be subject to stock options or stock awards is 4,249,167. As of
December 31, 2008, we have granted an aggregate of 984,055 options to our
directors, officers and employees with 3,265,112 shares of common stock
available for future issuance.
Our Board
of Directors authorized on December 1, 2009 the issuance of stock options and
the re-pricing and reissuance of certain other options previously issued to our
employees, officers and members of the Board of Directors pursuant to the
Company’s 2006 Equity Incentive Plan (the “Plan”). Approximately
4,249,000 options were either issued or reissued at $0.025 per share, the
closing price of the company’s stock on December 1, 2009 (the
“Options”). Options to employees that own greater than 10% of our
stock were issued at $0.0275 (110% of the current market price) pursuant to the
Plan. The Board of Directors issued these Options for, and to realign
the value of the issued Options with, their intended purpose, which is to retain
and motivate our employees, officers and directors. After the issuance of these
options, we have issued nearly all of the 4,249,167 Options permitted under the
Plan.
Prior to
the repricing, many of the Options had exercise prices well above the recent
market prices of our common stock as quoted on the Pink Sheets. The
Options will vest over three years with 50% of the Options vesting after the
first six months with an additional 10% of the options granted vesting after
each subsequent six-month period.
Recent
Sales of Unregistered Securities
In 2009,
the Company sold to accredited investors $312,402 of convertible
notes. The convertible notes bear interest at 6% per annum with
interest payable each quarter. The notes can be converted into the
Company’s common stock at $0.025 per share.
The
convertible notes were issued to accredited investors pursuant to an exemption
from registration under Section 4(2) of the Securities Act and Regulation D
promulgated pursuant thereto. No general solicitation or advertising was used to
market the convertible notes. All funds raised from the sale of the
convertible notes was used to fund our operations.
In the
fourth quarter of 2009, the Company issued, in exchange for advisory services,
500,000 warrants to purchase the Company’s common stock at $0.05 per
share. The warrants were issued to accredited investors pursuant to
an exemption from registration under Section 4(2) of the Securities Act and
Regulation D promulgated pursuant thereto.
17
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with our Financial
Statements, including the related notes thereto, and other financial information
included herein. The information in this Annual Report includes forward-looking
statements , however, our actual results could differ materially from those set
forth as a result of general economic conditions and changes in the assumptions
used in making such forward-looking statements. The analysis set forth below is
provided pursuant to applicable SEC regulations and is not intended to serve as
a basis for projections of future events.
Overview
In a very
competitive industry, we believe Java Detour® stores successfully compete with
other coffee retailers by continuing to offer premium coffees and excellent
proprietary frozen beverages, fast friendly service, superior convenience,
affordable, turn-key franchise opportunities, and distinct and proprietary menu
offerings. As a boutique brand preparing for national and international
expansion, we believe we have to address our competition with efficient and
consistent execution of our core competencies including consistent preparation
of excellent quality products, high speed drink preparation, specialized
training procedures, and excellent customer service.
Java
Detour also has significant expansion opportunity and possible competitive
advantage with its recently signed Co-Branding and Reciprocal Development
Agreements with Mrs. Fields Famous Brands, franchisor of over 1,200 franchised
and licensed stores throughout the U.S. and internationally under the names Mrs.
Fields Cookies and TCBY Yogurt. The Java Detour/ Mrs. Fields Famous
Brands Reciprocal Development Agreement allows current and future franchisees of
Java Detour, Mrs. Fields and TCBY to open franchise stores that promote and sell
all three brands in the same location. The partnership also provides
Java Detour the potential to sell its coffee products to existing and future
Mrs. Fields and TCBY franchisees.
Java
Detour, Mrs. Fields and TCBY have begun opening co- and tri-branded
stores. The first tri-brand store opened October 3rd
2009, in the main lobby of the Flamingo Hotel and Casino in Las Vegas,
Nevada. The second co-branded Java Detour/Mrs. Fields store opened in New
York City on December 9, 2009. Additional multi-branded stores are
planned to open in early 2010.
As the
economic conditions in the United States, particularly in California, has
broadened and intensified, many sectors of the economy have been adversely
impacted. As a retailer that is dependent upon consumer discretionary spending,
we endured an extremely challenging fiscal 2009 year because our customers had
less money for discretionary purchases as a result of job losses, foreclosures,
bankruptcies, reduced access to credit and sharply falling home prices. The
resulting decreases in customer traffic, or average value per transaction,
negatively affected our financial performance as reduced
revenues.
We are
reorganizing the Company’s business, including restructuring its balance sheet,
reducing costs and implementing a revised strategic plan. These initiatives may
include restructuring actions, a business combination or merger with a strategic
or financial investor and the divestiture of certain assets and
operations. We cannot predict the form or our reorganization, if we
will be successful in our reorganization or if we will achieve profitability in
the future.
Critical
Accounting Policies Used in Financial Statements
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
We believe the following are the critical accounting policies that impact the
financial statements, some of which are based on management’s best estimates
available at the time of preparation. Actual results may differ from these
estimates.
Intangible Assets
- In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, the Company evaluates intangible assets and other long-lived assets for
impairment, at least on an annual basis and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable from its
estimated future cash flows. Recoverability of intangible assets and other
long-lived assets is measured by comparing their net book value to the related
projected undiscounted cash flows from these assets, considering a number of
factors including past operating results, budgets, economic projections, market
trends and product development cycles. As we assess the ongoing expected cash
flows and carrying amounts of our long-lived assets, these factors could cause
us to realize material impairment losses. Property, plant and
equipment assets are grouped at the lowest level for which there are
identifiable cash flows when assessing impairment, cash flows for retail assets
are identified at the individual store level, and long-lived assets to be
disposed of are reported at the lower of their carrying amount or fair
value. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and an impairment
loss is recorded as a charge against current operations. No impairment was
recorded during the years ended December 31, 2008 and
2007. Amortization expenses of $10,974 and $0 were
recorded for the years ended December 31, 2008 and 2007,
respectively.
18
Stock Based
Compensation - We adopted SFAS No. 123 (Revised 2004), Share
Based Payment (“SFAS No. 123R”), under the modified-prospective transition
method on January 1, 2006. SFAS No. 123R requires companies
to measure and recognize the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value. Share-based
compensation recognized under the modified-prospective transition method of SFAS
No. 123R includes share-based compensation based on the grant-date fair
value determined in accordance with the original provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, for all share-based
payments granted prior to and not yet vested as of January 1, 2006 and
share-based compensation based on the grant-date fair-value determined in
accordance with SFAS No. 123R for all share-based payments granted after
January 1, 2006. SFAS No. 123R eliminates the ability to account
for the award of these instruments under the intrinsic value method prescribed
by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock
Issued to Employees, and allowed under the original provisions of SFAS
No. 123. Prior to the adoption of SFAS No. 123R, we would have
accounted for our stock option plans using the intrinsic value method in
accordance with the provisions of APB Opinion No. 25 and related
interpretations. We account for stock-based compensation in accordance with the
fair value recognition provisions of SFAS 123R. We use the Black-Scholes
option pricing model which requires the input of highly subjective assumptions.
These assumptions include estimating the length of time employees will retain
their stock options before exercising them (“expected term”), the estimated
volatility of our common stock price over the expected term and the number of
options that will ultimately not complete their vesting requirements
(“forfeitures”). Changes in the subjective assumptions can materially affect the
estimate of fair value of stock-based compensation and consequently, the related
amount recognized on the consolidated statements of earnings.
Revenue
Recognition –Net revenue is recognized at the point of sale at our
Company-operated retail stores. Royalty revenue from franchisees is recognized
during the month the franchisees completed the sales generating that royalty.
Revenue for franchise units and area agreements are recognized based on the
terms of agreement, typically upon either the opening of a store or the
completion of franchisee training. Revenue from stored value cards is
recognized upon redemption or receipt of product by the customer. Cash received
in advance of product delivery is recorded in gift card liability on the
accompanying consolidated balance sheets.
Results
of Operations
The
following table sets forth our statements of operations for the years ended
December 31, 2008 and 2007 in U.S. dollars:
Year
Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
(in
thousands)
|
||||||||
Sales
and other operating revenues
|
$ | 7,642 | $ | 6,470 | ||||
Cost
of sales
|
(2,189 | ) | (2,022 | ) | ||||
Gross
profit
|
$ | 5,453 | $ | 4,448 | ||||
Store
expenses
|
4,567 | 4,434 | ||||||
Selling,
general and administrative expenses
|
3,277 | 4,242 | ||||||
Acquisition
due diligence
|
0 | 209 | ||||||
Depreciation
|
557 | 462 | ||||||
Amortization
|
11 | 0 | ||||||
Total
operating expenses
|
8,412 | $ | 9,347 | |||||
Income
(loss) from operations
|
(2,959 | ) | (4,899 | ) | ||||
Other
income and expenses
|
||||||||
Other
income
|
933 | 142 | ||||||
Interest
expense
|
(1,180 | ) | (267 | ) | ||||
Gain
on registration rights agreement
|
0 | 150 | ||||||
Other
expenses
|
(694 | ) | (990 | ) | ||||
Net
loss before income taxes
|
$ | (3,900 | ) | $ | (5,864 | ) | ||
Income
tax expense
|
(490 | ) | (3 | ) | ||||
Net
loss
|
$ | (4,390 | ) | $ | (5,867 | ) |
19
Comparison
of the Fiscal Year ended December 31, 2008 to the Year ended December 31,
2007
Sales and
other operating revenues for year ended December 31, 2008 were approximately $
7.6 million, an increase of $ 1.1 million, or 18.1 %, from sales and other
operating revenues earned of approximately $6.5 million for the year ended
December 31, 2007. The primary reasons for the increase were an increase in
master area development fees of $0.7 million and in new store revenues of $0.4
million.
Cost of
sales for the year ended December 31, 2008 was approximately $ 2.2 million, an
increase of $ 0.2 million, or 8.3 %, from approximately $2.0 million for the
year ended December 31, 2007. The increase was primarily due to product costs
associated with new stores of $0.2 million. Cost of sales as a percentage of net
sales for the year ended December 31, 2008 was approximately 28.6 %, which was a
decrease from 31.3% for the year ended December 31, 2007. This decrease was
primarily due to the lower relative cost of sale for franchising activity
compared to store operations.
Gross
profit for the year ended December 31, 2008 was approximately $ 5.5 million, a
increase of $1.1 million, or 22.6 %, from $4.4 million for the year ended
December 31, 2007. Our gross margin for the year ended December 31, 2008 was
71.4 % as compared with 68.7% for the year ended December 31, 2007.
Store
expenses were approximately $ 4.6 million for the year ended December 31, 2008,
an increase of $0.2 million from approximately $4.4 million for the year ended
December 31, 2007. The increase is primarily due to the operation of new
stores.
Selling
and general administrative expenses were approximately $ 3.3 million for the
year ended December 31, 2008, a decrease of approximately $1 million, or 22.7 %,
from approximately $4.2 million for the year ended December 31, 2007. The
decrease was primarily due to decreased salaries and benefits of approximately
$0.4 million, decreased stock based compensation expense of $0.1 million, and
decreased other general administrative expenses of approximately $0.5
million.
Acquisition
due diligence costs for the year ended December 31, 2008 was approximately $0 as
compared to $209,000 for the year ended December 31, 2007. The decrease of
$209,000 was due to a onetime loss in the prior year.
Depreciation
expenses for the year ended December 31, 2008 was approximately $ 557,000 as
compared to approximately $462,000 for the year ended December 31, 2007. The
increase of approximately $95,000, or 20.6%, was primarily due to the
depreciation on new store equipment.
Other
income was approximately $ 933,000 for the year ended December 31, 2008 as
compared with approximately $142,000 of other income for the year ended December
31, 2007. The increase of approximately $791,000 was primarily due to a gain on
the sale of fixed assets.
Interest
expenses for the year ended December 31, 2008 was approximately $ 1.2 million,
an increase of $ 0.9 million or 341.9 %, from approximately $267,000 for the
year ended December 31, 2007. The increase was primarily due to interest on new
debt.
Other
expenses for the year ended December 31, 2008 was approximately $ 694,000, a
decrease of $ 296,000, or 29.9 %, from approximately $990,000 for the year ended
December 31, 2007. The decrease was primarily due to a onetime loss of $506,000
in loss on bad debt incurred only in 2007, partially offset by an increase of
$190,000 in loss on disposal of equipment.
Net loss
for the year ended December 31, 2008 was approximately $4.4 million, a decrease
of approximately $1.5 million, or 25.2%, from $5.9 million for the year ended
December 31, 2007 for the reasons stated above.
20
Liquidity
and Capital Resources
At
December 31, 2008, we had total equity of approximately
$0.5 million and had total cash and cash equivalents of approximately $616,000,
however, this amount includes approximately $200,000 of restricted cash for
repayment of debt. Prior to November 2006, we have historically financed our
business through long-term bank loans and lines of credit and cash provided by
operations.
We will
need to raise additional capital in the future to fund our working capital needs
and to continue and expand our business. We may also require additional capital
to make acquisitions of stores and complementary businesses. We have
negative working capital of approximately $3.0 million at December 31,
2008. Further, our secured creditors hold a security interest in
substantially all of our assets. We are engaged in discussions with
our secured and unsecured creditors to design a voluntary recapitalization plan.
The goal is to continue operations and ultimately include an opportunity for our
unsecured creditors to receive some tangible consideration in settlement of
their claims.
We have
incurred net losses since our inception. Our net losses were $4.4 million and
$5.9 million for the years ended December 31, 2008 and 2007, respectively.
We will incur losses in 2009 and we cannot assure investors that we will be
profitable in future periods. We cannot predict whether we will become
profitable in future periods and, even if we become profitable, we may not be
able to sustain profitability.
We are
reorganizing the Company’s business, including restructuring its balance sheet,
reducing costs and implementing a revised strategic plan. These initiatives may
include restructuring actions, a business combination or merger with a strategic
or financial investor and the divestiture of certain assets and
operations. We cannot predict the form or our reorganization, if we
will be successful in our reorganization or if we will achieve profitability in
the future.
As of
December 31, 2008 and December 31, 2009, zero and five of the Company’s
creditors have default judgments against the Company for $0 and $580,259,
respectively. All of these judgments have been accrued by the Company in
accounts payable in the financial statements.
Net cash
used in operating activities for the year ended December 31, 2008 was
approximately $1.9 million, as compared to approximately $3.1 million used
during the year ended 2007. The change is primarily the result of operating
losses during the year ended December 31, 2008 of approximately $4.4 million as
compared to operating losses of approximately $5.9 million during the year ended
December 31, 2007.
Net cash
provided by investing activities was approximately $1.0 million for the year
ended December 31, 2008, as compared to net cash used of approximately $0.9
million for the year ended December 31, 2007. The decrease in cash used was
primarily a result of decreased capital asset acquisitions of approximately $0.6
million and by increased proceeds from the sale of investments of approximately
$0.4 million during the year ended December 31, 2008.
Net cash
provided by financing activities was approximately $0.8 million for the year
ended December 31, 2008, as compared to cash used in the amount of approximately
$0.3 million for the year ended December 31, 2007. The change was primarily due
to the proceeds from related party notes payable totaling $1.2
million.
Our
capital requirements, including development costs related to the opening of
additional retail locations and expansion of our franchise retail operations,
have been, and will continue to be significant. Our future capital requirements
and the adequacy of available funds will depend on many factors, including the
pace of our expansion, real estate markets, the availability of suitable site
locations and the nature of the arrangements negotiated with landlords. During
2009, we expended approximately $0.1 million to strategically expand our retail
operations while also creating other outlets and distribution points for sales
of our products. We are working to finish updating our FDD so we can resume
selling franchises, both domestically and internationally, and larger area
development agreements. We closed one underperforming store domestically and
continued our efforts to increase same store sales. In addition to
the above, we have and continue to find areas to aggressively cut costs at both
the corporate and store levels. We continue discussions for the possibility of
future capital raises and other strategic opportunities.
Significant
Events – Company Owned Stores and Lease Agreements
On
January 3, 2008, we took back operations of four Nevada franchise stores from
Java Nevada, one of our franchisees. Effective July 1, 2008 the Company
completed its negotiations with Java Nevada and re-acquired the Nevada Stores
and franchise territory and a new franchisee. Management elected to close the
stores located on Tropicana Avenue in Las Vegas (effective May 24, 2008), on
West Warm Springs Rd. in Henderson, NV (effective November 24, 2008), and on
West Charleston Blvd. in Las Vegas (effective May 6, 2009). The store located on
South Pecos Road in Las Vegas was sold to the new franchisee effective July 8,
2008.
21
The
Company, through its wholly-owned subsidiary JDCO, purchased from Java Universe
its right, title and interest in the assets related to a coffee retail location
in West Hollywood, California (the “Assets”), pursuant to an Asset Purchase
Agreement dated April 7, 2008 by and among JDCO, Java Universe, the Company,
Elie Samaha and Joseph Merhi (the “Purchase Agreement”). The purchase price for
the Assets was $681,500 which was paid with 1,450,000 shares of the Company’s
common stock valued at $0.47 per share. The Company also issued 25,000 shares of
common stock valued at $11,750 to Charles Tover as a finder’s fee associated
with the asset purchase. The total purchase price of $693,250 was allocated as
follows:
Purchase
Price Allocation
|
||||
Inventory
|
$
|
3,000
|
||
Supplies
|
2,000
|
|||
Furniture,
fixtures and equipment
|
169,778
|
|||
Leasehold
improvements
|
506,722
|
|||
Consulting
expense
|
11,750
|
|||
Total
purchase price
|
$
|
693,250
|
As a
condition to closing of the Purchase Agreement, the Company also entered into an
Agency, Co-Occupancy and Operating Agreement with Demitri Samaha, Samaha Foods
and Java Universe for the lease, occupancy and use of the West Hollywood store
premises. Pursuant to the terms of the Operating Agreement, certain events may
trigger the relinquishment of a portion of the common stock issued to Java
Universe under the Purchase Agreement.
Effective
July 7, 2008, the Company closed its store in Charlotte, North Carolina and is
soliciting offers for either the purchase of the store assets or sublease of the
facilities.
On
November 30, 2008 the Company entered into an asset purchase agreement with Java
Norcal, a franchisee of the Company owned by a shareholder and member of the
Company’s board of directors. Java Norcal purchased all assets related to the
Company’s stores in Yuba City, CA and Maryville, CA and will operate those
stores as franchise locations. The aggregate cash purchase price, which included
franchising rights, was $1,455,000. This included a note payable to the Company
of $255,000. The Company used $199,375 of the proceeds to pay the remaining
balance on an SBA loan encumbering the sold assets.
On July
1, 2008 the Company, through JDCO, reacquired store assets in Bakersfield, CA
pursuant to an asset purchase agreement. These assets had previously been sold
in 2005 pursuant to an asset purchase agreement and promissory note. The entire
balance of this note was deemed uncollectible in 2007 and a loss on bad debt of
$442,471 was recognized. The reacquired assets, which include a temporary
building and used coffee equipment, were valued at a fair market price, which
was the calculated present value of the lease payments from January 2009 through
the end of the original lease term, of $47,738 and were being held for disposal
at December 31, 2008. On June 3, 2009 the Company, pursuant to an asset purchase
agreement, sold these assets to the landlord of the assets’ location in exchange
for a mutual termination of the operating lease, which was in default at the
time, and also received a full release of liability from unpaid rental amounts
incurred during 2009.
On July
23, 2009 the Company entered a consent agreement with the landlord of its
location on Tropicana Blvd in Las Vegas, NV whereby the Company committed to
issuing said landlord 173,136 shares of its common stock in consideration for
unpaid lease payments of $103,882. As of December 31, 2009 these shares had not
been issued. The Company expects to terminate its lease at this location and may
have to recognize a loss for the full value of its permanent structure at this
location, which had a net book value of $264,073 as of December 31,
2009.
