UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
( Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended January 31, 2017
 
OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from -----_____ to _________

Commission File Number: 000-31797
 
CRYSTAL ROCK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
  03-0366218
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
 1050 Buckingham St., Watertown, CT   06795 
 (Address of principal executive offices)   (Zip Code) 
     
(860) 945-0661
( Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes    X            No ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
 
Yes     X           No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer _____
Accelerated filer _____
Non-accelerated filer _____
Smaller reporting company     X   
(Do not check if smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ____        No     X   

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
Shares outstanding at
Common Stock, $.001 Par Value
 
March 10, 2017
 
 
21,358,411
 
 
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY
 
Table of Contents
 
  Page
PART I - FINANCIAL INFORMATION
 
     
Item 1. Financial Statements.  
     
  Consolidated Balance Sheets as of
  January 31, 2017 and October 31, 2016 3 
 
 
  Consolidated Statements of Operations
  for the Three Months Ended January 31, 2017 and  
  2016 4
 
 
Consolidated Statements of  
  Comprehensive Loss for the Three Months  
  Ended January 31, 2017 and 2016 5
 
  Consolidated Statements of Cash Flows  
  for the Three Months Ended January 31,  
  2017 and 2016 6
 
 
Notes to Consolidated Financial  
  Statements 7-14
     
Item 2.
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations. 15-19
     
Item 3.
Quantitative and Qualitative Disclosures  
  About Market Risk. 20
 
 
Item 4. Controls and Procedures.
20
     
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings.
21
     
Item 1A.
Risk Factors.
21
     
Item 2.
Unregistered Sales of Equity Securities and
 
Use of Proceeds.
21
     
Item 3. Defaults Upon Senior Securities. 21
     
Item 4. Mine Safety Disclosures. 21
     
Item 5. Other Information. 21
     
Item 6. Exhibits. 21-22
     
SIGNATURE
  23

CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY
 
             
CONSOLIDATED BALANCE SHEETS
 
             
   
January 31,
   
October 31,
 
   
2017
   
2016
 
   
(Unaudited)
 
             
ASSETS
 
             
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
3,371,042
   
$
5,553,815
 
Accounts receivable, trade - net of reserve of $221,016 and
               
     $268,711 for 2017 and 2016, respectively
   
7,716,091
     
8,022,952
 
Inventories, net
   
2,261,356
     
2,061,713
 
Other current assets
   
818,455
     
901,374
 
                 
TOTAL CURRENT ASSETS
   
14,166,944
     
16,539,854
 
                 
PROPERTY AND EQUIPMENT - net
   
6,752,119
     
6,768,185
 
                 
OTHER ASSETS:
               
Goodwill
   
12,156,790
     
12,156,790
 
Other intangible assets - net
   
1,323,357
     
1,493,694
 
Deferred tax asset
   
692,373
     
692,373
 
Other assets
   
264,473
     
278,633
 
                 
TOTAL OTHER ASSETS
   
14,436,993
     
14,621,490
 
                 
TOTAL ASSETS
 
$
35,356,056
   
$
37,929,529
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                 
CURRENT LIABILITIES:
               
Current portion of long term debt
 
$
1,599,996
   
$
1,599,996
 
Accounts payable
   
2,205,874
     
3,268,951
 
Accrued expenses
   
2,061,628
     
3,087,566
 
Current portion of customer deposits
   
646,844
     
647,460
 
Current portion of unrealized loss on derivatives, net
   
10,317
     
24,793
 
                 
TOTAL CURRENT LIABILITIES
   
6,524,659
     
8,628,766
 
                 
Long term debt, less current portion
   
7,733,344
     
8,133,343
 
Deferred tax liability
   
4,472,100
     
4,472,100
 
Subordinated debt
   
9,000,000
     
9,000,000
 
Customer deposits, less current portion
   
2,528,925
     
2,529,300
 
Long term portion of unrealized loss on derivatives
   
-
     
7,660
 
                 
TOTAL LIABILITIES
   
30,259,028
     
32,771,169
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY:
               
Common stock - $.001 par value, 50,000,000 authorized shares,
               
21,960,229 issued and 21,358,411 outstanding shares as of
               
January 31, 2017 and October 31, 2016
   
21,960
     
21,960
 
Additional paid in capital
   
58,464,742
     
58,464,742
 
Treasury stock, at cost, 601,818 shares as of January 31, 2017
               
    and October 31, 2016
   
(900,360
)
   
(900,360
)
Accumulated deficit
   
(52,483,123
)
   
(52,408,509
)
Accumulated other comprehensive loss
   
(6,191
)
   
(19,473
)
TOTAL STOCKHOLDERS' EQUITY
   
5,097,028
     
5,158,360
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
35,356,056
   
$
37,929,529
 

See the accompanying notes to the consolidated financial statements.
3
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY
 
             
CONSOLIDATED STATEMENTS OF OPERATIONS
 
             
   
Three months ended January 31,
 
   
2017
   
2016
 
   
(unaudited)
 
             
NET SALES
 
$
14,650,146
   
$
16,131,560
 
                 
COST OF GOODS SOLD
   
6,956,412
     
8,542,117
 
                 
GROSS PROFIT
   
7,693,734
     
7,589,443
 
                 
OPERATING EXPENSES:
               
Selling, general and administrative expenses
   
7,171,804
     
6,948,863
 
Advertising expenses
   
119,439
     
135,969
 
Amortization
   
170,337
     
159,272
 
Gain on disposal of property and equipment
   
-
     
(3,300
)
                 
TOTAL OPERATING EXPENSES
   
7,461,580
     
7,240,804
 
                 
INCOME FROM OPERATIONS
   
232,154
     
348,639
 
                 
OTHER EXPENSE:
               
   Interest
   
350,590
     
397,445
 
                 
LOSS BEFORE INCOME TAXES
   
(118,436
)
   
(48,806
)
                 
INCOME TAX BENEFIT
   
(43,822
)
   
(19,278
)
                 
NET LOSS
 
$
(74,614
)
 
$
(29,528
)
                 
NET LOSS PER SHARE - BASIC
 
$
(0.00
)
 
$
(0.00
)
                 
NET LOSS PER SHARE - DILUTED
 
$
(0.00
)
 
$
(0.00
)
                 
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC
   
21,358,411
     
21,358,411
 
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED
   
21,358,411
     
21,358,411
 
 
See the accompanying notes to the consolidated financial statements.
4
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY
 
             
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
             
   
Three months ended January 31,
 
             
   
2017
   
2016
 
   
(Unaudited)
 
             
NET LOSS
 
$
(74,614
)
 
$
(29,528
)
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
               
  Cash Flow Hedges:
               
  Unrealized gain (loss) on derivatives designated as cash flow hedges
   
13,282
     
(27,726
)
  Other Comprehensive Income (Loss), net of tax
   
13,282
     
(27,726
)
TOTAL COMPREHENSIVE LOSS
 
$
(61,332
)
 
$
(57,254
)

See the accompanying notes to the consolidated financial statements.
5
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY
 
             
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
    
Three months ended January 31,
 
   
2017
   
2016
 
    
(Unaudited)
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(74,614
)
 
$
(29,528
)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
               
  Depreciation
   
654,427
     
681,764
 
  Provision for bad debts on accounts receivable
   
89,129
     
48,654
 
  Amortization
   
170,337
     
159,272
 
  Non cash interest expense
   
-
     
276,480
 
  Gain on disposal of property and equipment
   
-
     
(3,300
)
  Non cash share-based compensation
   
-
     
(1,580
)
                 
Changes in operating assets and liabilities:
               
  Accounts receivable
   
217,732
     
414,294
 
  Inventories
   
(199,643
)
   
92,765
 
  Other current assets
   
74,065
     
181,911
 
  Other assets
   
14,160
     
-
 
  Accounts payable
   
(1,063,077
)
   
(56,636
)
  Accrued expenses
   
(1,025,938
)
   
(551,656
)
  Customer deposits
   
(991
)
   
23,656
 
NET CASH (USED) PROVIDED  BY OPERATING ACTIVITIES
   
(1,144,413
)
   
1,236,096
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Purchase of property and equipment
   
(638,361
)
   
(395,638
)
  Proceeds from sale of property and equipment
   
-
     
3,300
 
NET CASH USED IN INVESTING ACTIVITIES
   
(638,361
)
   
(392,338
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
  Principal payments on debt
   
(399,999
)
   
(399,999
)
NET CASH USED IN FINANCING ACTIVITIES
   
(399,999
)
   
(399,999
)
                 
NET (DECREASE) INCREASE IN CASH
   
(2,182,773
)
   
443,759
 
                 
CASH AND CASH EQUIVALENTS - beginning of period
   
5,553,815
     
3,091,471
 
                 
CASH AND CASH EQUIVALENTS - end of period
 
$
3,371,042
   
$
3,535,230
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
                 
Cash paid for interest
 
$
371,800
   
$
112,720
 
                 
Cash paid for taxes
 
$
249,850
   
$
6,450
 
                 
NON-CASH FINANCING AND INVESTING ACTIVITIES:
               
                 
 Accrued interest added to subordinated debt principal
 
$
-
   
$
276,480
 
 
See the accompanying notes to the consolidated financial statements.
6
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.
BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with Form 10-Q instructions and in the opinion of management contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position, results of operations, and cash flows for the periods presented.  The results have been determined on the basis of generally accepted accounting principles and practices of the United States of America (“GAAP”), applied consistently with the Annual Report on Form 10-K of Crystal Rock Holdings, Inc. (the “Company”) for the year ended October 31, 2016.