As of
December 15, 2009 the Company is in default of three long term obligations (see
Note 7), one of its capital lease obligations (see Note 8), and all of its
operating leases, (see Item 2).
Significant
Events – Capital Transactions
In May
2008, the Company entered into a Securities Purchase, Loan and Security
Agreement (the “Agreement”) with two related parties (“Secured Party”). Each
Secured Party acquired a secured promissory note in the amount of $366,666 and
1,000,000 shares of the Company’s common stock in exchange for $366,666 each for
total consideration of $733,333. The secured promissory notes are secured by the
assets of three store locations, accrue interest at 24% and are due with
interest in January 2009. The Company has recorded $76,667 as deferred financing
costs associated with the closing. This amount represents $66,667 paid to an
investment banking firm and $10,000 in legal fees associated with the private
placement. These amounts will be amortized to interest expense over the term of
the notes.
22
In July
2008, the Company entered into a third Securities Purchase, Loan and Security
Agreement (the “Agreement”) with one of the same related parties (“Secured
Party”). The Secured Party acquired a secured promissory note in the amount of
$366,666 and 1,000,000 shares of the Company’s common stock in exchange for
$366,666, bringing total consideration of these notes to $1,100,000. This third
secured promissory note is secured by the assets of the same three store
locations, and also accrues interest at 24% and is also due with interest in
January 2009. The Company has recorded an additional $33,333 as deferred
financing costs associated with the closing, for total deferred financing of
$100,000. This amount will be amortized to interest expense over the term of the
notes. The Company has recognized $91,736 of interest expense related to
amortization of the total deferred financing costs for the year ended December
31, 2008. The Company has recognized $164,226 of accrued interest expense
related to the terms of the notes for the year ended December 31,
2008.
The
estimated fair value of the shares of common stock of $1,600,000 has been
determined using closing market price for the Company’s common shares on the
date the agreement closed. The face amount of the secured promissory notes of
$1,100,000 was proportionately allocated to the secured promissory notes and the
stock in the amount of $489,336 and $610,664, respectively. The $610,664 value
allocated proportionately to the shares of common stock has been accounted for
as a discount that is being amortized and treated as interest expense over the
term of the secured promissory notes under the effective interest method. The
Company has recognized interest expense related to the amortization of the debt
discount of $560,593 for the year ended December 31, 2008.
On
February 24, 2009, effective February 17, 2009, the Company amended the
Agreement. The due date for the Notes was extended from January 15,
2009 to May 17, 2009. As consideration for the extension, the Company agreed to
pay $33,333.33 to each Secured Party on or before March 3, 2009. The Company has
not made these payments. As additional consideration it did pay $3,396 in legal
fees to the Secured Parties’ counsel. Additionally, the Company
issued to two of the Secured Parties five-year warrants to each purchase 250,000
shares of the Company’s common stock at an exercise price of $0.50 with a
cashless exercise provision.
As of
December 15, 2009 the balance of these notes is due on demand and each of the
three Secured Parties has the right to foreclose.
In 2009,
the Company sold to accredited investors $312,402 of convertible
notes. The convertible notes bear interest at 6% per annum with
interest payable each quarter. The notes can be converted into the
Company’s common stock at $0.025 per share.
The
convertible notes were issued to accredited investors pursuant to an exemption
from registration under Section 4(2) of the Securities Act and Regulation D
promulgated pursuant thereto. No general solicitation or advertising was used to
market the convertible notes. All funds raised from the sale of the
convertible notes was used to fund our operations.
In the
fourth quarter of 2009, the Company issued, in exchange for advisory services,
500,000 warrants to purchase the Company’s common stock at $0.05 per
share. The warrants were issued to accredited investors pursuant to
an exemption from registration under Section 4(2) of the Securities Act and
Regulation D promulgated pursuant thereto.
Significant
Events – Franchise Agreements
On March
18, 2008, we amended our area development agreement with Colorado Java, one of
our franchisees, modifying such agreement to become a master franchise agreement
for the State of Colorado. Pursuant to the amended agreement, the aggregate
purchase price due and payable by Java Colorado was amended from $142,500 to
$275,000 (less the $57,000 already paid under the original area development
agreement). We have since received the remaining $218,000 due and payable under
the master franchise agreement. Upon payment in full by Java Colorado, we agreed
to issue 100,000 warrants to purchase shares of our common stock. The warrants
were issued with a strike price of $0.40. On January 5, 2010 the Company issued
a letter of default to Colorado Java which has not been cured as the filing of
this document.
On April
7, 2008, the Company agreed to terminate its Middle East Franchise and Southern
California Franchise agreements with Java Universe in connection with an Asset
Purchase Agreement. Pursuant to a Termination, Waiver and Mutual Release
(“Termination Agreement”) dated April 7, 2008, by and among the Company, JDCO
Subsidiary and Java Universe, the Company terminated such agreements in exchange
for 550,000 shares of the Company’s common stock valued at $1.00 per share. The
$550,000 value of the stock paid for the termination was exchanged for the
$550,000 received by Java Universe from the initial Master License Agreement and
the Option to extend. The Termination Agreement also included lock-up
restrictions on the sale of the common shares for 18 months from the signing of
such agreement.
On July
11, 2008 the Company entered into a Master Franchise License agreement for the
rights to sell franchises in Kuwait, Saudi Arabia, Egypt, the UAE, Bahrain,
Qatar, Oman and Jordan. The Master Franchise Licensee, Java Gulf, was also
granted a first right of refusal on other defined territories in the Middle East
and Asia if they adhere to the scheduled franchise opening timetables. Java Gulf
also completed its operations training at the Company’s headquarters in San
Francisco, CA.
23
On June
9, 2009 the Company entered an asset purchase agreement with franchisee Java
Universe whereby it transferred its West Hollywood location assets to the
franchisee in consideration for release of liability from paying $16,782 in
unpaid rent and $16,443 recorded as short term accounts receivable, which had
not been received by the Company as of December 31, 2009. Java Universe has an
oral agreement permitting continued use of the Company’s brand and image, which
is revocable by Company on demand.
As of
December 31, 2009 the Company had an oral agreement with Charles Tover, an
individual, to pay $5,000 as an introduction fee for introducing the Company to
Atlantic Provisions.
As of
December 31, 2009 the Company had an oral agreement with Atlantic Provisions to
pay an introduction fee for the introduction to a particular franchise group,
for which Atlantic Provisions has proposed a fee of 20,000 shares of the
Company’s common stock and negotiations are ongoing. The Company is also working
to finalize an ongoing relationship with Atlantic Provisions for their services
in brokering future licensing and franchise agreements with Indian gaming
facilities throughout the US and Canada.
Fourth
Quarter Adjustments
During
the fourth quarter of fiscal 2008, the Company recorded two significant
adjustments. The Company eliminated a gain of $451,141 recognized on January 3,
2008 as a result of the non-cash acquisition of assets from Java Nevada (see
Note 16). The company offset this loss of recognizing liabilities totaling
$231,321 and by reducing the book value of the acquired assets.
Also
during the fourth quarter of fiscal 2008, the Company restated the book value of
assets acquired from Java Universe on April 7, 2008 (see Note 15). These assets
were originally acquired in a non-cash stock purchase valuing the Company’s
shares at $1.00. The Company’s policy for valuing assets acquired with stock is
to use a variable weighted average price for the ten trading days prior to the
transaction. This results in a stock value of $0.47 per share at the transaction
date. The Company eliminated $150,000 of goodwill associated with the
transaction, reduced the book value of the acquired assets, and reduced
additional paid in capital by $768,500.
Off-Balance
Sheet Arrangements
None.
New
Accounting Pronouncements
In
November 2008, the FASB ratified Emerging Issues Task Force ("EITF") Issue
No. 08-6, "Equity Method Investment Accounting Considerations"
("EITF 08-6"). EITF 08-6 clarifies the accounting for certain
transactions and impairment considerations involving equity method investments.
EITF 08-6 is effective for fiscal years beginning after December 15,
2008, with early adoption prohibited. We are in the process of evaluating the
impact, if any, of EITF 08-6 on our consolidated financial
statements.
In
November 2008, the FASB ratified EITF Issue No. 08-7, "Accounting for
Defensive Intangible Assets" ("EITF 08-7"). EITF 08-7 clarifies the
accounting for certain separately identifiable intangible assets which an
acquirer does not intend to actively use but intends to hold to prevent its
competitors from obtaining access to them. EITF 08-7 requires an acquirer
in a business combination to account for a defensive intangible asset as a
separate unit of accounting which should be amortized to expense over the period
the asset diminishes in value. EITF 08-7 is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited. We are
in the process of evaluating the impact, if any, of EITF 08-7 on our
consolidated financial statements.
On
August 27, 2008, the SEC announced that it will issue for comment a
proposed roadmap regarding the potential use by U.S. issuers of financial
statements prepared in accordance with International Financial Reporting
Standards ("IFRS"). IFRS is a comprehensive series of accounting standards
published by the International Accounting Standards Board ("IASB"). Under the
proposed roadmap, the Company could be required in fiscal 2014 to prepare
financial statements in accordance with IFRS, and the SEC will make a
determination in 2011 regarding the mandatory adoption of IFRS. We have not yet
assessed the impact that this potential change would have on our consolidated
financial statements.
In May
2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)." This FSP specifies that issuers that have convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. This FSP is effective for
financial statements issued in fiscal years (and interim periods) beginning
after December 15, 2008 (calendar year 2009), and should be applied
retrospectively to all past periods presented even if the instrument has
matured, has been converted, or has otherwise been extinguished as of the FSP's
effective date. We have determined that FSP APB 14-1 does not currently
have a material impact on our financial statements as our existing convertible
debt instruments are not required to be settled in cash, nor do they give us an
option to settle in cash, upon conversion.
24
In April
2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position ("FSP") No. 142-3 ("FSP No. 142-3") "Determination of the Useful Life
of Intangible Assets." FSP No. 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and
Other Intangible Assets" to include an entity's historical experience in
renewing or extending similar arrangements, adjusted for entity-specific
factors, even when there is likely to be "substantial cost or material
modifications." FSP No. 142-3 states that in the absence of historical
experience an entity should use assumptions that market participants would make
regarding renewals or extensions, adjusted for entity-specific factors. The
guidance for determining the useful life of intangible assets included in this
FSP will be applied prospectively to intangible assets acquired after the
effective date of January 1, 2009. We are in the process of evaluating the
impact, if any, of FSP No. 142-3 on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
No. 141(R)”), which requires an acquirer to recognize in its financial
statements as of the acquisition date (i) the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree, measured
at their fair values on the acquisition date, and (ii) goodwill as the excess of
the consideration transferred plus the fair value of any noncontrolling interest
in the acquiree at the acquisition date over the fair values of the identifiable
net assets acquired. Acquisition-related costs, which are the costs an acquirer
incurs to effect a business combination, will be accounted for as expenses in
the periods in which the costs are incurred and the services are received,
except that costs to issue debt or equity securities will be recognized in
accordance with other applicable GAAP. SFAS No. 141(R) makes significant
amendments to other Statements and other authoritative guidance to provide
additional guidance or to conform the guidance in that literature to that
provided in SFAS No. 141(R). SFAS No. 141(R) also provides guidance as to what
information is to be disclosed to enable users of financial statements to
evaluate the nature and financial effects of a business combination.
SFAS No. 141(R) is effective for financial statements issued for fiscal
years beginning on or after December 15, 2008. Early adoption is
prohibited. We have not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS No. 141(R).
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51 (“SFAS No.
160”), which revises the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards that
require (i) the ownership interests in subsidiaries held by parties other than
the parent be clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from the parent’s
equity, (ii) the amount of consolidated net income attributable to the parent
and to the noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of income, (iii) changes in a parent’s
ownership interest while the parent retains its controlling financial interest
in its subsidiary be accounted for consistently as equity transactions, (iv)
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value, with
the gain or loss on the deconsolidation of the subsidiary being measured using
the fair value of any noncontrolling equity investment rather than the carrying
amount of that retained investment, and (v) entities provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 amends FASB
No. 128 to provide that the calculation of earnings per share amounts in the
consolidated financial statements will continue to be based on the amounts
attributable to the parent. SFAS No. 160 is effective for financial statements
issued for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Early adoption is prohibited. SFAS
No. 160 shall be applied prospectively as of the beginning of the fiscal year in
which it is initially applied, except for the presentation and disclosure
requirements, which shall be applied retrospectively for all periods presented.
We have not yet determined the effect on its consolidated financial statements,
if any, upon adoption of SFAS No. 160.
In
December 2007, the SEC issued Staff Accounting Bulletin
(SAB) No. 110, Share-Based Payment (“SAB
110”). SAB 110 establishes the continued use of the simplified method for
estimating the expected term of equity based compensation. The simplified method
was intended to be eliminated for any equity based compensation arrangements
granted after December 31, 2007. SAB 110 is being published to help
companies that may not have adequate exercise history to estimate expected terms
for future grants.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (“SFAS No. 159”),
which provides companies with an option to report selected financial assets and
liabilities at fair value. SFAS No. 159’s objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally accepted
accounting principles have required different measurement attributes for
different assets and liabilities that can create artificial volatility in
earnings. SFAS No. 159 helps to mitigate this type of accounting-induced
volatility by enabling companies to report related assets and liabilities at
fair value, which would likely reduce the need for companies to comply with
detailed rules for hedge accounting. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 requires companies to provide
additional information that will help investors and other users of financial
statements to more easily understand the effect of the company’s choice to use
fair value on its earnings. SFAS No. 159 also requires companies to display the
fair value of those assets and liabilities for which the company has chosen to
use fair value on the face of the balance sheet. SFAS No. 159 does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS No.
157 and SFAS No. 107. SFAS No. 159 is effective as of the beginning of a
company’s first fiscal year beginning after November 15, 2007. Early
adoption is permitted as of the beginning of the previous fiscal year
provided we make that choice in the first 120 days of that fiscal
year and also elects to apply the provisions of SFAS No. 157. We are currently
assessing the potential effect of SFAS No. 159 on our consolidated
financial statements.
25
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (“SFAS No. 157”), which establishes a formal framework for
measuring fair value under Generally Accepted Accounting Principles (“GAAP”).
SFAS No. 157 defines and codifies the many definitions of fair value included
among various other authoritative literature, clarifies and, in some instances,
expands on the guidance for implementing fair value measurements, and increases
the level of disclosure required for fair value measurements. Although SFAS No.
157 applies to and amends the provisions of existing FASB and American Institute
of Certified Public Accountants (“AICPA”) pronouncements, it does not, of
itself, require any new fair value measurements, nor does it establish valuation
standards. SFAS No. 157 applies to all other accounting pronouncements requiring
or permitting fair value measurements, except for: SFAS No. 123R, share-based
payment and related pronouncements, the practicability exceptions to fair value
determinations allowed by various other authoritative pronouncements, and AICPA
Statements of Position 97-2 and 98-9 that deal with software revenue
recognition. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. We are currently assessing the potential effect of
SFAS No. 157 on its consolidated financial statements.
Seasonality
Historically,
sales in the gourmet coffee industry has experienced variations in sales from
quarter-to-quarter due to the temperature changes in specific geographic areas ,
as well as from a variety of other factors including, but not limited to,
general economic trends, the cost of green coffee, competition, marketing
programs, weather and special or unusual events.
ITEM
8. FINANCIAL STATEMENTS
The
information required by this Item 8 is incorporated by reference to the Index to
Consolidated Financial Statements beginning at page F-1 of this Annual
Report.
26
JAVA
DETOUR, INC. AND SUBSIDIARIES
INDEX
TO FINANCIAL STATEMENTS
Page
|
||||
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
|
F-2
|
|||
CONSOLIDATED
FINANCIAL STATEMENTS
|
||||
Consolidated
Balance Sheet as of December 31, 2008 and 2007
|
F-4
|
|||
Consolidated
Statements of Operations for the years ended December 31, 2008 and
2007
|
F-6
|
|||
Consolidated
Statements of Changes in Stockholders' Equity (Deficit) for the years
ended December 31, 2008 and 2007
|
F-7
|
|||
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007
|
F-8
|
|||
Notes
to Consolidated Financial Statements
|
F-10
|
F-1
Farber
Hass Hurley LLP
Certified
Public Accountants
888
West Ventura Blvd., #A
Camarillo,
California 93010
Report
of Independent Registered Public Accounting Firm
To The
Board of Directors and Stockholders of
Java
Detour, Inc.
San
Francisco, California
We have
audited the accompanying consolidated balance sheet of Java Detour, Inc. (the
“Company”), as of December 31, 2008, and the related consolidated statements of
operations, stockholders’ equity (deficit), and cash flows for the year then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 2008 and the consolidated results of its operations and its
consolidated cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
/s/
Farber Hass Hurley LLP
Camarillo,
California
December
28, 2009
F-2
AJ.
ROBBINS, P.C.
Certified
Public Accountants
216
Sixteenth Street
Suite
600
Denver,
Colorado 80202
Report
of Independent Registered Public Accounting Firm
To The
Board of Directors and Stockholders of
Java
Detour, Inc.
San
Francisco, California
We have
audited the accompanying consolidated balance sheet of Java Detour, Inc. and
Subsidiaries as of December 31, 2007, and the related consolidated
statements of operations, changes in stockholders’ equity (deficit) and cash
flows for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Java Detour,
Inc. and Subsidiaries as of December 31, 2007, and the consolidated
results of their operations and consolidated cash flows for the
year then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/
AJ. Robbins PC.
AJ.