Certain information and footnote disclosures normally included in audited consolidated financial statements presented in accordance with GAAP have been condensed or omitted. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2016.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

The financial statements herewith reflect the consolidated operations and financial condition of Crystal Rock Holdings, Inc. and its wholly owned subsidiary Crystal Rock LLC.

2.   GOODWILL AND OTHER INTANGIBLE ASSETS

Major components of intangible assets consisted of:
 
 
January 31, 2017
 
October 31, 2016
     
 
Gross Carrying Amount
 
Accumulated Amortization
 
Wgt. Avg. Amort. Years
 
Gross Carrying Amount
 
Accumulated Amortization
 
Wgt. Avg. Amort. Years
 
Amortized Intangible Assets:
                       
Covenants Not to Compete
 
$
2,536,488
   
$
2,460,558
     
1.63
   
$
2,536,488
   
$
2,444,293
     
1.80
 
Customer Lists
   
10,313,819
     
9,363,125
     
1.80
     
10,313,819
     
9,217,143
     
2.02
 
Other Identifiable Intangibles
   
608,393
     
311,660
     
22.80
     
608,393
     
303,570
     
23.04
 
Total
 
$
13,458,700
   
$
12,135,343
           
$
13,458,700
   
$
11,965,006
         
 
Amortization expense for the three month periods ending January 31, 2017 and 2016 was $170,337 and $159,272, respectively.  There were no changes in the carrying amount of goodwill for the three months ending January 31, 2017.
 
7

3.   DEBT

On May 20, 2015 the Company amended its Credit Agreement (the “Agreement”) with Bank of America to provide a senior financing facility consisting of term debt and a revolving line of credit.  Under the Agreement, the Company became obligated on $12,000,000 of debt in the form of a term note to refinance the previous senior term debt and to fund repayment of a portion of its outstanding subordinated debt. Additionally, the Agreement includes a $5,000,000 revolving line of credit that can be used for the purchase of fixed assets, to fund acquisitions, to collateralize letters of credit, and for operating capital.

The Agreement amortizes the term debt over a five year period with 59 equal monthly installments of $133,333 and a final payment of $4,133,333 due in May 2020. The revolving line of credit matures in May 2018.  There are various restrictive covenants under the Agreement, and the Company is prohibited from entering into other debt agreements without the bank’s consent.  The Agreement also prohibits the Company from paying dividends without the prior consent of the bank.

At January 31, 2017, there was no balance outstanding on the line of credit and a letter of credit issued for $1,415,000 to collateralize the Company’s liability insurance program as of that date.  Consequently, as of January 31, 2017, there was $3,585,000 available to borrow from the revolving line of credit. There was $9,333,000 outstanding on the term note as of January 31, 2017.

Effective September 12, 2016, the Company amended its Credit Agreement with Bank of America (the “Second Amendment”).  Under the Second Amendment, interest is paid at a rate of one-month LIBOR plus a margin based on the achievement of a specified leverage ratio.  As of January 31, 2017, the margin was 2.50% for the term note and 2.25% for the revolving line of credit.  The Company fixed the interest rate on a portion of its term debt by entering into an interest rate swap.  As of January 31, 2017, the Company had $4,667,000 of the term debt subject to variable interest rates.  The one-month LIBOR was 0.77% on January 31, 2017 resulting in total variable interest rates of 3.27% and 3.02%, for the term note and the revolving line of credit, respectively, as of January 31, 2017.

The Second Amendment requires the Company to be in compliance with certain financial covenants as follows: (i) a maximum annual limit for capital expenditures of $4,000,000 each fiscal year, (ii) consolidated adjusted operating cash flows to consolidated total debt service ratio, as defined, to be no less than 1.5 to 1 for any reference period ending on or after October 31, 2016 and (iii) senior funded debt to consolidated adjusted EBITDA, as defined, to be no greater than 2.5 to 1 as of the end of any fiscal quarter ending on or after October 31, 2016.  As of January 31, 2017, the Company was in compliance with these financial covenants.