Robbins PC
Certified
Public Accountants
Denver,
Colorado
March 21,
2008
F-3
JAVA
DETOUR, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2008
|
2008
|
2007
|
||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 415,775 | $ | 671,018 | ||||
Cash
restricted for payment of current debt
|
200,104 | - | ||||||
Accounts
receivable, net
|
18,033 | 97,167 | ||||||
Inventories
|
166,052 | 85,421 | ||||||
Deferred
financing cost
|
8,264 | - | ||||||
Prepaid
expenses
|
42,059 | 127,443 | ||||||
Total
current assets
|
850,287 | 981,049 | ||||||
NONCURRENT
ASSETS:
|
||||||||
Notes
receivable, net
|
- | 900,000 | ||||||
Notes
receivable, related party
|
255,000 | - | ||||||
Property
and equipment, net
|
4,721,298 | 4,192,213 | ||||||
Intangibles,
net
|
490,314 | 498,907 | ||||||
Prepaid
expenses
|
11,320 | 26,049 | ||||||
Deferred
tax assets
|
- | 485,647 | ||||||
Other
assets
|
62,855 | 70,756 | ||||||
TOTAL
ASSETS
|
$ | 6,391,074 | $ | 7,154,621 | ||||
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 1,362,942 | $ | 703,491 | ||||
Accounts
payable, related party
|
55,919 | 46,086 | ||||||
Deferred
revenue, current portion
|
105,000 | 792,500 | ||||||
Short-term
notes payable, related party, net
|
1,055,928 | - | ||||||
Notes
payable, current portion
|
437,243 | 146,508 | ||||||
Capital
lease obligations, current portion
|
205,818 | 261,504 | ||||||
Accrued
expenses and other current liabilities
|
328,522 | 197,644 | ||||||
Stored
value and gift card liability
|
200,058 | 217,080 | ||||||
Contingent
liability
|
60,000 | - | ||||||
Total
current liabilities
|
3,811,430 | 2,364,813 | ||||||
Deferred revenue, net of current
portion
|
186,500 | 385,500 | ||||||
Notes
payable, net of current portion
|
1,079,338 | 1,287,037 | ||||||
Capital
lease obligations, net of current portion
|
347,470 | 510,017 | ||||||
Line
of Credit
|
89,607 | - | ||||||
Deferred
rent
|
421,795 | 203,502 | ||||||
Total
liabilities
|
5,936,140 | 4,750,869 | ||||||
COMMITMENTS AND
CONTINGENCIES
|
||||||||
STOCKHOLDERS’
EQUITY:
|
||||||||
Preferred
stock, $0.001 par value; 5,000,000 shares authorized; 0 Shares
issued and outstanding
|
- | |||||||
Common
stock, $0.001 par value; 75,000,000 shares authorized; 33,768,823
and 28,743,823 shares issued and outstanding at December 31, 2008 and 2007
respectively.
|
33,770 | 28,745 | ||||||
Additional
paid in capital
|
17,226,352 | 14,790,037 | ||||||
Accumulated
deficit
|
(16,805,188 | ) | (12,415,030 | ) | ||||
Total
stockholders’ equity
|
454,934 | 2,403,752 | ||||||
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
$ | 6,391,074 | $ | 7,154,621 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
JAVA
DETOUR, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
2008
|
2007
|
||||||
OPERATING
REVENUES:
|
||||||||
Sales
and other operating revenues, net
|
$ | 7,641,542 | $ | 6,470,127 | ||||
Cost
of sales
|
(2,188,571 | ) | (2,021,678 | ) | ||||
Gross
profit
|
5,452,971 | 4,448,449 | ||||||
|
||||||||
OPERATING
EXPENSES:
|
||||||||
Store
operating expenses
|
4,567,485 | 4,433,547 | ||||||
Selling,
general and administrative expenses
|
3,276,797 | 4,241,603 | ||||||
Acquisition
due diligence
|
- | 209,426 | ||||||
Amortization
|
10,974 | - | ||||||
Depreciation
|
557,414 | 462,063 | ||||||
Total
operating expenses
|
8,412,670 | 9,346,639 | ||||||
LOSS FROM
OPERATIONS
|
(2,959,699 | ) | (4,898,190 | ) | ||||
OTHER
INCOME/(EXPENSE):
|
||||||||
Net
gain on disposal of assets
|
345,593 | - | ||||||
Other
income
|
33,495 | 141,514 | ||||||
Interest
expense
|
(1,179,469 | ) | (266,728 | ) | ||||
Gain
on registration rights agreement
|
- | 150,000 | ||||||
Loss
on bad debt
|
(75,261 | ) | - | |||||
Other
expenses
|
(65,170 | ) | (990,101 | ) | ||||
Total
other income/(expense)
|
(940,812 | ) | (965,315 | ) | ||||
NET LOSS BEFORE INCOME
TAXES
|
(3,900,511 | ) | (5,863,505 | ) | ||||
INCOME TAX
EXPENSE
|
(489,647 | ) | (3,322 | ) | ||||
NET LOSS
|
$ | (4,390,158 | ) | $ | (5,866,827 | ) | ||
NET LOSS PER
SHARE:
|
||||||||
BASIC AND
DILUTED
|
$ | (0.13 | ) | $ | (0.21 | ) | ||
WEIGHTED AVERAGE
SHARESOUTSTANDING:
|
||||||||
BASIC AND
DILUTED
|
33,768,823 | 28,488,531 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
JAVA
DETOUR, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Preferred Stock Series A
|
Common
|
Stock
|
Additional
|
Accumulated
|
||||||||||||||||||||||||
Paid in
|
||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
Total
|
||||||||||||||||||||||
Balance, December 31,
2006
|
- | $ | - | $ | 28,327,787 | $ | 28,328 | $ | 14,306,474 | $ | (6,548,203 | ) | $ | 7,786,599 | ||||||||||||||
Fair
value of employee stock options
|
458,980 | 458,980 | ||||||||||||||||||||||||||
Shares
issued in connection with acquisition
|
12,500 | 13 | 24,987 | 25,000 | ||||||||||||||||||||||||
Shares
issued for cashless exercise of warrants
|
403,536 | 404 | (404 | ) | - | |||||||||||||||||||||||
Net
loss for the year
|
(5,866,827 | ) | (5,866,827 | ) | ||||||||||||||||||||||||
Balance, December 31,
2007
|
- | - | 28,743,823 | 28,745 | 14,790,037 | (12,415,030 | ) | 2,403,752 | ||||||||||||||||||||
Fair
value of employee stock options
|
523,669 | 523,669 | ||||||||||||||||||||||||||
Shares
issued in connection with acquisition
|
2,025,000 | 2,025 | 1,241,225 | 1,243,250 | ||||||||||||||||||||||||
Shares
issued in connection with financing
|
3,000,000 | 3,000 | 631,615 | 634,615 | ||||||||||||||||||||||||
Fair
value of warrants issued
|
39,806 | 39,806 | ||||||||||||||||||||||||||
Net
loss for the year
|
(4,390,158 | ) | (4,390,158 | ) | ||||||||||||||||||||||||
Balance, December 31,
2008
|
- | $ | - | 33,768,823 | $ | 33,770 | $ | 17,226,352 | $ | (16,805,188 | ) | $ | 454,934 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
JAVA
DETOUR, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
2008
|
2007
|
|||||||
CASH FLOWS (TO) FROM OPERATING
ACTIVITIES:
|
||||||||
Net
income/(loss)
|
$ | (4,390,158 | ) | $ | (5,866,827 | ) | ||
Adjustments
to reconcile net (loss) to net cash (used in) operating activities:
|
||||||||
Depreciation
|
557,414 | 462,063 | ||||||
Amortization
of intangibles
|
10,974 | - | ||||||
Gain/(loss)
on disposal of fixed assets
|
(345,593 | ) | 398,279 | |||||
Loss
on sale of available for sale investments
|
- | 16,167 | ||||||
Provision
for bad debt
|
75,261 | - | ||||||
Write-down
of uncollectable note receivable
|
501,443 | |||||||
Amortization of
debt discount
|
596,332 | - | ||||||
Value
of contingent warrants granted
|
39,806 | - | ||||||
Value
of options granted to employees
|
523,669 | 458,980 | ||||||
Reacquired
cash from exchange
|
2,800 | - | ||||||
Changes
in operating assets & liabilities
|
||||||||
Accounts
receivable
|
79,134 | (100,571 | ) | |||||
Inventories
|
(62,865 | ) | (39,502 | ) | ||||
Prepaid
expenses
|
85,384 | (71,453 | ) | |||||
Prepaid
expenses long term
|
14,729 | (13,731 | ) | |||||
Deferred
tax assets
|
485,647 | - | ||||||
Other
assets
|
7,901 | (12,901 | ) | |||||
Accounts
payable
|
564,451 | 334,343 | ||||||
Accounts
payable related party
|
9,833 | 10,642 | ||||||
Deferred
revenue
|
(371,500 | ) | 803,000 | |||||
Accrued
expenses and other current liabilities
|
82,535 | 94,853 | ||||||
Contingent
liability
|
60,000 | (150,000 | ) | |||||
Deferred
rent
|
78,066 | 79,326 | ||||||
NET CASH (USED IN) OPERATING
ACTIVITIES
|
(1,896,180 | ) | (3,095,889 | ) | ||||
- | ||||||||
CASH FLOW FROM (TO) INVESTING
ACTIVITIES
|
||||||||
Purchase
of property and equipment
|
(389,559 | ) | (1,010,825 | ) | ||||
Proceeds
from sale of stores
|
1,383,078 | |||||||
Payments
received on notes receivable
|
- | 200,000 | ||||||
Purchase
of investments
|
- | (991,481 | ) | |||||
Proceeds
from sale of investments
|
- | 975,314 | ||||||
Intangible
assets
|
(2,381 | ) | (63,031 | ) | ||||
NET CASH (USED IN) INVESTING
ACTIVITIES
|
991,138 | (890,023 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-7
JAVA
DETOUR, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
CASH FLOWS FROM (TO) FINANCING
ACTIVITIES
|
||||||||
Proceeds
from notes payable
|
170,336 | - | ||||||
Payment
of financing costs
|
(8,264 | ) | - | |||||
Principal
repayments of notes payable
|
(151,300 | ) | (48,710 | ) | ||||
Principal
repayments of capital lease obligations
|
(350,476 | ) | (232,509 | ) | ||||
Proceeds
from lines of credit
|
90,200 | - | ||||||
Principal
repayments of lines of credit
|
(593 | ) | - | |||||
Proceeds
from related party notes payable
|
1,200,000 | - | ||||||
Principal
repayments of related party notes payable
|
(100,000 | ) | - | |||||
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
|
849,903 | (281,219 | ) | |||||
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
|
(55,139 | ) | (4,267,131 | ) | ||||
Cash
and cash equivalents, at beginning of period
|
671,018 | 4,938,149 | ||||||
CASH AND CASH EQUIVALENTS, AT
END OF PERIOD
|
$ | 615,879 | $ | 671,018 | ||||
NONCASH INVESTING AND FINANCING
ACTIVITY:
|
||||||||
Acquisition
of property and equipment under capital leases
|
$ | 132,243 | $ | - | ||||
Acquisition
of property and equipment in exchange for common stock
|
$ | 676,500 | $ | - | ||||
Acquisition
of property and equipment under note payable
|
$ | 70,000 | $ | 501,111 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
|
||||||||
Cash
paid for interest
|
$ | 261,215 | $ | 258,065 | ||||
Cash
paid for income taxes
|
$ | 4,000 | $ | 3,200 |
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Java
Detour, Inc. (formerly known as Media USA.com, Inc. and referred to herein as
the “Company” or “Java Detour”) operates through its wholly-owned subsidiary
JDCO, Inc., a California corporation (“JDCO”). The Company sells high-quality
gourmet coffees, whole leaf teas, cold-blended beverages, fresh fruit smoothies
and select baked goods to its customers from uniquely designed retail stores
specialized in providing fast and convenience customer service. Java Detour
Franchise Corp., a California corporation formerly known as Java Detour (“JDCO
Subsidiary”) and a wholly owned subsidiary of JDCO, is a franchisor of Java
Detour cafés, with nine franchised outlets in the United States. As of December
31, 2008, there were 11 company-owned stores and 9 franchised
stores.
Principles
of Consolidation
The
financial statements reflect the consolidation of JDCO and JDCO Subsidiary,
wholly-owned subsidiaries of Java Detour, and all material intercompany
transactions have been eliminated. In the opinion of management, the financial
information reflects all adjustments necessary for a fair presentation of the
financial condition, results of operations and cash flows of the Company in
conformity with generally accepted accounting principles. The accompanying
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has incurred net losses from
continuing operations for the years end December 31, 2008 and2007 of $2.9
million and $4.8 million, respectively, and has a working capital deficit of
approximately $3 million at December 31, 2008. Management’s plans in this
regard include seeking new debt and equity financing and seeking new revenue
sources through joint operating agreements.
Stock
Based Compensation to Employees
The
Company accounts for its stock-based compensation in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 123R, "Share-Based Payment, an
Amendment of Financial Accounting Standards Board (“FASB”) Statement No. 123."
The Company recognizes in the statement of operations the grant-date fair value
of stock options and other equity-based compensation issued to employees and
non-employees.
Stock
Based Compensation to Other than Employees
The
Company accounts for equity instruments issued in exchange for the receipt of
goods or services from other than employees in accordance with Statement of
Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation,” and the conclusions reached by the Emerging Issues Task Force in
Issue No. 96- 18, “Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or Services”
(“EITF 96-18”). Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably determinable. The value of equity instruments
issued for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by the provider
of goods or services as defined by EITF 96-18. In the case of equity instruments
issued to consultants, the fair value of the equity instrument is recognized
over the term of the consulting agreement.
Reclassifications
Certain
prior year amounts have been reclassified to conform with the current year’s
presentation, none of which had an impact on total assets, stockholders’ equity
(deficit), net loss, or net loss per share.
Fair
Value of Financial Instruments
The
carrying value of cash, accounts receivable, deferred revenue, accounts payable,
and accrued expenses approximate fair value because of the short maturity of
these items.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly-liquid
instruments purchased with a remaining maturity of three months or less to be
cash equivalents.
F-9
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Concentrations
The
Company maintains its cash in bank deposit accounts that, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts. Management believes the Company is not exposed to any significant
credit risk related to cash.
The
Company primarily operates its stores in California and generated approximately
76.8% of its revenues in its California store operations in the year ended
December 31, 2008.
Currently,
we purchase all coffee beans from Landgrove Coffee Co., a related party under
ownership by a brother of the President of the Company.
Accounts
Receivable
Accounts
receivable are stated at amounts due from customers or individuals net of an
allowance for doubtful accounts. Accounts longer than the contractual payment
terms are considered past due.
Allowance
for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts resulting from the
inability, failure or refusal of franchisees to make required payments.
The Company determines the adequacy of this allowance by regularly
reviewing the accounts receivable aging and applying various expected loss
percentages to certain accounts receivable categories based upon historical bad
debt experience.
Notes
Receivable
Notes
receivable consist of amounts due from purchasers of former Company owned stores
and are stated net of amounts due from an individual that acquired the assets of
a store. The Company routinely evaluates the collectability of the notes to
determine if there is any risk of default. During the years ended December 31,
2008 and 2007 the Company reserved $0 and $442,461, respectively, as an
allowance for uncollectable debt.
Deferred
Offering Costs
Deferred
offering costs, consisting of legal and filing fees relating to future offerings
will be capitalized. The deferred offering costs will be offset against offering
proceeds in the event the offering is successful. In the event the offering is
unsuccessful or is abandoned, the deferred offering costs will be expensed.
Costs associated with debt offerings will be capitalized and amortized over the
terms of the debt. If the debt is repaid before it is due, or the debt is
converted, the Company will expense the remaining unamortized balance of these
costs at that time.
Investments
Investments
consist of corporate and government bonds. The Company purchased these during
2007 and classified them as available for sale. Any unrealized gain or loss was
recognized as other comprehensive income (loss) prior to the sale of these
investments. All investments were sold prior to December 31, 2007 and the
Company recorded $16,167 as realized loss on sale of investments during the year
ended December 31, 2007.
Acquisition
Due Diligence Costs
Acquisition
due diligence costs, consisting of legal, accounting and travel expenses
relating to an acquisition target in which the Company was unable complete
negotiations. These expenses would have been included in the purchase price
allocation in the event the acquisition was successfully completed. They are now
being recorded as an expense, in as much as the acquisition was abandoned.
Acquisition due diligence costs on an unrealized acquisition opportunity
for twelve months ended December 31, 2008 and 2007 were approximately $0
and $209,000, respectively.
Inventories
Inventories
consist of coffee and other beverage ingredients, cups, napkins, and other
serving goods, and are valued at the lower of cost or market, computed on the
first-in, first-out basis.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is
provided for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives. The estimated lives in
determining depreciation are recognized on the straight-line method over
estimated useful lives of five to seven years for equipment, signs, vehicles,
and site preparation and engineering. For leasehold improvements and buildings,
the Company depreciates the assets over the shorter of their estimated useful
lives or original lease terms plus any renewal periods for which renewal has
been determined to be reasonably assured.
F-10
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Intangible
Assets
In
accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets,” the Company evaluates intangible assets and other long-lived assets for
impairment, at least on an annual basis and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable from its
estimated future cash flows. Recoverability of intangible assets and other
long-lived assets is measured by comparing their net book value to the related
projected undiscounted cash flows from these assets, considering a number of
factors including past operating results, budgets, economic projections, market
trends and product development cycles. If the net book value of the asset
exceeds the related undiscounted cash flows, the asset is considered impaired,
and a second test is performed to measure the amount of impairment loss.
Impairment for the twelve months ended December 31, 2008 and 2007 was $0 and $0
respectively.
Deferred
Rent
For those
leases that require fixed rental escalations during their lease terms, rent
expense is recognized on a straight-line basis over the term of each lease (SFAS
13, par. 15). This method results in deferred rent of $421,795 and
$203,502 at December 31, 2008 and 2007, respectively. The liability will be
satisfied through future rental payments.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS 109, “Accounting for
Income Taxes.” The
Company records deferred income tax assets and liabilities based up the
difference between the financial statement and income tax bases of assets and
liabilities using enacted income tax rates. Valuation allowances are established
when necessary to reduce deferred income tax assets to the amount expected to be
realized. Income tax expense is the taxes paid and payable for the period and
the change during the period in the net deferred income tax assets and
liabilities.
Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes,” (“FIN 48”). FIN 48 prescribes recognition thresholds that must be met
before a tax position is recognized in the financial statements and provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. Under FIN 48, an entity may only
recognize or continue to recognize tax positions that meet a "more likely than
not" threshold. The Company did not make any adjustment to opening retained
earnings as a result of the implementation.
Based on
its evaluation, the Company has concluded that there are no significant
uncertain tax positions requiring recognition in its financial statements. The
Company’s evaluation was performed for the tax years ended December 31, 2005
through 2008 for U.S. Federal Income Tax and for the tax years ending December
31, 2005 through 2008 for the State of California Income Tax, the tax years
which remain subject to examination by major tax jurisdictions as of December
31, 2008.
The
Company’s policy is to recognize interest and penalties related to income tax
issues as components of income tax expense. The Company did not recognize or
incur any accrual for interest and penalties relating to income taxes as of
January 1, 2008 or December 31, 2008.
Franchise
Stores
The
following shows a detail of the franchise stores in operation as of December 31,
2008 for Company-owned and franchise stores:
Units
in Operation
|
Franchisee
Operated
|
Company
Operated
|
|||
Total
at December 31, 2007
|
9
|
11
|
|||
Units
opened
|
2
|
1
|
|||
Units
closed
|
0
|
3
|
|||
Units
sold
|
5
|
3
|
|||
Units
purchased
|
3
|
5
|
|||
Total
at December 31, 2008
|
9
|
11
|
F-11
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Revenue
Recognition
Initial
Franchise Fees
Initial
franchise fee income is recognized as revenue in accordance with Statement of
Financial Accounting Standards (SFAS) No. 45, “Accounting for Franchise Fee
Revenue.” SFAS 45 requires franchisors to recognize revenue from individual and
area franchise sales only when all material services or conditions relating to
the sale have been substantially performed or satisfied by the franchisor. In
accordance with SFAS 45, the Company recognizes these fees as revenue upon the
Company’s material and substantial performance of its obligations under the
Franchise Agreement, which usually occurs at the commencement of operations of
the individual location, unless it can be demonstrated that substantial
performance has occurred before this time. Initial franchise fee income amounted
to $127,000 and $0 for each of the years ended December 31, 2008 and 2007,
respectively.
Area
Development Fees
Area
development fee income is recognized in accordance with SFAS 45 on a pro rata
basis of the required quota of stores to be opened upon the Company’s material
and substantial obligations under its area development agreement which usually
occurs upon the Company’s approval of applicants to become franchisees provided
by the area developer. Area development fee income was $0 in 2008 and
2007.
Master
License Agreement Fees
Master
license agreement fee income is recognized as revenue in accordance with
Statement of Financial Accounting Standards (SFAS) No. 45 “Accounting for
Franchise Fee Revenue.” SFAS 45 requires franchisors to recognize revenue from
individual and area franchise sales only when all material services or
conditions relating to the agreement have been substantially performed or
satisfied by the franchisor. In accordance with SFAS 45, the Company recognizes
these fees as revenue upon the Company’s material and substantial performance of
its obligations under the Master License Agreement, which usually occurs at the
completion of operations training for the Master Licensee. Master license
agreement fee income amounted to $835,194 and $275,000 for the years ended
December 31, 2008 and 2007, respectively.
Royalties
Royalty
income of 4% of defined net sales is earned based on sales by franchisees and is
recognized monthly as revenue when the related sales are reported to the
Company. Additionally, the Company may receive a rebate or charge a mark-up for
delivered supplies and coffee. Royalty income amounted to $58,273 and $43,633
for the years ended December 31, 2008 and 2007, respectively.
Promotional
Fund Fees
Promotional
fund fee income of 1% of defined net sales is earned based on sales by specific
franchisees, as determined by their franchise agreements, and is recognized
monthly as revenue when the related sales are reported to the
Company. Promotional costs arising from area franchisee stores
are charged to advertising and marketing expense during the period
incurred. Promotional fund fee income amounted to $17,502 and $14,544
for the years ended December 31, 2008 and 2007, respectively.