In addition to the senior debt, as of January 31, 2017, the Company has subordinated debt owed to Henry, Peter and John Baker in the aggregate principal amount of $9,000,000 that is due November 20, 2020.  The interest rate on each of these notes is 12% per annum.
 
8

The notes are secured by all of the assets of the Company but specifically subordinated, with a separate agreement between the debt holders, to the senior financing facility described above.

4.   INVENTORIES
Inventories consisted of the following at:

 
January 31,
   
October 31,
 
   
2017
   
2016
 
Finished Goods
 
$
2,282,759
   
$
2,117,241
 
Raw Materials
   
182,993
     
178,134
 
Inventory reserve
   
(204,396
)
   
(233,662
)
Total Inventories
 
$
2,261,356
   
$
2,061,713
 
 
Finished goods inventory consists of products that the Company sells such as, but not limited to, coffee, cups, soft drinks, and snack foods.  Raw material inventory consists primarily of bottle caps.  The amount of raw and bottled water on hand does not represent a material amount of inventory.  The Company estimates that value as of January 31, 2017 and October 31, 2016 to be $44,000 and $47,000, respectively.  This value includes the cost of allocated overhead.  Bottles are accounted for as fixed assets.
5.   ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Financial Instruments

The Company has stand-alone derivative financial instruments in the form of interest rate swap agreements, which derive their value from underlying interest rates. These transactions involve both credit and market risk.  The notional amount is an amount on which calculations, payments, and the value of the derivative are based.  The notional amount does not represent direct credit exposure.  Direct credit exposure is limited to the net difference between the calculated amount to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s consolidated balance sheet as an unrealized gain or loss on derivatives.

The Company is also exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements.  The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and currently has no reason to believe that any counterparties will fail to fulfill their obligations.
9
This interest rate swap agreement is considered a cash flow hedge to hedge against the variability of interest rates on outstanding debt.  The net unrealized loss relating to interest rate swaps was recorded in current and long term liabilities with an offset to other comprehensive income for the effective portion of the hedge. At January 31, 2017, these cash flow hedges were deemed 100% effective.  The portion of the net unrealized loss in current liabilities is the amount expected to be reclassified to income within the next twelve months.
 
The following information pertains to the Company's outstanding interest rate swap at January 31, 2017.  The pay rate is fixed and the receive rate is one month LIBOR.
 
Instrument
 
Notional Amount
   
Pay Rate
   
Receive Rate
 
Interest rate swap
 
$
4,666,668
     
1.25
%
   
0.77
%
 
The table below details the adjustments to other comprehensive income (loss), on a before tax and net-of tax basis, for the fiscal quarters ended January 31, 2017 and 2016.
 
   
Before-Tax
   
Tax Benefit
   
Net-of-Tax
 
Three Months Ended January 31, 2016
                 
Loss on interest rate swap
 
$
(51,043
)
 
$
20,417
   
$
(30,626
)
Reclassification adjustment for loss in income
   
4,833
     
(1,933
)
   
2,900
 
Net unrealized loss
 
$
(46,210
)
 
$
18,484
   
$
(27,726
)
Three Months Ended January 31, 2017
                       
Gain on interest rate swap
 
$
15,121
   
$
(6,048
)
 
$
9,073
 
Reclassification adjustment for loss in income
   
7,015
     
(2,806
)
   
4,209
 
Net unrealized gain
 
$
22,136
   
$
(8,854
)
 
$
13,282
 
 
The reclassification adjustments of $7,015 and $4,833 represent interest the Company paid in excess of the amount that would have been paid without the interest rate swap agreement during the quarters ended January 31, 2017 and 2016, respectively. These amounts were reclassified from accumulated other comprehensive loss and recorded in consolidated statements of operations as interest expense.  No other material amounts were reclassified during the quarters ended January 31, 2017 and 2016.
10

6.   FAIR VALUES OF ASSETS AND LIABILITIES

Fair Value Hierarchy
 
The Company’s assets and liabilities measured at fair value on a recurring basis are as follows:

   
Level 1
   
Level 2
   
Level 3
 
Liabilities:
                 
January 31, 2017
                 
Unrealized loss on derivatives
 
$
-
   
$
10,317
   
$
-
 
       
October 31, 2016
     
Unrealized loss on derivatives
 
$
-
   
$
32,453
   
$
-
 
 
In determining the fair value, the Company uses a model that calculates a present value of the payments as they amortize through the life of the loan (float) based on the variable rate and compares them to the calculated value of the payment based on the fixed rate (fixed) defined in the swap.  In calculating the present value, in addition to the term, the model relies on other data – the “rate” and the “discount factor.”

§
In the “float” model, the rate reflects where the market expects LIBOR to be for the respective period and is based on the Eurodollar futures market.
§
The discount factor is a function of the volatility of LIBOR.

Payments are calculated by applying the rate to the notional amount and adjusting for the term. Then the present value is calculated by using the discount factor.

There were no assets or liabilities measured at fair value on a nonrecurring basis.

7.   INCOME (LOSS) PER SHARE AND WEIGHTED AVERAGE SHARES

The Company considers outstanding in-the-money stock options as potential common stock in its calculation of diluted earnings per share, unless the effect would be anti-dilutive, and uses the treasury stock method to calculate the applicable number of shares.
 
11

The following calculation provides the reconciliation of the denominators used in the calculation of basic and fully diluted earnings per share:

   
Three Months Ended
January 31,
 
   
2017
   
2016
 
Net Loss
 
$
(74,614
)
 
$
(29,528
)
Denominator:
               
Basic Weighted Average Shares Outstanding
   
21,358,411
     
21,358,411
 
Dilutive effect of Stock Options
   
-
     
-
 
Diluted Weighted Average Shares Outstanding
   
21,358,411
     
21,358,411
 
Basic Loss Per Share
 
$
(.00
)
 
$
(.00
)
Diluted Loss Per Share
 
$
(.00
)
 
$
(.00
)
 
As of January 31, 2017 and 2016 there were no options outstanding.

8.   COMPENSATION PLANS

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide services in exchange for the award, the requisite service period (usually the vesting period).  The Company provides an estimate of forfeitures at the initial date of grant.

In April 2014, the Company’s stockholders approved the 2014 Stock Incentive Plan.  The plan provided for issuances of awards of up to 500,000 restricted or unrestricted shares of the Company’s common stock, or incentive or non-statutory stock options to purchase such common stock. Of the total amount of shares authorized under this plan, no options have been granted and 500,000 shares are available for grant at January 31, 2017.
The options issued under the plans generally vest in periods up to five years based on the continuous service of the recipient and have 10 year contractual terms.  Share awards generally vest over one year.  Option and share awards provide for accelerated vesting if there is a change in control of the Company (as defined in the plans).
There was one option grant, for a total of 10,000 shares that was forfeited in the first three months of 2016.  Other than this forfeiture, there was no activity related to stock options and outstanding stock option balances during the three month periods ended January 31, 2017 and 2016.

Compensation is determined using the Black-Scholes model and the simplified method to derive the expected term of the options and historical volatility over the past five years.
12
 
9.   RECENT ACCOUNTING PRONOUNCEMENTS
 
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation.  In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the ASU to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the transition methods and the impact of the standard on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. The ASU requires entities using the first-in, first-out (FIFO) inventory costing method to subsequently value inventory at the lower of cost and net realizable value. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU requires prospective application and is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases", which is intended to improve financial reporting about leasing transactions.  This ASU requires that leased assets be recognized as assets on the balance sheet and the liabilities for the obligations under the lease also be recognized on the balance sheet.  This ASU requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.  The required disclosures include qualitative and quantitative requirements.  This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.  Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently in the process of evaluating our adoption timing and the impact of this new pronouncement on our consolidated financial position and results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses will be based on historical experience, current conditions, and reasonable and supportable forecasts that impact the collectability of the reported amount. The standard is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact the standard will have on the consolidated financial statements and related disclosures.
13

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which addresses presentations of total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows.  The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), to simplify the process used to test for goodwill. Under the new standard, if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.”  For public companies, the ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019.  Early adoption is permitted for impairment tests that occur after January 1, 2017. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.

10.    ACCOUNTS RECEIVABLE
 
Trade Accounts Receivable - Uncollectible individual accounts receivable are written off when deemed uncollectible, with any future recoveries recorded as income when received.
For more details regarding the Company’s accounts receivable polices refer to Note 2, Significant Accounting Policies, in the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2016.
 
14
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto as filed in our Annual Report on Form 10-K for the year ended October 31, 2016 as well as the consolidated financial statements and notes contained herein.
 
Forward-Looking Statements

The “Management’s Discussion and Analysis” (MD&A) portion of this Form 10-Q contains forward-looking statements, including statements about these topics:

(1)
the potential adverse effect of climate changes and severe weather,
(2)
the outstanding debt levels may adversely impact the business profitability and ability to finance future expansion, and
(3)
the cost pressures related to commodities affecting our business.
 