Retail
Revenues
Company-operated
retail store revenues are recognized when payment is tendered at the point of
sale. Retail revenues amount to $6,592,312 and $6,127,951 for the years ended
December 31, 2008 and 2007, respectively.
Deferred
Revenue
Deferred
revenue consists of the portion of the initial franchise fees received from
franchisees who have not commenced operations, the pro rata portion of the
initial fees received from area development fees of which the Company has not
approved franchisee applications for the required quota, master license
agreement fees of which the Company has not completed its obligations and the
excess, if any, of the 1% weekly promotional fund fees received from franchisees
less the related promotional fund expenses incurred by the Company. Deferred
revenue amounted to $291,500 and $1,178,000 for the years ended December 31,
2008 and 2007, respectively.
Rewards/Gift
Cards
Revenues
from the Company’s stored value cards, such as the Java Detour rewards/gift
card, are recognized upon redemption. Outstanding customer balances are stated
separately as “Gift Card liability” on the accompanying consolidated balance
sheet. In accordance with the Company’s policies, none of its rewards/gift cards
carry expiration dates and Java Detour does not charge any service fees that
cause a decrement to customer balances. As of December 31, 2008 and 2007 the
Company has recorded $200,058 and $217,080, respectively as the gift card
liability for the stored value cards.
F-12
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
While the
Company will continue to honor all stored rewards/gift cards presented for
payment, management may determine the likelihood of redemption to be remote for
certain card balances due to, among other things, long periods of inactivity. In
these circumstances, to the extent management determines there is no requirement
for remitting card balances to government agencies under unclaimed property
laws, card balances may be recognized in the consolidated statements of
operations in “Other income.” The Company did not recognize any rewards/gift
card as “Other income” in 2008 or 2007.
Through
September 15, 2007 the Company offered two types of discounts to its customers:
reward cards and 2-for-1 coupons. The Company’s reward cards rewarded customers
for dollars spent at Java Detour stores. Every time a customer made a purchase
with their card, the value of the purchase was tracked on the card. Each
time a customer spent at least $35.00, $3.50 was loaded on their card and could
be used toward future purchases. These discounts constituted approximately
63% of all discounts for the year ended December 31, 2007. The Company
discontinued the reward card program on September 16, 2007 and converted
outstanding reward points to future purchase dollars at that time. In the year
ended December 31, 2008 the company used mass mail to distribute customer
coupons redeemable for reduced cost or free product, and in some cases for free
gift cards containing pre-loaded value. The value of these gift cards was
recognized as a sales discount immediately upon receipt, regardless of if or
when their balance was redeemed for product. These discounts constituted
approximately 15.7% of all discounts for the year ended December 31,
2008.
Occasionally
the Company will promote Java Detour in local markets and publish “Buy one drink
and get the second drink free” in newspapers and local coupon books, which are
redeemable at any Java Detour store. The Company accounts for these discounts in
accordance with the conclusions reached by the Emerging Issues Task Force in
Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)” as a reduction in revenue and
the above rewards and/or discounts are included in the line item “Sales and
other operating revenues, net” in the Company’s Consolidated Statements of
Operations.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Earnings
Per Share
In
accordance with SFAS No. 128, “Earnings Per Share,” the basic
loss per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding.
Diluted loss per common share is computed similar to basic loss per common
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
At December 31, 2008, the Company had 5,604,055 of potential
dilutive securities. The Company’s potential dilutive securities included
4,620,000 warrants that are exercisable at between $0.40 and $2.00 per share for
the purchase of common stock and 984,055 of stock options that are exercisable
between $1.00 and $1.10 a share for the purchase of common stock. At
December 31, 2007, the Company had 7,731,165 of potential dilutive
securities. The Company’s potential dilutive securities included 4,520,000
warrants that were exercisable at $2.00 a share for the purchase of common stock
and 3,211,165 of stock options that are exercisable between $1.00 and $1.10 a
share for the purchase of common stock. Due to the net loss, none of the
potentially dilutive securities were included in the calculation of diluted
earnings per share since their effect would be anti-dilutive.
Costs
of Sales
Included
in costs of sales are coffee beans, dairy products, other beverage ingredients,
paper products and food. These costs include freight charges, purchasing and
receiving costs, warehousing cost and other distribution network
costs.
Store
Operating Expenses
Store
operating expenses consist of direct and indirect labor, operating supplies,
store utilities, travel and entertainment, store maintenance, store leases,
store advertising, insurance, and taxes and licenses.
F-13
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist of salaries and related benefits,
travel and entertainment, corporate headquarters rent and utilities,
corporate advertising and marketing, and professional fees.
Advertising
and Marketing Costs
The
Company expenses costs of advertising and marketing as incurred. Advertising and
marketing expense for the years ended December 31, 2008 and 2007 were
$70,481 and $301,498, respectively.
Recently
Issued Accounting Pronouncements
In
November 2008, the FASB ratified Emerging Issues Task Force ("EITF") Issue
No. 08-6, "Equity Method Investment Accounting Considerations"
("EITF 08-6"). EITF 08-6 clarifies the accounting for certain
transactions and impairment considerations involving equity method investments.
EITF 08-6 is effective for fiscal years beginning after December 15,
2008, with early adoption prohibited. We are in the process of evaluating the
impact, if any, of EITF 08-6 on our consolidated financial
statements.
In
November 2008, the FASB ratified EITF Issue No. 08-7, "Accounting for
Defensive Intangible Assets" ("EITF 08-7"). EITF 08-7 clarifies the
accounting for certain separately identifiable intangible assets which an
acquirer does not intend to actively use but intends to hold to prevent its
competitors from obtaining access to them. EITF 08-7 requires an acquirer
in a business combination to account for a defensive intangible asset as a
separate unit of accounting which should be amortized to expense over the period
the asset diminishes in value. EITF 08-7 is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited. We are
in the process of evaluating the impact, if any, of EITF 08-7 on our
consolidated financial statements.
On
August 27, 2008, the SEC announced that it will issue for comment a
proposed roadmap regarding the potential use by U.S. issuers of financial
statements prepared in accordance with International Financial Reporting
Standards ("IFRS"). IFRS is a comprehensive series of accounting standards
published by the International Accounting Standards Board ("IASB"). Under the
proposed roadmap, the Company could be required in fiscal 2014 to prepare
financial statements in accordance with IFRS, and the SEC will make a
determination in 2011 regarding the mandatory adoption of IFRS. We have not yet
assessed the impact that this potential change would have on our consolidated
financial statements.
In May
2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)." This FSP specifies that issuers that have convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. This FSP is effective for
financial statements issued in fiscal years (and interim periods) beginning
after December 15, 2008 (calendar year 2009), and should be applied
retrospectively to all past periods presented even if the instrument has
matured, has been converted, or has otherwise been extinguished as of the FSP's
effective date. We have determined that FSP APB 14-1 does not currently
have a material impact on our financial statements as our existing convertible
debt instruments are not required to be settled in cash, nor do they give us an
option to settle in cash, upon conversion.
In April
2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position ("FSP") No. 142-3 ("FSP No. 142-3") "Determination of the Useful Life
of Intangible Assets." FSP No. 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and
Other Intangible Assets" to include an entity's historical experience in
renewing or extending similar arrangements, adjusted for entity-specific
factors, even when there is likely to be "substantial cost or material
modifications." FSP No. 142-3 states that in the absence of historical
experience an entity should use assumptions that market participants would make
regarding renewals or extensions, adjusted for entity-specific factors. The
guidance for determining the useful life of intangible assets included in this
FSP will be applied prospectively to intangible assets acquired after the
effective date of January 1, 2009. We are in the process of evaluating the
impact, if any, of FSP No. 142-3 on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
No. 141(R)”), which requires an acquirer to recognize in its financial
statements as of the acquisition date (i) the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree, measured
at their fair values on the acquisition date, and (ii) goodwill as the excess of
the consideration transferred plus the fair value of any noncontrolling interest
in the acquiree at the acquisition date over the fair values of the identifiable
net assets acquired. Acquisition-related costs, which are the costs an acquirer
incurs to effect a business combination, will be accounted for as expenses in
the periods in which the costs are incurred and the services are received,
except that costs to issue debt or equity securities will be recognized in
accordance with other applicable GAAP. SFAS No. 141(R) makes significant
amendments to other Statements and other authoritative guidance to provide
additional guidance or to conform the guidance in that literature to that
provided in SFAS No. 141(R). SFAS No. 141(R) also provides guidance as to what
information is to be disclosed to enable users of financial statements to
evaluate the nature and financial effects of a business combination.
SFAS No. 141(R) is effective for financial statements issued for fiscal
years beginning on or after December 15, 2008. Early adoption is
prohibited. We have not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS No. 141(R).
F-14
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51 (“SFAS No.
160”), which revises the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards that
require (i) the ownership interests in subsidiaries held by parties other than
the parent be clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from the parent’s
equity, (ii) the amount of consolidated net income attributable to the parent
and to the noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of income, (iii) changes in a parent’s
ownership interest while the parent retains its controlling financial interest
in its subsidiary be accounted for consistently as equity transactions, (iv)
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value, with
the gain or loss on the deconsolidation of the subsidiary being measured using
the fair value of any noncontrolling equity investment rather than the carrying
amount of that retained investment, and (v) entities provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 amends FASB
No. 128 to provide that the calculation of earnings per share amounts in the
consolidated financial statements will continue to be based on the amounts
attributable to the parent. SFAS No. 160 is effective for financial statements
issued for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Early adoption is prohibited. SFAS
No. 160 shall be applied prospectively as of the beginning of the fiscal year in
which it is initially applied, except for the presentation and disclosure
requirements, which shall be applied retrospectively for all periods presented.
We have not yet determined the effect on its consolidated financial statements,
if any, upon adoption of SFAS No. 160.
In
December 2007, the SEC issued Staff Accounting Bulletin
(SAB) No. 110, Share-Based Payment (“SAB
110”). SAB 110 establishes the continued use of the simplified method for
estimating the expected term of equity based compensation. The simplified method
was intended to be eliminated for any equity based compensation arrangements
granted after December 31, 2007. SAB 110 is being published to help
companies that may not have adequate exercise history to estimate expected terms
for future grants. We utilized the guidance in SAB 110 in estimating the
expected terms of options granted to employees.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (“SFAS No. 159”),
which provides companies with an option to report selected financial assets and
liabilities at fair value. SFAS No. 159’s objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally accepted
accounting principles have required different measurement attributes for
different assets and liabilities that can create artificial volatility in
earnings. SFAS No. 159 helps to mitigate this type of accounting-induced
volatility by enabling companies to report related assets and liabilities at
fair value, which would likely reduce the need for companies to comply with
detailed rules for hedge accounting. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 requires companies to provide
additional information that will help investors and other users of financial
statements to more easily understand the effect of the company’s choice to use
fair value on its earnings. SFAS No. 159 also requires companies to display the
fair value of those assets and liabilities for which the company has chosen to
use fair value on the face of the balance sheet. SFAS No. 159 does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS No.
157 and SFAS No. 107. SFAS No. 159 is effective as of the beginning of a
company’s first fiscal year beginning after November 15, 2007. Early
adoption is permitted as of the beginning of the previous fiscal year
provided we make that choice in the first 120 days of that fiscal
year and also elects to apply the provisions of SFAS No. 157. We are currently
assessing the potential effect of SFAS No. 159 on our consolidated
financial statements.
F-15
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (“SFAS No. 157”), which establishes a formal framework for
measuring fair value under Generally Accepted Accounting Principles (“GAAP”).
SFAS No. 157 defines and codifies the many definitions of fair value included
among various other authoritative literature, clarifies and, in some instances,
expands on the guidance for implementing fair value measurements, and increases
the level of disclosure required for fair value measurements. Although SFAS No.
157 applies to and amends the provisions of existing FASB and American Institute
of Certified Public Accountants (“AICPA”) pronouncements, it does not, of
itself, require any new fair value measurements, nor does it establish valuation
standards. SFAS No. 157 applies to all other accounting pronouncements requiring
or permitting fair value measurements, except for: SFAS No. 123R, share-based
payment and related pronouncements, the practicability exceptions to fair value
determinations allowed by various other authoritative pronouncements, and AICPA
Statements of Position 97-2 and 98-9 that deal with software revenue
recognition. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. We are currently assessing the potential effect of
SFAS No. 157 on its consolidated financial statements.
NOTE
2 – ACCOUNTS RECEIVABLE
Accounts
receivable as of December 31, 2008 and 2007 include balances due from
franchisees and other miscellaneous items totaling $18,033, net of $19,406 of
allowance for doubtful accounts and $97,167, net of $61,335 of allowance for
doubtful accounts, respectively. The royalties owed from a single franchisee, on
their 2008 net sales, amounted to $69,264, all of which was written off as bad
debt expense as of December 31, 2008 due to the fact that the Company has not
had any success in collecting monies owed on this account through December
2009.
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at December 31, 2008 and 2007
respectively:
2008
|
2007
|
|||||||
Land
|
$ | 425,000 | $ | 425,000 | ||||
Site
preparation and engineering
|
119,515 | 590,196 | ||||||
Buildings
|
2,285,672 | 1,783,861 | ||||||
Leasehold
improvements
|
1,687,853 | 1,565,391 | ||||||
Signs
|
293,098 | 355,823 | ||||||
Store
equipment
|
1,196,728 | 772,608 | ||||||
Other
equipment, furniture, and vehicles
|
418,402 | 475,128 | ||||||
Assets
held for disposal
|
47,738 | - | ||||||
Total
|
6,474,006 | 5,968,007 | ||||||
Less
accumulated depreciation
|
(1,752,708 | ) | (1,775,794 | ) | ||||
Property
and equipment, net
|
$ | 4,721,298 | $ | 4,192,213 | ||||
Depreciation
expense for the years ending December 31, 2008 and 2007 was $557,414 and
$462,063, respectively. Accumulated depreciation for assets under capital
leases was $540,484 and $306,091 at December 31, 2008 and 2007,
respectively. Depreciation expense for the assets under capital leases was
$146,203 and $149,279 for years ended December 31, 2008 and 2007,
respectively
|
NOTE
4 - INTANGIBLE ASSETS
Other
intangible assets consist of the following at December 31, 2008 and 2007
respectively:
2008
|
2007
|
|||||||
Indefinite-lived,
goodwill (see note 13)
|
$ | 429,000 | $ | 429,000 | ||||
Definite-lived
intangibles
|
72,288 | 69,907 | ||||||
Accumulated
amortization
|
(10,974 | ) | - | |||||
Definite-lived
intangibles, net
|
61,314 | 69,907 | ||||||
Total
|
$ | 490,314 | $ | 498,907 |
F-16
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
The
Company has evaluated the indefinite-lived intangible assets for impairment and
has estimated that $429,000 of the carrying value will be recoverable from its
estimated future cash flows. No impairment was recorded during the years ended
December 31, 2008 and 2007, respectively.
NOTE
5 - NOTES RECEIVABLE
During
2007, the Company sold four of its Las Vegas, Nevada locations to an unrelated
third party for cash, certain franchise rights, and a note receivable in the
amount of $900,000. During January 2008 the Company reacquired these assets and
forgave the full balance on the note receivable. See Note 16.
In
December of 2008, the Company sold two of its stores, located in Yuba City, CA
and Marysville, CA, to Java Norcal, operated by Ronald Sands, a
franchisee, Director and shareholder, for cash, certain franchise rights, and a
note receivable in the amount of $255,000. The term of the note is for ten years
and bears interest at the rate of 6.75% annually, however, interest does not
accrue for the first 12 months of the term of the note. The Company recorded a
gain on the sale of these stores of $882,710 during the year ended December 31,
2008.
NOTE
6 - SHORT-TERM RELATED PARTY NOTES PAYABLE
In May
2008, the Company entered into a Securities Purchase, Loan and Security
Agreement (the “Agreement”) with two related parties (“Secured Party”). Each
Secured Party acquired a secured promissory note in the amount of $366,666 and
1,000,000 shares of the Company’s common stock in exchange for $366,666 each for
total consideration of $733,333. The secured promissory notes are secured by the
assets of three store locations, accrue interest at 24% and are due with
interest in January 2009. The Company has recorded $76,667 as deferred financing
costs associated with the closing. This amount represents $66,667 paid to an
investment banking firm and $10,000 in legal fees associated with the private
placement. These amounts will be amortized to interest expense over the term of
the notes.
In July
2008, the Company entered into a third Securities Purchase, Loan and Security
Agreement (the “Agreement”) with one of the same related parties (“Secured
Party”). The Secured Party acquired a secured promissory note in the amount of
$366,666 and 1,000,000 shares of the Company’s common stock in exchange for
$366,666, bringing total consideration of these notes to $1,100,000. This third
secured promissory note is secured by the assets of the same three store
locations, and also accrues interest at 24% and is also due with interest in
January 2009. The Company has recorded an additional $33,333 as deferred
financing costs associated with the closing, for total deferred financing of
$100,000. This amount will be amortized to interest expense over the term of the
notes. The Company has recognized $91,736 of interest expense related to
amortization of the total deferred financing costs for the year ended December
31, 2008. The Company has recognized $164,226 of accrued interest expense
related to the terms of the notes for the year ended December 31,
2008.
The
estimated fair value of the shares of common stock of $1,600,000 has been
determined using closing market price for the Company’s common shares on the
date the agreement closed. The face amount of the secured promissory notes of
$1,100,000 was proportionately allocated to the secured promissory notes and the
stock in the amount of $465,385
and $634,615, respectively. The $634,615 value allocated proportionately to the
shares of common stock has been accounted for as a discount that is being
amortized and treated as interest expense over the term of the secured
promissory notes under the effective interest method. The Company has recognized
interest expense related to the amortization of the debt discount of $596,332
for the year ended December 31, 2008.
On
February 24, 2009, effective February 17, 2009, the Company amended the
Agreement. The due date for the Notes was extended from January 15,
2009 to May 17, 2009. As consideration for the extension, the Company agreed to
pay $33,333.33 to each Secured Party on or before March 3, 2009. The Company has
not made these payments. As additional consideration it did pay $3,396 in legal
fees to the Secured Parties’ counsel. Additionally, the Company
issued to two of the Secured Parties five-year warrants to each purchase 250,000
shares of the Company’s common stock at an exercise price of $0.50 with a
cashless exercise provision.
As of
December 15, 2009 the balance of these notes is due on demand and each of the
three Secured Parties has the right to foreclose.
F-17
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
NOTE
7 - LONG-TERM OBLIGATIONS
Long-term
obligations, excluding capital leases, consist of the following:
|
2008
|
2007
|
||||||
Notes
payable to a bank, payable in monthly installments with interest at Prime
Rate plus 1.75% (6.75 % at December 31, 2008 and 9.50% at December
31, 2007), maturing in 2021 through 2029, secured by the property and
equipment at three stores
|
$ | 831,951 | $ | 860,120 | ||||
Notes
payable to a multi-bank organization, payable in monthly installments with
interest at Prime Rate plus 2.75% (7.75 % at December 31, 2008 and
10.50% at December 31, 2007), maturing in 2009, secured by substantially
all the Company’s assets. A final balloon payment on this loan was due
February, 2009. This payment was not made. The Company has continued
making monthly payments equal to the agreement’s original monthly
installments.
|
39,630 | 60,144 | ||||||
Term
loan from vehicle dealer, payable in monthly installments with fixed
interest of 7.69% maturing in 2011, secured by one vehicle
|
14,236 | 19,209 | ||||||
Term
loan from vehicle dealer, payable in monthly installments with fixed
interest of 2.74% maturing in 2010, secured by one vehicle
|
10,410 | 19,072 | ||||||
Note
payable to an individual, payable in monthly installments with fixed
interest at 6.00%, maturing in 2014, secured by all assets purchased
through this agreement at a single store (13).
|
391,018 | 475,000 | ||||||
Non-interest
note payable to a corporation, net of discount of $6,000 using an
effective rate of 10%, payable in monthly installments, , maturing in
2010, not secured. The Company has not made any of it 2009 payments and is
in default. Note 16
|
64,000 | - | ||||||
Note
payable to a corporation, payable in monthly installments, non-interest
bearing, maturing in 2010, not secured. The Company has been in default
since failing to make its February, 2009 payment.
|
165,336 | - | ||||||
Total
notes payable
|
$ | 1,516,581 | $ | 1,433,545 | ||||
Less
current portion
|
437,243 | 146,508 | ||||||
Long-term
obligations
|
$ | 1,079,338 | $ | 1,287,037 |
Scheduled
annual maturities of long-term obligations, excluding capital leases, are as
follows:
2009
|
$
|
437,243
|
||
2010
|
269,755
|
|||
2011
|
137,663
|
|||
2012
|
131,914
|
|||
2013
|
26,972
|
|||
Thereafter
|
513,034
|
|||
Total
|
$
|
1,516,581
|
F-18
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
NOTE
8 - LEASE COMMITMENTS
The
Company currently has 26 capital leases. Approximately 60% of the leases have a
60-month term with a $1.00 buyout option after the final payment under the
lease. The remaining leases have terms of either 36 or 48 months. Additionally,
7% of the leases required a 10% balloon payment at the beginning of the lease,
and 3% call for a fair market buy out. All leases have either the final month
prepaid or a single payment on account as a refundable security deposit. None of
the leases have an escalation clause; however annual payments may vary slightly
if there are changes to regional sales or property tax rates. The Company has
failed to make payments on one of these leases, which has been in
default since February 25, 2009.
Capital
lease obligations consist of the following:
2008
|
2007
|
|||||||
Lease
for the land of the Red Bluff store site, on which payments, less interest
at 10% per annum, are credited toward purchase of the land; expires in
2012 with options to extend by two six-year periods; full ownership would
be attained in 2022 under present terms
|
$ | 204,676 | $ | 212,168 | ||||
Leases
for property and equipment at several store sites, expiring through 2011,
a majority of the total balance guaranteed by two
stockholders
|
348,612 | 559,353 | ||||||
Total
|
$ | 553,288 | $ | 771,521 |
The
Company leases its headquarters and most of its store sites under long-term
operating lease agreements expiring in 2009 through 2021. Included in these are
13 operating leases governing 11 of its stores (two for its San Francisco and
San Rafael stores each), a 14th lease on an undeveloped site in Los Altos, CA,
and four leases for properties it is attempting to sublet in Bakersfield, CA,
Las Vegas, NV, Henderson, NV and Charlotte, NC. Additional leases exist for the
Company’s headquarters and a storage facility in California. The leases
initially run for 5, 10 or 15 years and each store have between one and
five-year extensions available. Four leases have pre-established rent increase
that take effect when each five-year option is exercised, all others have small
annual rent increases and allow for renegotiation of the rental amount before
options are exercised. The Company does not typically
guarantee leases for franchisee locations, however, during 2008 the
Company did guarantee one lease pursuant to the agreement. Rent expense under
operating leases totaled $1,385,354 for 2008 and $715,595 for 2007.
Future
minimum lease payments are as follows:
Capital
|
Operating
|
Total
|
||||||||||
2009
|
$ | 272,660 | $ | 1,085,952 | $ | 1,358,612 | ||||||
2010
|
139,583 | 1,047,621 | 1,187,204 | |||||||||
2011
|
70,334 | 1,023,662 | 1,093,996 | |||||||||
2012
|
54,354 | 860,347 | 914,701 | |||||||||
2013
|
28,372 | 617,889 | 646,261 | |||||||||
Thereafter
|
222,243 | 2,344,093 | 2,566,336 | |||||||||
Total
|
$ | 787,546 | $ | 6,979,564 | $ | 7,767,110 | ||||||
Less
amounts representing interest
|
(234,258 | ) | ||||||||||
Present
value of minimum lease payments
|
553,288 | |||||||||||
Less
current portion
|
(205,818 | ) | ||||||||||
Total,
net of current portion
|
$ | 347,470 | ||||||||||
The
gross amount of assets under capital leases recorded as property and
equipment was $1,262,096 and $840,876 as of December 31, 2008 and 2007
respectively. Depreciation expense for the assets under capital leases was
$146,203 and $149,279 for the years ended December 31, 2008 and 2007,
respectively.
|
F-19
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
NOTE 9 - LINES OF
CREDIT
As of
December 31, 2008 the Company had two revolving lines of credit with interest
rates ranging from 13.5% and 15.0%. Both lines of credit are personally
guaranteed by Michael Binninger, President and Chief Operating
Officer. Total available credit under the lines of credit with Wells
Fargo Bank was $92,200. Outstanding balances as of December 31, 2008 and 2007
totaled $89,607 and $0, respectively.
NOTE
10 - INCOME TAXES
The
provision (benefit) for income taxes consists of the following:
December 31,
|
||||||||
2008
|
2007
|
|||||||
Deferred
income tax benefit for net operating losses
|
$ | 485,647 | $ | - | ||||
Current
income tax expense
|
4,000 | 3,322 | ||||||
Income
tax expense (benefit), net
|
$ | 489,647 | $ | 3,322 |
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax liabilities and assets as of December 31, 2008
and 2007 are as follows:
|
2008
|
2007
|
||||||
Net
operating loss carry-overs for federal income taxes totaling approximately
$14,800,000, expiring in 2022 through 2028 for 2008 and $10,937,087,
expiring in 2022 through 2027 for 2007
|
$ | 5,087,476 | $ | 3,937,351 | ||||
Net
operating loss carry-overs for state of California income taxes totaling
approximately $14,500,000, expiring in 2012 through 2018 for 2008 and
$10,651,284, expiring in 2012 through 2017 for 2007
|
1,316,758 | 735,096 | ||||||
Total
|
6,404,234 | 4,672,447 | ||||||
Valuation
allowance
|
(6,404,234 | ) | (4,186,800 | ) | ||||
Deferred
tax assets, net
|
$ | 0 | $ | 485,647 |
The
Components of deferred income tax expense (benefit) are as follows:
December 31,
2008
|
December 31,
2007
|
|||||||
Depreciation
|
$ | (71,704 | ) | $ | 4,241 | |||
Contingent
liability
|
(12,852 | ) | 128,520 | |||||
Accrued
vacation
|
4,024 | (26,025 | ) | |||||
Accrued
officer salaries
|
2,707 | 4,467 | ||||||
Net
operating loss carry forward
|
(1,653,962 | ) | (1,395,654 | ) | ||||
Increase
in valuation allowance
|
2,217,434 | 1,287,773 | ||||||
Income
tax expense
|
$ | 485,647 | $ | 3,322 |
Following
is a reconciliation of the amount of income tax expense (benefit) that would
result from applying the statutory federal income tax rates to pre-tax income
and the reported amount of income tax expense (benefit):
2008
|
2007
|
|||||||
Tax
benefit (expense) at federal statutory rates
|
$ | (1,328,894 | ) | $ | (1,994,721 | ) | ||
Depreciation
|
71,878 | 14,970 | ||||||
Timing
differences
|
(55,655 | ) | (57,813 | ) | ||||
Increase
in valuation allowance
|
1,312,671 | 2,037,564 | ||||||
Income
tax benefit, net
|
$ | 0 | $ | 0 |
F-20
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
At
December 31, 2007, the Company has provided a partial valuation allowance for
the deferred tax assets since management has determined that the realization of
a portion of that asset is more likely than not.
NOTE
11 - STOCKHOLDER’S EQUITY
PREFERRED
STOCK
The
Company is authorized to issue up to 5,000,000 shares of $0.001 par value
preferred stock. As of December 31, 2008, the Company does not have any shares
of preferred stock outstanding. All transactions relating to preferred stock
prior to the reverse merger were that of JDCO.
COMMON
STOCK
The
Company is authorized to issue 75,000,000 shares of common stock, with a $0.001
par value per share. On December 31, 2008 and 2007, the Company has
33,768,823 and 28,743,823 shares issued and outstanding,
respectively.
On
November 30, 2006, as part of a single private placement, the Company sold
10,000,000 shares together with five-year warrants to purchase 2,500,000 shares
of common stock at $2.00 per share for total consideration of $10.0 million. As
part of the transaction, the Company paid the placement agent $1,050,000 for
commissions and fees and granted warrants to purchase 2,000,000 shares of common
stock with the same terms as those granted to the investors in the placement
except that the placement agent warrants are exercisable nine months from the
date of issuance and have a cashless exercise feature. The shares included in
the private placement have weighted average anti-dilution coverage for the
issuance of securities within 12 months of the closing of the Merger at a price
below $1.00, subject to customary exceptions.
As part
of the private placement, the Company entered into a share registration rights
agreement, whereby the Company agreed to register the shares of common stock
sold in the private placement. The agreement requires the Company to file a
registration statement within 30 days of the closing and to have the
registration statement declared effective within 120 days of the closing. If the
Company fails to have the registration statement declared effective within 120
days, the Company must pay a prorated monthly penalty of 1.5% of the amount
raised. The Company filed the registration statement on Form SB-2 to register
9,442,593 shares of the common stock sold in the private placement on December
29, 2006. The registration statement was not declared effective within 120 days
of the closing.
The
Company also entered into a warrant registration rights agreement, whereby the
Company agreed to register the remaining shares of the common stock sold in the
private placement, the shares underlying the warrants issued in the private
placement and 4,418,403 shares of common stock
which are owned by the placement agent and its affiliates. The agreement
requires the Company to file a registration statement within 10 days of June 29,
2007 and to have the registration statement declared effective within 120 days
of such filing. If the Company fails to have the registration statement declared
effective within 120 days, the Company must pay a prorated monthly penalty of
1.5% of the amount raised. The registration statement covering the warrant
registration rights was filed on July 10, 2007 and declared effective on July
26, 2007.
In
accordance with FSP EITF 00-19-2, on the date of the private placement, the
Company reviewed the terms of the registration rights agreements and as of that
date, the Company believed they would meet all of the required deadlines under
both of the agreements. As a result, the Company did not record any liability
associated with the registration rights agreement. The registration statement
covering the shares issued in the private placement was not declared effective
within the 120 day requirement. The Company received a 30 day waiver from the
investors, which extended the deadline for the effectiveness of the registration
statement to April 24, 2007. As a result the Company determined that it was
probable that the registration statement would be declared effective within 30
days of the extended deadline and recorded a contingent liability of $150,000
representing one month of registration rights penalties. The Company’s
registration was declared effective July 5, 2007. Upon effectiveness, the
investors waived the penalty and the Company has recorded a gain on registration
rights agreement as other income for the year ended December 31, 2007. The
Company believed it would meet its deadlines for the registration and
effectiveness of the stock underlying the warrant registration rights agreement
and therefore did not record any contingent liability associated with those
shares. The Company met the deadlines associated with the shares underlying the
warrant registration rights agreement.
F-21
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
The
warrants granted to the investors in the above private placement were treated as
permanent equity pursuant to exemption from FAS 133 under paragraph
11a.
In August
2007, the Company issued 403,536 shares of common stock for the cashless
exercise of 500,000 warrants with an exercise price of $0.60 per
share.
During
the year ended December 31, 2008 the Company issued 2,025,000 shares of common
stock to acquire property and equipment (see Note 15). The Company also issued
3,000,000 shares of common stock as part of a related party secured promissory
note (see Note 6).
DESCRIPTION OF STOCK
PLANS
Java
Detour, Inc. 2006 Equity Incentive Plan
On
November 30, 2006, the Company’s board of directors adopted the Java
Detour, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). Under
the 2006 Plan, a total of 4,249,167 common shares will be available for
issuance through the grant of a variety of common share-based awards under the
plan. Types of awards that may be granted under the 2006 Plan include stock
awards, restricted stock awards and non-qualified and incentive stock options.
Option vesting terms are determined at the Grant Date, but have generally been
set at even increments over four years. In no event may the term exceed ten
years. As of December 31, 2008, there were 984,055 outstanding options
under the 2006 Plan, all vesting over a period of 4 years, and 3,265,112
shares available for issuance. As of December 31, 2007, there were 3,211,165
outstanding options under the 2006 Plan, all vesting over a period of 4 years,
and 1,038,002 shares available for issuance.
The
Company uses the Black-Scholes option-pricing model to estimate the fair value
of share-based awards under SFAS No. 123(R). The Black-Scholes option-pricing
model incorporates various and highly subjective assumptions, including expected
term and expected volatility. Because the Company did not have sufficient amount
of historical information regarding the volatility of its share price, expected
volatility was estimated based on the historical volatility of a comparable
company in a similar industry.
Additionally,
SFAS No. 123(R) requires the Company to estimate pre-vesting option forfeitures
at the time of grant and periodically revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. The company records
stock-based compensation expense for only those awards expected to vest. From
February 15, 2008 through December 27, 2008, 2,778,110 options were forfeited
due to employee terminations.
The
following table shows the Company’s assumptions used to compute the stock-based
compensation expense and the weighted average grant-date fair value of the stock
options granted during the years ended December 31, 2008 and 2007:
2008
|
2007
|
|||||||
Weighted-average
risk free rate of interest
|
4.24 | % | 4.87 | % | ||||
Expected
Volatility
|
140 | % | 130 | % | ||||
Weighted-average
expected life
|
5
years
|
5
years
|
||||||
Dividend
Yield
|
-- | -- | ||||||
Weighted-average
fair Value
|
$ | 0.47 | $ | 0.79 |
The
information set forth in the following table covers options granted under the
Company’s stock option plan:
Options
Granted
|
Weighted Average
Exercise Price
|
|||||||
Balance,
December 31, 2006
|
2,324,165 | $ | 1.03 | |||||
Exercised
|
0.00 | $ | 0.00 | |||||
Cancelled
|
0.00 | $ | 0.00 | |||||
Granted
|
887,000 | $ | 1.00 | |||||
Balance,
December 31, 2007
|
3,211,165 | $ | 1.02 | |||||
Exercised
|
0.00 | $ | 0.00 | |||||
Cancelled
|
(2,278,110 | ) | $ | 1.02 | ||||
Granted
|
51,000 | $ | 1.00 | |||||
Balance,
December 31, 2008
|
984,055 | $ | 1.02 | |||||
Exercisable,
December 31, 2008
|
310,778 | $ | 1.04 |
F-22
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
The
aggregate intrinsic value for stock options outstanding and for stock options
exercisable as of December 31, 2008 was $80,349 and $29,299, respectively. The
intrinsic value for stock options outstanding and exercisable is calculated as
the difference between the fair market value as the end of the period and the
exercise price of the shares.
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2008 and 2007 respectively.
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||
Range
of
|
Number
|
Weighted-Average
|
Weighted
–Average
|
Weighted-Average
|
|||||||||||||
Exercise
prices
|
Outstanding
|
Remaining
Contractual Life
|
Exercise
Price
|
Number
Exercisable
|
Exercise
Price
|
||||||||||||
At
December 31, 2007
|
|||||||||||||||||
$1.00
to $1.10
|
3,211,165
|
9.09
|
$
|
1.02
|
581,041
|
1.03
|
|||||||||||
At
December 31, 2008
|
|||||||||||||||||
$1.00
to $1.10
|
984,055
|
8.35
|
$
|
1.02
|
310,778
|
1.03
|
Changes
in the Company’s nonvested options at December 31, 2008 and 2007 are
summarized as follows:
Number
Of
Shares
|
Weighted Average
Grant
Date
Fair Value
|
||||
Nonvested
at December 31,2006
|
2,324,165
|
$
|
0.87
|
||
Granted
|
887,000
|
$
|
0.79
|
||
Vested
|
581,041
|
$
|
0.87
|
||
Forfeited
|
0
|
$
|
0.00
|
||
Nonvested
at December 31,2007
|
2,630,124
|
$
|
0.81
|
||
Granted
|
51,000
|
$
|
0.47
|
||
Vested
|
238,764
|
$
|
0.74
|
||
Forfeited
|
1,763,583
|
$
|
0.84
|
||
Nonvested
at December 31, 2008
|
678,777
|
$
|
0.70
|
As of
December 31, 2008 and 2007, there was $601,385 and $403,432, respectively of
total unrecognized compensation cost related to nonvested stock options, which
is expected to be recognized over a weighted-average period of 3.32 and 4.09
years, respectively. Total compensation
expense recorded in accordance with FAS 123R during the years ended December 31,
2008 and 2007 was $523,669 and $458,980, respectively.
WARRANTS
We have
outstanding warrants to purchase 4,620,000 shares of our common stock
outstanding, 2,000,000 exercisable at $2.00 per share for a five-year period
from the date of issuance, 100,000 exercisable at $0.40 per share for a 15-year
period from the date of issuance.
Summary
of Warrants Granted
The
following table summarizes warrants granted for the years ended December 31,
2008 and 2007.
F-23
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Warrants
|
Weighted Average
Exercise Price
|
|||||||
Balance,
December 31, 2006
|
5,020,000 | $ | 1.86 | |||||
Exercised
|
(500,000 | ) | $ | .60 | ||||
Cancelled
|
0 | $ | 0.00 | |||||
Granted
|
0 | $ | 0.00 | |||||
Balance,
December 31, 2007
|
4,520,000 | $ | 2.00 | |||||
Exercised
|
$ | 0.00 | ||||||
Cancelled
|
$ | 0.00 | ||||||
Granted
|
100,000 | $ | 0.40 | |||||
Balance,
December 31, 2008
|
4,620,000 | $ | 1.97 | |||||
Exercisable,
December 31, 2008
|
4,620,000 | $ | 1.97 |
The
weighted average remaining contractual life of the common share purchase
outstanding is 3.04 years at December 31, 2008. The exercise prices for common
share purchases outstanding at December 31, 2008 were as
follows:
Number
of
Warrants
|
Exercise
Price
|
|||||
4,520,000 | $ | 2.00 | ||||
100,000 | $ | 0.40 | ||||
4,620,000 |
During
the year ended December 31, 2006, the Company issued a total
of 500,000 common share purchase warrants valued at $450,499 as
additional consideration for the bridge loan from The Hunter Fund Limited of
$500,000. The Company calculated the value of these warrants using the
Black-Scholes model based on the following assumptions: a risk-free rate of
4.75%, volatility of 130%, estimated life of 5 years and a fair market value of
$1.00 per share. The value of these warrants of $450,499 was recorded as
deferred financing cost and was being amortized over the 2 year term of the
note. Upon repayment of the note in December 2006, the remaining unamortized
balance was expensed to interest. These warrants were exercised during the year
ended December 31, 2007 under the cashless provision in exchange for 403,536
shares of common stock.
During
the year ended December 31, 2008, the Company issued a total
of 100,000 common share purchase warrants valued at $39,806 as
additional consideration for the consummation of a franchise area agreement. The
Company calculated the value of these warrants using the Black-Scholes model
based on the following assumptions: a risk-free rate of 4.75%, volatility of
130%, estimated life of fifteen years and a fair market value of $0.40 per
share. The value of these warrants of $39,806 was recorded as additional paid in
capital.
NOTE
12 - COMMITMENTS AND CONTINGENCIES
Litigation
On June
30, 2009 a suit claimed damages against the Company of $165,336. The full amount
is recorded as a long-term note payable as of December 31, 2008 (see Note 7).
The Company became subject to a default judgment on this matter in 2009
and finalized a settlement resolving the issue in January
2010.
On
September 9, 2009 a suit claimed damages against the Company of $300,000 for
reimbursement of funds advanced to the Company. This creditor has a default
judgment against the Company for $363,173, which includes penalty interest and
legal fees.