The following factors could strain liquidity and working capital availability in MD&A about topic (1):  We incorporate by reference into this paragraph the full Risk Factor on page 15 of our 2016 Form 10-K beginning “ Climate changes and severe weather may impact ”.

The following factors could strain liquidity and working capital availability in MD&A about topic (2):  We incorporate by reference into this paragraph the full Risk Factor on page 15 of our 2016 Form 10-K beginning “ Our Company is significantly leveraged ”.

The following factors could cause actual results to differ materially from statements in MD&A about topic (3):  We incorporate by reference into this paragraph the full Risk Factor on page 15 of our 2016 Form 10-K beginning “ Fluctuations in the cost of essential raw materials and commodities ”.
 
Results of Operations

Overview and Trends

Our strategy of focusing sales efforts on new water customers and providing value-added service has resulted in stronger gross margins for the first three months of fiscal 2017 compared to the comparable period of 2016.
Sales in the first quarter of fiscal 2017 declined 9% from in the first quarter fiscal 2016, however sales of water products increased 6%.  The most notable sales decline for the period was in the office products category which accounted for over 90% of the net sales decline.
The effect of the office product revenue decline and the increase in water sales resulted in an increase in gross profit of $104,000 or 1%.
15
Selling and general and administrative expenses increased during the first three months of fiscal 2017 as compared to 2016.  This is the result of adding resources to increase sales volumes of traditional water and coffee products and improving customer service levels.  These added investments in improving the customer experience resulted in a reduction in operating income of $116,000 in the first quarter of fiscal 2017 compared to the comparable period in 2016.
Results of Operations for the Three Months Ended January 31, 2017 (First Quarter) Compared to the Three Months Ended January 31, 2016

Sales
Sales for the three months ended January 31, 2017 were $14,650,000 compared to $16,132,000 for the corresponding period in 2016, a decrease of $1,482,000 or 9%.  Other than water and other, all sales categories declined.  The most notable decline was that of office products.  The comparative breakdown of sales of the product lines for the respective three-month periods ended January 31, 2017 and 2016 is as follows:
 
Product Line (000’s $)
 
2017
   
2016
   
Difference
   
% Diff.
 
Water
 
$
6,520
   
$
6,148
   
$
372
     
6
%
Coffee
   
2,700
     
2,922
     
(222
)
   
(8
%)
Refreshment
   
2,049
     
2,369
     
(320
)
   
(14
%)
Equipment Rental
   
1,779
     
1,791
     
(12
)    
(1
%)
Office Products    
1,127
     
2,479
     
(1,352
)
    (5 %)
Other
   
475
     
423
     
52
     
12
%
Total
 
$
14,650
   
$
16,132
   
$
(1,482
)
   
(9
%)
 
Water – Sales of water increased 6% for the first quarter 2017 as compared to the same period of 2016.  The increase is attributable to a volume increase of 6% as prices have remained stable.

Coffee – The decrease in sales was attributable to a decline in our traditional higher volume bulk and K-cup lines.  Bulk products sales continued to be negatively influenced by the single serve lines and K-cup sales declined as a result of ongoing commoditization of coffee products.

Refreshment – Complementary coffee products, single serve drinks, small package water, and cups, all declined.  The Company no longer services vending machines which accounted for $204,000 of the sales decline in this category.

Equipment Rental – The decrease in sales was a result of a 1% decrease in the average monthly rental price per rental unit.  The number of rental units in the field increased by less than 1%.

Office Products – The decrease in sales was a result of implemented price increases on items previously sold at cost or near cost.

Other – The increase is attributable to an increase in the sale of equipment.

Gross Profit/Cost of Goods Sold – Despite a decrease in sales for the three months ended January 31, 2017, gross profit increased to $7,694,000 from $7,589,000 for the comparable period in 2016.  As a percentage of sales, gross margin was 53% compared to 47% for the same period a year ago.  For the comparable three month periods, water accounted for 45% and 38% of total sales in 2017 and 2016 respectively.  Lower margin office product sales for the same periods accounted for 8% and 15% of total sales in 2017 and 2016 respectively.  The improved sales in the higher margin water products and the decrease in lower margin office products coupled to improve our gross margin by 6%.

16
Cost of goods sold includes all costs to bottle water, costs of purchasing and receiving products for resale, including freight, as well as costs associated with product quality, warehousing and handling costs, internal transfers, and the repair and service of rental equipment, but does not include the costs of distributing our product to our customers.  We include distribution costs in selling, general, and administrative expense, and the amount is reported below.  The reader should be aware that other companies may include distribution costs in their cost of goods sold, in which case, on a comparative basis, such other companies may have a lower gross margin as a result.