In
addition to these suits, as of December 31, 2008 and December 31, 2009, 0 and 3
of the Company’s creditors have default judgments against the Company for $0 and
$119,923, respectively. All of these judgments have been accrued by the
Company in accounts payable in the financial statements.
As of
December 31, 2009, the Company is delinquent in each of its leases.
Management is working with our landlords on lease amendments, lease extensions
and lease terminations and will become current on its rental payments as soon as
funds are available.
The
Company is in default on three notes due to secured parties totaling $1,364,226
including accrued interest at December 31, 2008. The amount of these notes is
due on demand. The three creditors have entered into a stipulated judgment with
the Company for the amount due (see Note 6).
F-24
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
The
Company is party to various other legal proceedings arising in the ordinary
course of its business and for collection of past due payables, but it is not
currently a party to any legal proceeding that management believes would have a
material adverse effect on its consolidated financial position.
Related Party
Transactions
The
Company purchases coffee from Landgrove Coffee Co., a related-party under
ownership by a brother of the President of the Company. A third brother is also
a Director of the Company. While we typically do not enter into
exclusive supply contracts to purchase coffee beans, we do enter oral agreements
committing to purchase up to 80,000 pounds of whole bean coffee at fixed pricing
several times per year. As of December 31, 2008 and 2007 the Company owes
$55,919 and $46,086, respectively, to Landgrove Coffee Co for coffee purchases
in 2008. The Company paid Landgrove $347,184 and $381,533 for coffee purchases
for the years ended December 31, 2008 and 2007 respectively. The
Company paid Landgrove $ 103,057 and $39,231 for coffee related equipment and
supply purchases for the years ended December 31, 2008 and 2007 respectively.
JDCO Subsidiary reserves the right to earn a profit on the sale of proprietary
products of up to 20% and may from time to time request that Landgrove Coffee
facilitate this through its invoicing of franchisees. In such cases, Landgrove
Coffee will issue JDCO Subsidiary a quarterly rebate. The rebates are recorded
as royalty revenue in the Company’s consolidated statements of operations. For
its fiscal year ended December 31, 2008 and 2007, JDCO Subsidiary’s revenue from
franchisee purchases totaled $3,760 and $8,999, respectively. On June 1, 2009
Landgrove agreed to convert $104,871 of outstanding accounts payable balance to
a promissory note due July, 2011 bearing interest at the rate of 6% annually.
The Company will start making monthly payments in February, 2010.
In
December 2008, the Company sold two of its stores, located in Yuba City, CA and
Marysville, CA, to its franchisee Java Norcal, which is owned and operated by
Ronald Sands, a Director and Shareholder of the Company. In exchange for the two
stores and their assets, the Company accepted cash, certain franchise rights,
and a note receivable in the amount of $255,000. The term of the note
is for ten years and bears interest at the rate of 6.75% annually, however,
interest does not accrue for the first 12 months of the term of the note and
principal payments do not commence until December 2010. The Company
recorded a gain on the sale of these stores of $882,710 during the year ended
December 31, 2008.
On March
1, 2009 the company engaged the West Embarcadero Group (“WEG”) to advise and
assist the board of directors of the Company with a reorganization plan designed
to best secure the interests of the stakeholders of the Company. Harry R. Kraatz
is the principal and sole owner of the West Embarcadero Group. The Company
agreed to pay W.E.G. Inc. $25,000 per month, $10,000 of which is being deferred
and accrued as a payable . The contract is cancelable at the end of any month.
On April 13, 2009, the Company retained and appointed Harry R. Kraatz as Chief
Restructuring Officer, a newly created position, to oversee the management and
reorganization of the Company’s business including assisting the Company with
restructuring its balance sheet, reducing costs and implementing a revised
strategic plan. On November 1, 2009, the Company’s Board of Directors appointed
Mr. Kraatz as the Company’s Chairman of the Board of Directors and Chief
Executive Officer. As of January 26, 2010, there was no employment
agreement in place for the CEO position. Mr. Kraatz is being paid $1 per year as
compensation for his role as Chief Executive Officer and the $25,000 per month
payments to WEG remain in place.
Employment
Agreements
The
Company has a five year employment agreement with Michael
Binninger President and Chief Executive Officer, amended November 1, 2009
to change position to President and Chief Operating Officer. Under the
agreement, he is entitled to an annual base salary of $205,900 per year and cash
bonus to be determined by the Company, and is entitled to a severance of up to
one year base salary if he is terminated by the Company without cause. The
agreement automatically renews for a period of one year, and each successive
year thereafter, unless the Company or employee declines to renew by providing
written notice of such decision on the other party not less than 60 days before
the expiration date. The agreement allows for annual cost of living increases
based on the consumer price index, San Francisco, California. For the fourth
quarter of 2007, the executive verbally agreed to reduce base salary to an
effective rate of $180,000 per year. For the year ended December 31, 2008 the
executive verbally agreed to defer $15,835 of his annual salary until further
notice. As of April 1, 2009 the executive verbally agreed to further
reduce the annual amount of salary paid in cash to $150,000. For the
year ended December 31, 2009 the executive deferred $11,531 of his annual salary
until further notice, and has returned $18,120 of previously received cash
compensation to the Company which shall be paid by the Company at future
undetermined date. All compensation that the executive has deferred and
continues to defer from his gross pay as defined in his employment contract is
being accrued as a payable. No interest is being paid on the amount
payable.
F-25
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Future
commitments under employment agreements are as follows:
Base
|
||||
2009
|
$
|
205,900
|
||
2010
|
205,900
|
|||
2011
|
188,742
|
|||
2012
|
0
|
|||
Thereafter
|
0
|
NOTE
13 – STORE ACQUISITION
On
November 9, 2007, the Company purchased the right, title and interest in the
assets related to a coffee retail location in Northern California. The purchase
price for the Assets was $650,000, which comprised of (i) $150,000 in cash, (ii)
$475,000 payable pursuant to a promissory note accruing interest at a fixed rate
of 6% per annum and maturing on January 1, 2013, and (iii) 12,500 shares of the
Company’s common stock valued at $2.00 per share. The fair value of the assets
acquired and allocation of the purchase price is summarized as
follows:
Inventory
|
$
|
6,000
|
||
Building
|
$
|
175,000
|
||
Property
and Equipment
|
$
|
40,000
|
||
Goodwill
|
$
|
429,000
|
||
Purchase
price
|
$
|
650,000
|
On June
1, 2009 the Company amended and restated this secured promissory note whereby
the remaining $361,889 of principle will now mature April 20, 2014. It continues
to accrue intrest at a fixed rate of 6% per annum.
NOTE
14 – FRANCHISE AGREEMENTS
During
2007 the Company entered into franchise, area development and master license
agreements which granted rights to sell or open stores in the cities of
Livermore, California, and Tracy, California, the counties of Broward and
Gainesville in Florida, the States of Colorado, New York and New Jersey, and the
country of China. The aggregate acquisition price of these territories was
$946,000, of which $528,000 was received as of December 31, 2007. No revenue was
recorded on the received funds for the twelve months ended December 31, 2007. Of
the $528,000 received, $142,500 was recorded as deferred revenue, current
portion and $385,500 was recorded as deferred revenue, long term. The Company
has also agreed to issue an aggregate of 300,000 warrants of the Company’s
common stock valued at $1.00 per share pending the successful completion of
specific terms in certain of these agreements. As of December 31, 2007, no
stores had been opened under these agreements.
During
2008 and through December 31, 2009 the Company entered into franchise, area
development and master license agreements which granted rights to sell or open
stores in the States of California, Colorado, and Nevada, and the countries of,
Singapore, Kuwait, Dubai, and other Gulf States. The aggregate acquisition price
of these territories was $860,500, of which $860,500 was received as of December
31, 2008. Revenue of $775,000 was recorded on the received funds for the twelve
months ended December 31, 2008. Of the $860,500 received, $57,000 was recorded
as deferred revenue, current portion and $142,500 was recorded as deferred
revenue, long term. The Company has also issued an aggregate of 100,000 warrants
of the Company’s common stock valued at $0.40 per share as a result of specific
terms in certain of these agreements. As of December 31, 2008, one new store has
been opened under these agreements, and three existing stores have been
transferred to franchisee ownership.
F-26
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
NOTE
15 – JAVA UNIVERSE AGREEMENT
On March
30, 2007 the Company entered into a Master License Agreement with Java Universe,
LLC, a Nevada limited liability company, for the sale of rights to sell Java
Detour® franchises throughout the Middle East and parts of North Africa. The
aggregate purchase price is $1.0 million, of which $100,000 was received as a
deposit on February 5, 2007 and $400,000 was received during the three months
ended June 30, 2007. The remaining balance of $500,000 will be receivable either
when the Company registers as a franchisor in the Middle East and North Africa
marketplaces or six months from the execution of the Master License Agreement,
whichever occurs first. The Company has yet to receive the remaining $500,000
payment. On October 16, 2007, the Company entered into an amendment to the
Master License Agreement, pursuant to which the Company granted Java Universe an
extension until October 31, 2007 to tender the remaining $500,000 payment.
The initial $500,000 was recorded as deferred revenue. As an incentive to enter
into the Master License Agreement, the Company originally agreed to grant
600,000 options to purchase common shares at $1.00 per share to persons as
designated by Java Universe, LLC. The options were initially to be granted under
the 2006 Plan, of which all the shares approved for issuance under the 2006 Plan
have been registered pursuant to an S-8 registration statement. It has been
determined that the options do not qualify for issuance pursuant to the 2006
Plan and the S-8 registration. Instead, the Company intends to issue to Java
Universe, LLC another form of derivative security. The Company has not
determined what derivative security will be issued to Java Universe; therefore
for accounting purposes the Company determined the measurement date has not
occurred and no value has been recorded for the derivative security that will be
issued. The Company has a commitment to issue Java Universe these derivative
securities and believes the terms and number of such derivative securities will
be similar to what was originally agreed upon in the Master License Agreement.
Once the Company has determined what derivative security will be issued and all
other terms are agreed upon by both parties, the value of the derivative
security will be recorded as a reduction to unearned revenue and they will be
subsequently recorded as a reduction to license fee revenues when they are
earned. Neither the previously discussed options nor any other derivative
security has been issued by the Company pursuant to the Master License
Agreement. The Company will recognize the revenue and the value of the
derivative security that will be issued as a sales incentive upon the Company’s
completion of all obligations to Java Universe, which includes the granting of
the derivative security. Pursuant to the amendment referenced above, the Company
has determined the derivative security to be issued to Java Universe will be a
warrant to purchase 600,000 common shares at $1.00 per share, such warrant to be
issued upon the Company’s receipt of the remaining $500,000 payment from Java
Universe.
On
December 31, 2007, the Company entered into an Option to Extend (the “Option to
Extend”) with Java Universe, its master franchisee in the Middle East and
Southern California, amending the terms of its Master Franchise Agreement dated
March 31, 2007, as amended. Pursuant to the Option to Extend, the Company
granted Java Universe an option to extend (the “Option”) until June 30, 2008 to
tender a remaining payment of $500,000 (the “Payment”) previously due and
payable on or before October 31, 2007; provided, that Java Universe was required
to pay the Company $50,000 before December 31, 2007 (payment received and
recorded as deferred revenue as of December 31, 2007) and is required to pay an
additional $50,000 to the Company on or before June 30, 2008 in order to
exercise the Option. Pursuant to the terms of the Option to Extend, the Company
agreed to credit any payments received from Java Universe in connection with the
Option towards amounts owed under the Payment. Additionally, the Company agreed
to grant a warrant to Java Universe to purchase an additional 250,000 shares of
the Company’s common stock at $1.00 per share upon the Company’s receipt of the
Payment as a result of the cost overruns of the Santa Monica/Robertson franchise
location of Java Universe. If Java Universe is successful in selling the Dubai
and Qatar territories, the Company will grant them an additional 150,000
warrants. None of the above warrants have been granted as of December 31,
2007.
On April
7, 2008, the Company, through its wholly-owned subsidiary JDCO, purchased from
Java Universe its right, title and interest in the assets related to a coffee
retail location in West Hollywood, California (the “Assets”), pursuant to an
Asset Purchase Agreement dated April 7, 2008 by and among JDCO, Java Universe,
the Company, Elie Samaha and Joseph Merhi (the “Purchase Agreement”). The
purchase price for the Assets was $681,500 which was paid with 1,450,000 shares
of the Company’s common stock valued at $0.47 per per share. The Company also
issued 25,000 shares of common stock valued at $11,750 for a finder's fee
associated with the asset purchase. As a condition to closing of the Purchase
Agreement, the Company also entered into an Agency, Co-Occupancy and Operating
Agreement with Demitri Samaha, Samaha Foods and Java Universe for the lease,
occupancy and use of the West Hollywood store premises. Pursuant to the terms of
the Operating Agreement, certain events may trigger the relinquishment of a
portion of the common stock issued to Java Universe under the Purchase
Agreement.
On April
7, 2008, the Company agreed to terminate its Middle East Franchise and Southern
California Franchise agreements with Java Universe. Pursuant to a Termination,
Waiver and Mutual Release (“Termination Agreement”) dated April 7, 2008, by and
among the Company, JDCO Subsidiary and Java Universe, the Company
terminated such agreements in exchange for 550,000 shares of the Company’s
common stock valued at $1.00 per share. The Agreement also included lock-up
restrictions on the sale of the common shares for 18 months from the signing of
the Termination Agreement.
F-27
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
NOTE
16 – JAVA NEVADA AGREEMENT
On August
2, 2007, the Company, through JDCO, sold to Java Nevada, LLC (“Java Nevada”) its
right, title and interest in the assets related to its four company-owned
gourmet coffee retail locations in the State of Nevada (the “Assets”), pursuant
to an Asset Purchase Agreement dated July 11, 2007 by and between JDCO and Java
Nevada (the “Purchase Agreement”). The purchase price for the Assets was (i)
$200,000 in cash, (ii) $900,000 payable pursuant to a promissory note accruing
interest at a fixed rate of 8% per annum and maturing on August 2, 2012, and
(iii) the assumption by Java Nevada of certain liabilities related to the
Assets, subject to limited exceptions set forth in the Purchase Agreement.
Pursuant to the Purchase Agreement, the Company and JDCO also agreed to cause
JDCO Subsidiary to relinquish its rights to open additional company-owned
gourmet coffee retail locations in the State of Nevada as granted under a Master
Franchise Agreement dated as of December 6, 2006 between JDCO Subsidiary and
Java Nevada.
The
Purchase Agreement included customary, covenants, representations and warranties
by the parties, including, among others, representations by JDCO regarding
ownership of the Assets. Further, the principals of Java Nevada agreed to
guaranty the payment obligations of Java Nevada under the Purchase
Agreement.
The
Purchase Agreement was amended to state the Assets sold would be free and clear
of all liens, security interest, and encumbrances of any kind or nature. Such
Assets are subject to capital leases and the Company agreed to remain obligated
to make any and all payments under such leases from and after the closing and
that all amounts due under the leases shall be paid off on or prior to the
maturity date of the promissory note. The promissory note was amended to state
that Java Nevada is entitled to offset on a dollar for dollar basis any amounts
it pays on the Company’s behalf with respect to equipment leases against any
amounts due to the Company under the terms of such note.
The
Purchase Agreement was further amended to state the Company shall not present
gift card promotions sold by the Company to buyer for reimbursement for those
promotions sold on or prior to July 31, 2007. On or prior to August 15, 2007 the
Company agrees to pay buyer $26,650. Gift cards sold by the Company on or after
August 1, 2007 and redeemed within Java Nevada’s territory shall result in
dollar for dollar reimbursement without discount, unless mutually agreed upon,
in writing, by and between Java Nevada and the Company.
As a
result of the sale, the Company recognized a loss on the sale of the assets for
the Nevada stores in the amount of $378,377 during the year ended December 31,
2007.
On
January 3, 2008, Java Nevada turned over operations of its four Nevada stores
back to the Company. An asset purchase agreement was finalized on July 1, 2008.
The Company was the sole operator and collector of revenue during the interim
period. The purchase price for these assets was (i) cancellation of a $900,000
promissory note payable by Java Nevada to the Company, (ii) $70,000 payable by
the Company to Java Nevada pursuant to a promissory note bearing zero interest
and due in 2010, (iii) the Company’s assumption of $70,000 in deferred revenue
liability pursuant to franchise fees paid by Noah’s Creations LLC to Java
Nevada, and (iv) $60,000 in other contingent liabilities.
NOTE
17 – BAKERSFIELD REACQUISITION
On July
1, 2008 the Company, through JDCO, reacquired store assets in Bakersfield, CA
pursuant to an asset purchase agreement. These assets had previously been sold
in 2005 pursuant to an asset purchase agreement and promissory note. The entire
balance of this note was deemed uncollectible in 2007 and a loss on bad debt of
$442,471 was recognized. The reacquired assets, which include a temporary
building and used coffee equipment, were valued at a fair market price, which
was the calculated present value of the lease payments from January 2009 through
the end of the original lease term, of $47,738 and were being held for disposal
at December 31, 2008. On June 3, 2009 the Company, pursuant to an asset purchase
agreement, sold these assets to the landlord of the assets’ location in exchange
for a mutual termination of the operating lease, which was in default at the
time, and also received a full release of liability from unpaid rental amounts
incurred during 2009.
F-28
JAVA
DETOUR, INC. AND SUBSIDIARIES
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
NOTE
18 – SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During
the fourth quarter of fiscal 2008, the Company recorded two significant
adjustments. The Company eliminated a gain of $451,141 recognized on January 3,
2008 as a result of the non-cash acquisition of assets from Java Nevada (see
Note 16). The company offset this loss of recognizing liabilities totaling
$231,321 and by reducing the book value of the acquired assets.
Also
during the fourth quarter of fiscal 2008, the Company restated the book value of
assets acquired from Java Universe on April 7, 2008 (see Note 15). These assets
were originally acquired in a non-cash stock purchase valuing the Company’s
shares at $1.00. The Company’s policy for valuing assets acquired with stock is
to use a variable weighted average price for the ten trading days prior to the
transaction, and the ten days subsequent to the transaction. This results in a
stock value of $0.47 per share at the transaction date. The Company eliminated
$150,000 of goodwill associated with the transaction, reduced the book value of
the acquired assets, and reduced additional paid in capital by
$768,500.
F-29
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On
November 10, 2008, Java Detour, Inc. dismissed AJ. Robbins PC as its independent
registered public accounting firm. On November 11, 2008, we engaged
Farber Hass Hurley LLP as our new independent registered public accounting firm.
Our board of directors has approved the dismissal of AJ. Robbins PC and the
appointment of Farber Hass Hurley LLP as our new independent registered public
accounting firm.
During
the fiscal years ended December 31, 2007 and 2006, and the subsequent interim
periods through November 10, 2008, there were no disagreements between our
company and AJ. Robbins PC on any matter listed under Item 304
Section (a)(1)(iv) of Regulation S-K, including accounting principles or
practices, financial statement disclosure or auditing scope or procedure which,
if not resolved to the satisfaction of AJ. Robbins PC would have caused AJ.
Robbins PC to make reference to the matter in its reports on our financial
statements. For the fiscal years ended December 31, 2007 and 2006,
the reports of AJ. Robbins PC on our financial statements for those fiscal years
then ended did not contain an adverse opinion or a disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principle.