Operating Expenses and Income from Operations

Total operating expenses increased to $7,462,000 in the first fiscal quarter of 2017 from $7,241,000 in the comparable period in 2016, an increase of $221,000, or 3%.

Selling, general and administrative (SG&A) expenses of $7,172,000 in the first fiscal quarter of 2017 increased $223,000, or 3%, from $6,949,000 in the comparable period in 2016.  Of total SG&A expenses, route distribution costs decreased $162,000, or 5%, as a result of lower labor, truck operating and fuel costs; combined selling and marketing costs increased $198,000, or 24%, as a result of increased sales staffing; and administration costs increased $187,000, or 7%, as a result of increased spending in the areas of information technology and customer service improvements .

Advertising expenses were $119,000 in the first fiscal quarter of 2017 compared to $136,000 in the first quarter of 2016, a decrease of $17,000, or 13%. The decrease in advertising costs is primarily related to lower utilization of printed advertising materials.

Amortization increased to $170,000 in the first fiscal quarter of 2017 from $159,000 in the comparable quarter in 2016, an increase of $11,000, or 7%.  Amortization is attributable to intangible assets that were acquired as part of acquisitions.  We had no gains or losses from the sale of assets in the first quarter of 2017.  We recognized a gain from the sale of assets of $3,000 in the first fiscal quarter of 2016. We routinely sell assets used in the normal course of business as they are replaced with newer assets.

The income from operations for the three months ended January 31, 2017 was $232,000 compared to $349,000 in the comparable period in 2016, a decline of $117,000.  The decline was the result of higher selling and administrative expenses partially offset by higher gross profits and lower delivery expenses.

17

Interest, Taxes, and Other Expenses
 
Interest expense was $351,000 for the three months ended January 31, 2017 compared to $397,000 in the three months ended January 31, 2016, a decrease of $46,000.  The decrease is attributable to lower average interest rates and lower debt balances.
The loss before income taxes was $118,000 for the three months ended January 31, 2017 compared to $49,000 in the corresponding period in 2016, an increased loss of $69,000.  The tax benefit for the first quarter of 2017 was $44,000 compared to $19,000 in 2016.

Net Loss
 
The net loss for the three months ended January 31, 2017 was $75,000 compared to a net loss of $30,000 in the corresponding period in 2016.  The increased net loss is attributable to increased operating expenses partially offset by a higher gross profit.
 
Liquidity and Capital Resources

As of January 31, 2017, we had working capital of $7,642,000 compared to $7,911,000 as of October 31, 2016, a decrease of $269,000.  The most significant change in working capital was due to the use of cash for investment purposes in the purchase of equipment in the first quarter of 2017.  Cash used from operations during the three months ended January 31, 2017 was $1,144,000.  The primary driver of cash used was the use of cash generated by operations in the payment of liabilities during the quarter ended January 31, 2017.

Our Credit Agreement with Bank of America (the “Bank”) provides a senior financing facility consisting of term debt and a revolving line of credit.  As of January 31, 2017 we had $9,333,000 outstanding on our term loan.  We have no funds borrowed from our line of credit with the Bank.  We have a letter of credit of $1,415,000 secured by our line of credit resulting in $3,585,000 available to borrow on the line of credit as of January 31, 2017.

Our term debt amortizes over a five year period with 59 equal monthly installments of $133,333 and a final payment of $4,133,333 due in May 2020. The revolving line of credit matures in May 2018.  There are various restrictive covenants under the Agreement, and the Company is prohibited from entering into other debt agreements without the bank’s consent.  The Agreement also prohibits the Company from paying dividends without the prior consent of the bank.

Effective September 12, 2016, the Company amended its Credit Agreement with Bank of America (the “Second Amendment”).  Under the Second Amendment, interest is paid at a rate of one-month LIBOR plus a margin based on the achievement of a specified leverage ratio.  As of January 31, 2017, the margin was 2.50% for the term note and 2.25% for the revolving line of credit.  The Company fixed the interest rate on a portion of its term debt by entering into an interest rate swap.  As of January 31, 2017, the Company had $4,667,000 of the term debt subject to variable interest rates.  The one-month LIBOR was 0.77% on January 31, 2017 resulting in total variable interest rates of 3.27% and 3.02%, for the term note and the revolving line of credit, respectively, as of January 31, 2017.
 
18

The following information pertains to the Company's outstanding interest rate swap at January 31, 2017.  The pay rate is fixed and the receive rate is one month LIBOR.
 