During
the fiscal years ended December 31, 2007 and 2006 and the subsequent periods
through November 11, 2008, prior to engaging Farber Hass Hurley LLP, we did not
consult Farber Hass Hurley LLP regarding either:
1.
|
the
application of accounting principles to any specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered
our financial statements, and neither a written report was provided to our
company nor oral advice was provided that Farber Hass Hurley LLP concluded
was an important factor considered by our company in reaching a decision
as to the accounting, auditing or financial reporting issue;
or
|
2.
|
any
matter that was either subject of disagreement or event, as defined in
Item 304(a)(1)(iv) of Regulation S-K and the related instruction to Item
304 of Regulation S-K, or a reportable event, as that term is explained in
Item 304(a)(1)(iv) of Regulation
S-K.
|
During
the fiscal years ended December 31, 2007 and 2006 and the subsequent periods
through November 11, 2008, prior to engaging Farber Hass Hurley LLP, Farber Hass
Hurley LLP has not provided our company with either written or oral advice that
was an important factor considered by our company in reaching a decision to
change our company’s new principal independent accountant from AJ. Robbins PC to
Farber Hass Hurley LLP.
27
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Exchange Act) designed to provide reasonable assurance that the information
required to be disclosed in our reports under the Exchange Act is processed,
recorded, summarized and reported within the time periods specified in the SEC’s
rules and forms and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As
required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the period covered by this Annual Report. Based on this evaluation, Michael
Binninger, our Chief Executive Officer, and Ronald Sands, our Chief Financial
Officer, concluded that these disclosure controls and procedures were effective
at the reasonable assurance level as of December 31, 2008.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f), is a process designed by, or under
the supervision of, our principal executive and principal financial officers and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use of disposition of our assets that could have
a material effect on the financial
statements.
|
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. Based on this assessment,
management believes that as of December 31, 2008, our internal control over
financial reporting is not effective. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the SEC to provide only
management’s report in this annual report.
Changes
in internal control over financial reporting
There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation required by Rule 13a-15(d) or Rule 15d-15(d)
under the Exchange Act that occurred during the quarter ended December 31, 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
28
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
On March
1, 2009 the company engaged the West Embarcadero Group (“WEG”) to advise and
assist the board of directors of the Company with a reorganization plan designed
to best secure the interests of the stakeholders of the Company. Harry R. Kraatz
is the principal and sole owner of the West Embarcadero Group. The Company
agreed to pay W.E.G. Inc. $25,000 per month, $10,000 of which is being deferred
and accrued as a payable . The contract is cancelable at the end of any month.
On April 13, 2009, the Company retained and appointed Harry R. Kraatz as Chief
Restructuring Officer, a newly created position, to oversee the management and
reorganization of the Company’s business including assisting the Company with
restructuring its balance sheet, reducing costs and implementing a revised
strategic plan. On November 1, 2009, the Company’s Board of Directors
appointed Mr. Kraatz as the Company’s Chairman of the Board of Directors and
Chief Executive Officer. As of January 26, 2010, there was no employment
agreement in place for the CEO position. Mr. Kraatz is being paid $1 per year as
compensation for his role as Chief Executive Officer and the $25,000 per month
payments to WEG remain in place. After the appointment of Harry Kraatz, Michael
Binninger, the Co-Founder of Java Detour and a Board member, was appointed as
President and Chief Operating Officer.
As of
December 15, 2009, the following individuals constitute our Board of Directors
and executive management:
Name
|
Age
|
Positions
|
||
Harry
R. Kraatz
|
60
|
Chief
Executive Officer and Chairman of the Board
|
||
Michael
Binninger
|
43
|
President
and Chief Operating Officer and Director
|
||
Ronald
Sands
|
43
|
Director
|
||
Steven
Binninger
|
42
|
Director
|
Harry R. Kraatz became a
director and was appointed Chairman of the Board on November 1, 2009. Mr. Kraatz
has been the sole officer and director of West Embarcadero Group, a crisis and
turn-around management and consulting firm and its predecessor since 1984. In
such capacity he has provided consulting services to numerous finance and
franchise companies including Montgomery Medical Ventures, Commonwealth
Associates, Westminster Capital, Liberty Travel, Swensen’s Ice Cream Company,
Aca Joe Inc., Finet Holdings Company, Zapworld.com, Worldwide Wireless, Shearson
Financial Network, Inc., Java Detour Inc., E-3 Biofuels, FAO Schwarz Sweet
Shoppes, Positron Corporation, Fresh Roast Coffee Company, Tsar Nicholia Caviar,
Websky International and others. Mr. Kraatz has held
various positions including, among others, serving as Vice Chairman of
Commercial Bank of San Francisco and Chief Executive Officer of Finet Holdings
Corporation and Shearson Financial Network Inc. He was also appointed by the
United States Bankruptcy Court, Southern District of New York, as Liquidating
Trustee for Redsky Interactive, Inc. He has also previously
been employed by AMOCO Oil Company, served as a police officer
in Illinois and as served as a member of the Marin County
Grand Jury. Mr. Kraatz received his degree from MSU in 1971.
Michael D. Binninger,
currently the Company’s President, Chief Operating Officer and Director,
was formerly the Company’s Chief Executive Officer and Chairman of the Board of
Directors since the Company’s inception. Mr. Binninger joined Java Detour in
1996 when the company had one location. Mr. Binninger was instrumental in
helping to grow the company from one store and several employees to a publically
traded company with over 100 employees. Mr. Binninger directed the
development of Java Detour’s Franchise program and has negotiated the sale of
numerous franchises as well as three international Area Development
Agreements. Through his recent efforts the company was able to secure a
flagship location for its prototype Tri-Branded (Java Detour, Mrs. Fields and
TCBY) store at the Flamingo Hotel in Las Vegas. Mr. Binninger has also led
all Company branding efforts including store designs, brand specifications,
coffee packaging, menu enhancements, and the development of other key marketing
collateral. His efforts have also led to continued new product development
including the company’s popular breakfast sandwich program and the creation of
six new blended cookie and coffee drinks that incorporate Mrs. Fields cookies
into Java Detour coffee drinks. Mr. Binninger has overseen Java Detour’s
site selection, lease and purchase negotiations, and construction of new Java
Detour® locations including a Java Detour flagship location in West Hollywood,
California. Mr. Binninger served honorably in the US Army and also worked
in fashion advertising in New York City, Milan, and Tokyo. Mr. Binninger
is a graduate from the University of California at Berkeley. He and his wife
live in San Francisco, California.
Ronald Sands has been a
director since 2006. He served as our Chief Financial Officer and
Secretary from 2002 until December 1, 2008. Mr. Sands graduated with
honors from Menlo College in Atherton, California in 1991 with a B.S. in
Business Management. Prior to joining us, Mr. Sands was employed by Charles
Schwab and was named national Manager of the Year for employee development in
2000. Mr. Sands was instrumental in developing comprehensive systems to
track and manage store operations and financial performance. His efforts
lead to significant cost savings and increased profitability at the store
level. Mr. Sands’ efforts were also instrumental in helping the company
prepare for the reverse merger it entered into in Dec 2006. Mr. Sands is
currently a Java Detour franchisee and owns three Java Detour stores in northern
California where he lives with his wife and two children.
Steven Binninger has been a
Director since 2002. He served as Chief Operating Officer and President
from 2002 until 2008. Mr. Binninger graduated with honors from the
University of Idaho Business School. As Java Detour founder Mr. Binninger
developed all Java Detour store recipes, operation systems, training procedures,
and quality control measures. Mr. Binninger also developed all proprietary
products and coffee roasting specifications for all Java Detour coffees and laid
the groundwork for the company’s wholesale business opportunities. Mr. Binninger
currently owns and operates a restaurant in McCall Idaho where he lives with his
wife and two children.
29
Family
Relationships
Michael
Binninger and Steven Binninger are brothers. Other than the foregoing, there are
no family relationships among the individuals comprising our Board of Directors,
management or other key personnel.
Committees
of the Board of Directors
Our Board
of Directors does not maintain a separate audit, nominating or compensation
committee. Functions customarily performed by such committees are performed by
our Board of Directors as a whole. We are not required to maintain such
committees under the rules applicable to companies that do not have securities
listed or quoted on a national securities exchange or national quotation system.
We intend to charter audit, nominating and compensation committees in the near
future.
Director
Compensation
We did
not and we do not currently have an established policy to provide compensation
to members of our Board of Directors for their services in that capacity. We
intend to develop such a policy in the near future.
Section
16(a) Beneficial Ownership Reporting Compliance.
Our
securities are currently registered under Section 12 of the Securities Exchange
Act of 1934, as amended. As a result, and pursuant to Rule 16a-2, our directors
and officers and holders of 10% or more of our common stock are currently
required to file statements of beneficial ownership with regards to their
ownership of equity securities under Sections 13 or 16 of the Exchange Act. Our
current officers, directors and beneficial holders of 10% or more of our equity
securities became subject to such requirement and to date, based solely upon a
review of Forms 3, 4 and 5 and any amendments thereto furnished to us during our
most recent fiscal year, none of our officers or directors has failed to file on
a timely basis, as disclosed in the above forms, reports required by Section
16(a) of the Exchange Act during the most recent fiscal year. However, Hunter
World Markets, Inc. a holder of 10% or more of our common stock, did not file
its Form 3 reflecting its acquisition of such an equity position in our
company.
Code
of Ethics.
As of
March 27, 2007, our Board of Directors unanimously approved a Code of Business
Conduct and Ethics (the “Code of Ethics”) applicable to all directors, officers
and executive employees, including our Chief Executive Officer and Chief
Financial Officer. The purpose of the Code of Ethics is to promote honest and
ethical conduct. The Code of Ethics is filed as Exhibit 14.1 to this Annual
Report, and is also available in print, without charge, upon written or
telephonic request to our headquarters. Any amendments to or waivers of the Code
of Ethics will be promptly posted on our website at www.javadetour.com or
in a report on Form 8-K, as required by applicable laws.
30
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table summarizes all compensation that we have recorded in each of the
last two completed fiscal years for our principal executive officer, our two
most highly compensated executive officers other than our principal executive
officer whose annual compensation exceeded $100,000 (collectively, the “Named
Executive Officers”).
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Option Awards
(1)
|
All Other
Compensation(2)
|
Total
|
|||||||||||||
Michael
Binninger
|
|||||||||||||||||||
Chief
Executive Officer and
|
2008
|
$
|
205,900
|
$
|
0
|
$
|
0
|
$
|
10,200
|
$
|
216,100
|
||||||||
Chairman
of the Board
|
2007
|
$
|
184,948
|
$
|
8,333
|
$
|
36,780
|
$
|
14,720
|
$
|
244,781
|
||||||||
Steven
Binninger
|
|||||||||||||||||||
Chief
Operating Officer and
|
2008
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||||
President
|
2007
|
$
|
166,508
|
$
|
8,333
|
$
|
36,780
|
$
|
15,383
|
$
|
227,004
|
||||||||
Ronald
Sands
|
2008
|
$
|
153,062
|
$
|
0
|
$
|
0
|
$
|
9,350
|
$
|
162,412
|
||||||||
Chief
Financial Officer
|
2007
|
$
|
194,167
|
$
|
8,333
|
$
|
36,780
|
$
|
22,493
|
$
|
261,773
|
_____________________
(1) Represents
the dollar amount recognized for financial reporting purposes for the fiscal
year ended December 31, 2007, in accordance with SFAS 123(R)
(disregarding estimates of forfeitures). The total grant date fair value of
these options was $183,901 each and the unvested portion is $144,056. See
Note 11 to the Financial Statements beginning on page F-1 for a discussion
of the relevant assumptions used in calculating these amounts.
(2) Relates
to annual car allowance, life and health insurance premiums
Employment
Agreements
The
Company has a five year employment agreement with President and Chief Executive
Officer, amended November 1, 2009 to change position to President and Chief
Operating Officer. Under the agreement, he is entitled to an annual base salary
of $205,900 per year and cash bonus to be determined by the Company, and is
entitled to a severance of up to one year base salary if he is terminated by the
Company without cause. The agreement automatically renews for a period of one
year, and each successive year thereafter, unless the Company or employee
declines to renew by providing written notice of such decision on the other
party not less than 60 days before the expiration date. The agreement allows for
annual cost of living increases based on the consumer price index, San
Francisco, California. For the fourth quarter of 2007, the executive verbally
agreed to reduce base salary to an effective rate of $180,000 per year. For the
year ended December 31, 2008 the executive verbally agreed to defer $15,835 of
his annual salary until further notice. As of April 1, 2009 the executive
verbally agreed to further reduce the annual amount of salary paid in cash to
$150,000. For the year ended December 31, 2009 the executive deferred $11,531 of
his annual salary until further notice, and has returned $18,120 of previously
received cash compensation to the Company which shall be paid by the Company at
future undetermined date. All compensation that the executive has deferred
and continues to defer from his gross pay as defined in his employment contract
is being accrued as a payable. No interest is being paid on the amount
payable.
Option
Grants in 2008
There
were no option grants to Named Executive Officers in 2008.
31
Option
Grants in 2009
Our Board
of Directors authorized on December 1, 2009 the issuance of stock options and
the repricing and reissuance of certain other options previously issued to the
our employees, officers and members of the Board of Directors pursuant to our
2006 Equity Incentive Plan (the “Plan”). 4,249,000 options were
either issued or reissued at $0.025 per share, the closing price of the
company’s stock on December 1, 2009 (the “Options”). Options to employees
that own greater than 10% of our stock were issued at $0.0275 (110% of the
current market price) pursuant to the Plan. The Board of Directors
issued these Options for, and to realign the value of the issued Options
with, their intended purpose, which is to retain and motivate our employees,
officers and directors. After the issuance of these options we issued nearly all
of the 4,249,167 Options permitted under the Plan.
Prior to
the repricing, many of the Options had exercise prices well above the recent
market prices of our common stock as quoted on the Pink Sheets. The
Options will vest over three years with 50% of the Options vesting after the
first six months with an additional 10% of the options granted vesting after
each subsequent six-month period.
The
following options were issued to executive officers and members of the board of
directors:
Name
|
Options
|
Exercise
Price
|
Position
|
||||||
Harry
R. Kraatz
|
950,000 | $ | 0.0250 |
Chief
Executive Officer, Chairman of the Board of Directors
|
|||||
Michael
Binninger
|
975,000 | $ | 0.0275 |
President,
and Chief Operating Officer, Director
|
|||||
Ronald
J. Sands
|
25,000 | $ | 0.0250 |
Director
|
|||||
Steven
Binninger
|
25,000 | $ | 0.0275 |
Director
|
Subsequent
Events in 2009
On March
1, 2009 the company engaged the West Embarcadero Group (“WEG”) to advise and
assist the board of directors of the Company with a reorganization plan designed
to best secure the interests of the stakeholders of the Company. Harry R. Kraatz
is the principal and sole owner of the West Embarcadero Group. The Company
agreed to pay W.E.G. Inc. $25,000 per month, $10,000 of which is being deferred
and accrued as a payable. The contract is cancelable at the end of any month. On
April 13, 2009, the Company retained and appointed Harry R. Kraatz as Chief
Restructuring Officer, a newly created position, to oversee the management and
reorganization of the Company’s business including assisting the Company with
restructuring its balance sheet, reducing costs and implementing a revised
strategic plan. On November 1, 2009, the Company’s Board of Directors
appointed Mr. Kraatz as the Company’s Chairman of the Board of Directors and
Chief Executive Officer. As of January 26, 2010, there was no employment
agreement in place for the CEO position. Mr. Kraatz is being paid $1 per year as
compensation for his role as Chief Executive Officer and the $25,000 per month
payments to WEG remain in place.
32
Outstanding
Equity Awards at Fiscal Year-end
As of the
year ended December 31, 2008, the following Named Executive Officers had the
following unexercised options, stock that has not vested, and equity incentive
plan awards:
Name and Principal Position
|
Number of Securities
Underlying Unexercised
Options (#) Exercisable (1)
|
Number of Securities
Underlying Unexercised
Options (#) Unexercisable
(1)
|
Option Exercise
Price
|
Option
Expiration Date
|
|||||||||
Michael
Binninger
|
|||||||||||||
Chief
Executive Officer and
Chairman
of the Board
|
106,528
|
106,528
|
$
|
1.10
|
11/30/2016
|
||||||||
___________________
(1)Option awards were granted on November
30, 2006; 25% vested on November 30, of both 2007 and 2008 respectively with the
balance vesting in 25% increments on each anniversary
thereafter.
Director
Compensation
Name
|
Fees
Earned or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||
All
Directors (total of 3 persons)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
For the
year ended December 31, 2008, none of the members of our Board of Directors
received compensation for his service as a director. We do not currently have an
established policy to provide compensation to members of our Board of Directors
for their services in that capacity. We intend to develop such a policy in the
near future.
Indemnification
of Directors And Executive Officers And Limitations of Liability
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our certificate of incorporation provides that, pursuant
to Delaware law, our directors shall not be liable for monetary damages for
breach of the directors’ fiduciary duty of care to our company and our
stockholders. This provision in the certificate of incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as injunctive or other forms of nonmonetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director’s duty of loyalty to us or our
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of the law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director’s responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our Board of Directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our Board of Directors by a majority vote of a
quorum of disinterested Board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We have
been advised that in the opinion of the Board of Directors, insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than the our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. We have not entered into any indemnification agreements with our
directors or officers, but may choose to do so in the future. Such
indemnification agreements may require us, among other things, to:
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions; or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
33
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of the date hereof are deemed outstanding even if they have not actually
been exercised. Those shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
The
following table sets forth as of December 31, 2008, certain information with
respect to beneficial ownership of our common stock immediately after the
closing of the Merger and Private Placement, based on 33,768,823 issued and
outstanding shares of common stock, by:
·
|
Each
person known to be the beneficial owner of 5% or more of our outstanding
common stock;
|
|
·
|
Each
executive officer;
|
|
·
|
Each
director; and
|
|
·
|
All
of the executive officers and directors as a
group.
|
Unless
otherwise indicated, the persons and entities named in the table have sole
voting and sole investment power with respect to the shares set forth opposite
the stockholder’s name, subject to community property laws, where applicable.
Unless otherwise indicated, the address of each stockholder listed in the table
is c/o Java Detour, Inc., 1550 Bryant Street, Suite 725, San Francisco,
California, 94103.
Name and Address of
Beneficial Owner
|
Title
|
Beneficially
Owned
Post-Merger
|
Percent of Class
|
||||
Directors
and Officers:
|
|||||||
Michael
Binninger
|
Chief
Executive Officer and Chairman of the Board of Directors
|
3,580,993
|
(1)
|
10.6
|
%
|
||
Steven
Binninger
|
Director
|
3,580,993
|
(2)
|
10.6
|
%
|
||
Ronald
Sands
|
Director
|
2,080,991
|
(3)
|
6.1
|
%
|
||
All
executive officers and directors as a group (3 persons)
|
9,242,977
|
27.3
|
%
|
||||
Five
Percent Shareholders:
|
|||||||
Absolute
Return Europe Fund
c/o
Hunter World Markets, Inc.
9300
Wilshire Blvd. Penthouse Suite
Beverly
Hills, CA 90212
|
3,500,000
|
(4)
|
10.4
|
%
|
|||
European
Catalyst Fund
c/o
Hunter World Markets, Inc.
9300
Wilshire Blvd. Penthouse Suite
Beverly
Hills, CA 90212
|
2,500,000
|
(5)
|
7.4
|
%
|
|||
Absolute
Octane Fund
c/o
Hunter World Markets, Inc.
9300
Wilshire Blvd. Penthouse Suite
Beverly
Hills, CA 90212
|
2,000,000
|
(6)
|
5.9
|
%
|
|||
Absolute
Octane Master Fund
c/o
Hunter World Markets, Inc.
9300
Wilshire Blvd. Penthouse Suite
Beverly
Hills, CA 90212
|
2,296,939
|
(7)
|
6.8
|
%
|
|||
Paul
Klapper
201
Spear St., Suite 1150
San
Francisco, CA 94105
|
2,647,613
|
(8)
|
7.8
|
%
|
|||
Java
Universe, LLC
8228
Sunset Blvd, Suite 102
West
Hollywood, CA 90046
|
2,000,000
|
(9)
|
5.9
|
%
|
______________________]
(1) This
amount includes (i) 3,474,465 shares of common stock owned by Michael Binninger
and (ii) 106,528 shares of common stock issuable to Mr. Binninger upon exercise
of options vested as of March 31, 2008, or within 60 days
thereafter.
(2) This
amount includes (i) 3,474,465 shares of common stock owned by Steven Binninger
and (ii) 106,528 shares of common stock issuable to Mr. Binninger upon exercise
of options vested as of March 31, 2008, or within 60 days
thereafter.
(3) This
amount includes (i) 1,974,463 shares of common stock owned by Ronald Sands and
(ii) 106,528 shares of common stock issuable to Mr. Sands upon exercise of
options vested as of March 31, 2008, or within 60 days thereafter.
(4) As
Chief Investment Officer and control person of Absolute Return Europe Fund,
Florian Homm may be deemed to have voting and investment powers for the shares
held by the foregoing funds. Mr. Homm disclaims beneficial ownership of the
shares held by foregoing funds except to the extent of his proportionate
pecuniary interest therein.
(5) As
control person of European Catalyst Fund, Peter Irblad may be deemed to have
voting and investment powers for the shares held by the foregoing funds. Mr.
Irblad disclaims beneficial ownership of the shares held by foregoing funds
except to the extent of his proportionate pecuniary interest
therein.
(6) As
control person of Absolute Octane Fund, Jens Peters may be deemed to have voting
and investment powers for the shares held by the foregoing funds. Mr. Peters
disclaims beneficial ownership of the shares held by foregoing funds except to
the extent of his proportionate pecuniary interest therein.
(7) As
control person of Absolute German Fund, Frank Siebrecht may be deemed to have
voting and investment powers for the shares held by the foregoing funds. Mr.
Siebrecht disclaims beneficial ownership of the shares held by the foregoing
funds except to the extent of his proportionate pecuniary interest
therein.
(8) This amount includes (i) 498,677
shares of our common stock owned by Clydesdale Partners LLC, a partnership for
which Mr. Klapper is one of two managers, and (ii) 1,148,936 shares of our
common stock owned by The Klapper Family Trust, a trust for which Mr. Klapper is
the trustee. As control person of Clydesdale Partners LLC, and The Klapper
Family Trust, Mr. Klapper may be deemed to have voting and investment powers for
the shares held by the foregoing entities. Mr. Klapper disclaims beneficial
ownership of the shares held by the foregoing entities except to the extent of
his proportionate pecuniary interest therein.
(9) As
control person of Java Universe, Joseph Mehri may be deemed to have
voting and investment powers for the shares held by Java Universe.
34
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Interlocking
Directors
JDCO,
Inc. (“JDCO”) is our wholly-owned subsidiary and has interlocking executive and
director positions with Java Detour, Inc.
Director
Independence
As we are
quoted on Pink Sheets and not one of the national securities exchanges, we are
not subject to any director independence requirements. None of our present
directors qualifies as an independent director pursuant to Rule 10A-3
promulgated under the Exchange Act due to their affiliation with us as
employees.
Java
Detour Licensing Agreement
Pursuant
to a Master Licensing Agreement (the “Java Detour Licensing Agreement”) dated as
of August 1, 2002, JDCO granted Java Detour Franchise Corp., a California
corporation formerly known as Java Detour (“JDCO Sub”), an exclusive license to
open and operate Java Detour® stores and to franchise others to do so as well.
In June 2002, JDCO acquired all of the issued and outstanding stock in JDCO Sub
and JDCO Sub became a wholly-owned subsidiary of JDCO. The term of the Java
Detour Licensing Agreement is 10 years and JDCO Sub has the option to renew for
two successive terms of 10 years each by written notice not less than 90 days
prior to expiration. JDCO Sub currently pays JDCO a royalty equal to 75% of
gross revenues received each month in connection with the Java Detour Licensing
Agreement. We believe that our Java Detour Licensing Agreement is at fair market
value and is on terms comparable to those that would have been reached in arms’
length negotiations had the parties been unaffiliated at the time of the
negotiations.
Landgrove
Coffee Co.
We
purchase our whole coffee beans from various coffee-producing regions around the
world. We purchase our coffee beans from a roaster who is directly responsible
for selecting the supplier, purchasing, roasting, packaging and distributing
coffee beans directly to our Java Detour® stores. While we typically do not
enter into exclusive supply contracts to purchase coffee beans, we do enter oral
agreements for pricing for each 50,000 pounds purchased and we purchase whole
coffee beans at the agreed upon price per pound on a net 30 day basis.
Currently, we purchase all of our coffee beans from Landgrove Coffee Co., a
company co-owned by Jon Binninger, who is a brother of Michael and Steven
Binninger, the former our Chief Operating Officer and both of whom
are Board members.
Java
Norcal
In
December 2008, the Company sold two of its stores, located in Yuba City, CA and
Marysville, CA, to its franchisee Java Norcal, which is owned and operated by
Ronald Sands, a Director and Shareholder of the Company. In exchange for the two
stores and their assets, the Company accepted cash, certain franchise rights,
and a note receivable in the amount of $255,000. The term of the note
is for ten years and bears interest at the rate of 6.75% annually, however,
interest does not accrue for the first 12 months of the term of the note and
principal payments do not commence until December 2010. The Company
recorded a gain on the sale of these stores of $882,710 during the year ended
December 31, 2008.
Director
Guarantees
Michael
and Steven Binninger have guaranteed certain of the Company’s liabilities,
including loan payments, lease payments, rental payments and accounts
payable. While these directors are responsible for payments not made
by the Company, we do not anticipate that these directors have the assets to
satisfy all amounts which they have guaranteed.
Agreement
with West Embarcadero Group
On March
1, 2009 the company engaged the West Embarcadero Group (“WEG”) to advise and
assist the board of directors of the Company with a reorganization plan designed
to best secure the interests of the stakeholders of the Company. Harry R. Kraatz
is the principal and sole owner of the West Embarcadero Group. The Company
agreed to pay W.E.G. Inc. $25,000 per month, $10,000 of which is being deferred
and accrued as a payable . The contract is cancelable at the end of any month.
On April 13, 2009, the Company retained and appointed Harry R. Kraatz as Chief
Restructuring Officer, a newly created position, to oversee the management and
reorganization of the Company’s business including assisting the Company with
restructuring its balance sheet, reducing costs and implementing a revised
strategic plan. On November 1, 2009, the Company’s Board of Directors
appointed Mr. Kraatz as the Company’s Chairman of the Board of Directors and
Chief Executive Officer. As of January 26, 2010, there was no employment
agreement in place for the CEO position. Mr. Kraatz is being paid $1 per year as
compensation for his role as Chief Executive Officer and the $25,000 per month
payments to WEG remain in place.
Stock
Options
Our Board
of Directors authorized on December 1, 2009 the issuance of stock options and
the repricing and reissuance of certain other options previously issued to the
our employees, officers and members of the Board of Directors pursuant to our
2006 Equity Incentive Plan (the “Plan”). 4,249,000 options were
either issued or reissued at $0.025 per share, the closing price of the
company’s stock on December 1, 2009 (the “Options”). Options to employees
that own greater than 10% of our stock were issued at $0.0275 (110% of the
current market price) pursuant to the Plan. The Board of Directors
issued these Options for, and to realign the value of the issued Options
with, their intended purpose, which is to retain and motivate our employees,
officers and directors. After the issuance of these optionswe issued nearly all
of the 4,249,167 Options permitted under the Plan.
Prior to
the repricing, many of the Options had exercise prices well above the recent
market prices of our common stock as quoted on the Pink Sheets. The
Options will vest over three years with 50% of the Options vesting after the
first six months with an additional 10% of the options granted vesting after
each subsequent six-month period.
The
following options were issued to executive officers and members of the board of
directors:
Options
|
Exercise
Price
|
Position
|
|
Harry
R. Kraatz
|
950,000
|
$0.0250
|
Chief
Executive Officer, Chairman of the Board of Directors
|
Michael
Binninger
|
975,000
|
$0.0275
|
President,
and Chief Operating Officer, Director
|
Ronald
J. Sands
|
25,000
|
$0.0250
|
Director
|
Steven
Binninger
|
25,000
|
$0.0275
|
Director
|
35
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Farber
Hass Hurley LLP has provided audit services for us for the 2008 fiscal year. AJ
Robbins, PC, has provided audit services for us for the 2008 and 2007 fiscal
years. Aggregate fees are as follows:
2008 Fees
|
2007 Fees
|
|||||||
Audit
Fees (1)
|
$ | 88,798 | $ | 251,831 | ||||
Audit-Related
Fees (2)
|
$ | 11,925 | 76,041 | |||||
Tax
Fees (3)
|
$ | 5,500 | $ | 15,000 | ||||
All
Other Fees (4)
|
$ | 27,083 | $ | - | ||||
Total
|
$ | 133,306 | $ | 342,872 |
[Missing Graphic Reference]
(1)“Audit Fees” consist of fees billed for
professional services rendered for the audit of Java Detour, Inc.’s annual
financial statements for the years ended December 31, 2008 and 2007, and for the
review of our interim financial statements and services performed during
2007.
(2)“Audit-Related Fees” consist of fees
billed for professional services rendered by AJ. Robbins, PC, for the years
ended December 31, 2008 and 2007 reasonably related to the performance of the
audit and review that are not otherwise reported under Audit
Fees.
(3)“Tax Fees” consist of fees billed for
professional services rendered by AJ Robbins, PC, and by Farber Hass Hurley LLP
for services rendered in connection with tax compliance, tax advice and tax
planning.
(4)“All Other Fees” consist of fees billed
for professional services rendered by AJ. Robbins, PC, for services
rendered that are not otherwise reported above
Pre-Approval
Policy
From
inception to date, we have not had an audit committee. Our Board of Directors as
a whole pre-approves all services provided by Farber Hass Hurley LLP and AJ.
Robbins, PC. Prior to engagement for any non-audit or non-audit related
services, the Board of Directors must conclude that such services are compatible
with the independence of Farber Hass Hurley LLP and AJ. Robbins, PC, as our
auditors.
36
ITEM
15. EXHIBITS
Exhibit
Number
|
Description
of Exhibit
|
|
3.1
|
Certificate
of Incorporation of the Registrant (incorporated by reference to Exhibit
3.1 to the Registrant’s Form 10-SB filed with the SEC on December 8,
2006)
|
|
3.2
|
By-Laws
of the Registrant of the Registrant (incorporated by reference to Exhibit
3.2 to the Registrant’s Form 10-SB filed with the SEC on December 8,
2006)
|
|
3.3
|
Certificate
of Merger Effecting Reincorporation and Name Change (incorporated by
reference to Exhibit 3.3 to the Registrant’s Form 10-SB filed with the SEC
on December 8, 2006)
|
|
4.1
|
Form
of Investor Warrant (incorporated by reference to Exhibit 4.1 to the
Registrant’s Form 10-SB filed with the SEC on December 8,
2006)
|
|
4.2
|
Share
Registration Rights Agreement dated November 30, 2006 (incorporated by
reference to Exhibit 4.2 to the Registrant’s Form 10-SB filed with the SEC
on December 8, 2006)
|
|
4.3
|
Warrant
Share Registration Rights Agreement dated November 30, 2006 (incorporated
by reference to Exhibit 4.3 to the Registrant’s Form 10-SB filed with the
SEC on December 8, 2006)
|
|
4.4
|
Form
of Placement Agent Warrant (incorporated by reference to Exhibit 4.4 to
the Registrant’s Form 10-SB filed with the SEC on December 8,
2006)
|
|
4.5
|
Specimen
Common Stock Certificate of Registrant (incorporated by reference to
Exhibit 4.5 to Registrant’s Form SB-2 filed with the SEC on December 29,
2006)
|
|
10.1
|
Securities
Purchase Agreement dated November 30, 2006 (incorporated by reference to
Exhibit 10.1 to the Registrant’s Form 10-SB filed with the SEC on December
8, 2006)
|
|
10.2
|
Lease
Agreement dated September 21, 2007 by and between Registrant and AE-Hamm’s
Property Owner LLC
|
|
10.3
|
Term
Credit Agreement dated August 30, 2006 by and between JDCO, Inc. and The
Hunter Fund Limited (incorporated by reference to Exhibit 10.3 to the
Registrant’s Form 10-SB filed with the SEC on December 8,
2006)
|
|
10.4
|
Employment
Agreement dated November 27, 2006 by and between Michael Binninger and
JDCO, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s
Form 10-SB filed with the SEC on December 8, 2006)
|
|
10.5
|
Employment
Agreement dated November 27, 2006 by and between Steven Binninger and
JDCO, Inc. (incorporated by reference to Exhibit 10.5 to the Registrant’s
Form 10-SB filed with the SEC on December 8, 2006)
|
|
10.6
|
Employment
Agreement dated November 27, 2006 by and between Ronald Sands and JDCO,
Inc. (incorporated by reference to Exhibit 10.6 to the Registrant’s Form
10-SB filed with the SEC on December 8, 2006)
|
|
10.7
|
Placement
Agent Agreement dated August 30, 2006 by and between JDCO, Inc. and Hunter
World Markets, Inc. (incorporated by reference to Exhibit 10.7 to the
Registrant’s Form 10-SB filed with the SEC on December 8,
2006)
|
37
Exhibit
Number
|
Description
of Exhibit
|
|
10.8
|
2006
Equity Incentive Plan of the Registrant (incorporated by reference to
Exhibit 10.8 to the Registrant’s Amendment No. 1 to Form 10-SB filed with
the SEC on February 14, 2007)
|
|
10.9
|
Form
of Notice of Grant of Stock Option of the Registrant (incorporated by
reference to Exhibit 10.9 to the Registrant’s Form 10-SB filed with the
SEC on December 8, 2006)
|
|
10.10
|
Form
of Stock Option Agreement (including Addendum) of the Registrant
(incorporated by reference to Exhibit 10.10 to the Registrant’s Form 10-SB
filed with the SEC on December 8, 2006)
|
|
10.11
|
Form
of Stock Issuance Agreement (including Addendum) of the Registrant
(incorporated by reference to Exhibit 10.11 to the Registrant’s Form 10-SB
filed with the SEC on December 8, 2006)
|
|
10.12
|
Form
of Stock Purchase Agreement (including Addendum) of the Registrant
(incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-SB
filed with the SEC on December 8, 2006)
|
|
10.13
|
Development
Agreement dated August 11, 2006 by and between JDCO, Inc. and Pavilion
Development Company (incorporated by reference to Exhibit 10.14 to the
Registrant’s Form 10-KSB filed with the SEC on April 2, 2007)
|
|
10.14
|
Master
Franchise Agreement dated as of March 30, 2007 by and between Java Detour
Franchise Corp. and Java Universe, LLC (incorporated by reference to
Exhibit 10.16 to the Registrant’s Amendment No. 3 to Form 10-SB filed with
the SEC on May 2, 2007)
|
|
10.15
|
Letter Agreement, amending the
terms of the Master Franchise Agreement, executed as of October 16, 2007,
by and between the Registrant and Java Universe, LLC (incorporated by
reference to Exhibit 10.2 of the Registrant’s Form 8-K filed with the SEC
on October 19, 2007)
|
|
10.16
|
Asset Purchase Agreement dated as
of July 11, 2007 between JDCO, Inc. and Java Nevada, LLC (incorporated by
reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC
on August 7, 2007)
|
|
10.17
|
First Amendment to Asset Purchase
Agreement and Promissory Note dated as of August 1, 2007 between JDCO,
Inc. and Java Nevada, LLC (incorporated by reference to Exhibit 10.2 to
the Registrant’s Form 8-K filed with the SEC on September 14,
2007)
|
|
10.18
|
Second Amendment to Asset
Purchase Agreement dated as of August 1, 2007 between JDCO, Inc. and Java
Nevada, LLC (incorporated by reference to Exhibit 10.3 to the Registrant’s
Form 8-K filed with the SEC on September 14,
2007)
|
10.20
|
Asset
Purchase Agreement, dated as of April 7, 2008, by and among JDCO, Inc.,
Java Detour, Inc., Java Universe, LLC, Elie Samaha and Joseph Merhi.
(incorporated by reference to exhibit filed with Registrant’s Form 8-K
filed with the SEC on April 11, 2008)
|
|
10.21
|
Termination,
Waiver and Mutual Release Agreement, dated as of April 7, 2008 by and
among Java Universe, LLC, Java Detour Franchise Corp. and Java Detour,
Inc. (incorporated by reference to exhibit filed with Registrant’s Form
8-K filed with the SEC on April 11, 2008)
|
|
10.22
|
Agency,
Co-Occupancy and Operating Agreement, dated as of April 7, 2008 by and
among Demitri Samaha, Samaha Foods, Inc., Java Universe, LLC and JDCO,
Inc. (incorporated by reference to exhibit filed with Registrant’s Form
8-K filed with the SEC on April 11, 2008)
|
|
10.23
|
Securities
Purchase, Loan and Security Agreement, dated May 19, 2008, by and among
Java Detour, Inc., Java Finance, LLC and Clydesdale Partners, LLC.
(incorporated by reference to exhibit filed with Registrant’s Form 8-K
filed with the SEC on May 23, 2008)
|
|
10.24
|
Form
of Secured Promissory Note, dated May 19, 2008. (incorporated by reference
to exhibit filed with Registrant’s Form 8-K filed with the SEC on May 23,
2008)
|
|
10.25
|
Asset
Purchase Agreement, dated July 1, 2008, by and between JDCO, Inc. and Java
Nevada, LLC (incorporated by reference to exhibit filed with Registrant’s
Form 8-K filed with the SEC on July 11, 2008)
|
|
10.26
|
Asset
Purchase Agreement, dated December 31, 2008, by and between JDCO, Inc. and
Java NorCal, LLC. (incorporated by reference to exhibit filed with
Registrant’s Form 8-K filed with the SEC on January 7,
2009)
|
|
10.27
|
Amendment
to Secured Promissory Note and Securities Purchase, Loan and Security
Agreement, dated February 24, 2009, by and among Java Detour, Inc., Java
Finance, LLC, Clydesdale Partners, LLC and Westfield Wealth Management
(incorporated by reference to exhibit filed with Registrant’s Form 8-K
filed with the SEC on March 2,
2009).
|
10.19
|
Option
to Extend dated as of December 31, 2007 between Java Detour Franchise
Corp. and Java Universe, LLC
|
|
14.1
|
Java Detour, Inc. Code of
Business Conduct and Ethics, adopted March 27, 2007 (incorporated by
reference to Exhibit 14.1 to the Registrant’s Form 10-KSB filed with the
SEC on April 2, 2007)
|
|
21.1
|
List of Subsidiaries of
Registrant (incorporated by reference to Exhibit 21.1 to the Registrant’s
Form 10-SB filed with the SEC on December 8,
2006)
|
|
31.1
|
Certification of the Chief
Executive Officer pursuant to Exchange Act Rule 13a-14(a)
|
|
31.2
|
Certification of the Chief
Financial Officer pursuant to Exchange Act Rule 13a-14(a)
|
|
32.1
|
Certification
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002]
|
38
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on February 5,
2010.
JAVA DETOUR, INC. | |||
|
By:
|
/s/ Harry R. Kraatz | |
Harry R. Kraatz | |||
Chief Executive Officer and Chairman of the Board | |||
(Principal Executive Officer) |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities indicated on February 5, 2010.
Name
|
|
Title
|
|
/s/ Harry
R. Kraatz
Harry
R. Kraatz
|
|
Chief Executive Officer(Principal
Executive Officer),
Chairman
of the Board of Directors
|
|
/s/ Michael
Binninger
Michael
Binninger
|
|
President
and Director (Principal Financial Officer)
|
|
/s/ Evan
Hall
Evan
Hall
|
|
Controller
(Principal Accounting Officer)
|
|
/s/ Ronald
Sands
Ronald
Sands
|
|
Director
|
|
/s/
Steven Binninger
Steven
Binninger
|
|
Director
|
|
39