Instrument
 
Notional Amount
   
Pay Rate
   
Receive Rate
 
Interest rate swap
 
$
4,666,668
     
1.25
%
   
0.77
%
 
The Second Amendment requires the Company to be in compliance with certain financial covenants as follows: (i) a maximum annual limit for capital expenditures of $4,000,000 each fiscal year, (ii) consolidated adjusted operating cash flows to consolidated total debt service ratio, as defined, to be no less than 1.5 to 1 for any reference period ending on or after October 31, 2016 and (iii) senior funded debt to consolidated adjusted EBITDA, as defined, to be no greater than 2.5 to 1 as of the end of any fiscal quarter ending on or after October 31, 2016.  As of January 31, 2017, the Company was in compliance with these financial covenants.

In addition to the senior debt, as of January 31, 2017, the Company has subordinated debt owed to Henry, Peter and John Baker in the aggregate principal amount of $9,000,000 that is due November 20, 2020.  The interest rate on each of these notes is 12% per annum.

In addition to our senior and subordinated debt commitments, we have significant future cash commitments, primarily in the form of operating leases that are not reported on the consolidated balance sheet. The following table sets forth our contractual commitments in the remainder of the current year and future fiscal years as of January 31, 2017:

 
Payment due by Period
 
 
Contractual Obligations
 
Total
   
Remainder
of 2017
     
2018-2019
     
2020-2021
   
After 2020
 
Debt (1)
 
$
18,333,000
   
$
1,200,000
   
$
3,200,000
   
$
13,933,000
   
$
-
 
Interest on Debt (2)
   
5,089,000
     
1,038,000
     
2,615,000
     
1,436,000
     
-
 
Operating Leases
   
9,675,000
     
2,291,000
     
4,669,000
     
2,589,000
     
126,000
 
Total
 
$
33,097,000
   
$
4,529,000
   
$
10,484,000
   
$
17,958,000
   
$
126,000
 
 
(1)
Interest based on 50% of outstanding senior debt at the hedged interest rate discussed above, 50% of outstanding senior debt at a variable rate of 3.27%, line of credit at a rate of 3.02%, and subordinated debt at a rate of 12%.
 
(2)
Customer deposits have been excluded from the table.  Deposit balances vary from period to period with water sales but future increases and decreases in the balances are not accurately predictable.  Deposits are excluded because, net of periodic additions and reductions, it is probable that a customer deposit balance will always be outstanding as long as the business operates.

We have no other material contractual obligations or commitments.
 
19

Item 3.  Quantitative and Qualitative Disclosures about Market Risks.

Pursuant to Regulation S-K, Item 305(e), smaller reporting companies are not required to provide this information.

Item 4.  Controls and Procedures.

Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by us, including our consolidated subsidiary, in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive and Chief Financial officers, as appropriate to allow timely decisions regarding required disclosure.

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.
Changes in Internal Control over Financial Reporting.
No change in our internal control over financial reporting occurred during the three month period ended January 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
20
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.
There was no change in the three months ended January 31, 2017 from the Risk Factors reported in our Annual Report on Form 10-K for the year ended October 31, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.

Item 6. Exhibits.
 
 
Exhibit
Number
Description
 
3.1
Certificate of Incorporation (Incorporated by reference to Exhibit B to Appendix A to our registration statement on Form S-4, File No. 333-45226, filed with the SEC on September 6, 2000)

3.2
Certificate of Amendment of Certificate of Incorporation (Incorporated by reference to Exhibit 4.2 of our current report on Form 8-K, filed with the SEC on October 19, 2000)

3.3
Certificate of Ownership and Merger of Crystal Rock Holdings, Inc. with and into Vermont Pure Holdings, Ltd. (Incorporated by reference to Exhibit 3.1 to our current report on Form 8-K, filed with the SEC on May 6, 2010)
 
21
 
3.4
By-laws, as amended (Incorporated by reference to Exhibit 3.2 to our report on Form 8-K, filed with the SEC on April 2, 2010)

31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101
Interactive Data Files regarding (a) our Consolidated Balance Sheets as of January 31, 2017 and October 31, 2016, (b) our Consolidated Statements of Operations for the Three Months Ended January 31, 2017 and 2016, (c) our Consolidated Statements of Comprehensive Loss for the Three Months Ended January 31, 2017 and 2016, (d) our Consolidated Statements of Cash Flows for the Three Months Ended January 31, 2017 and 2016, and (e) the Notes to such Consolidated Financial Statements.
 
22
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 16, 2017
 
 
 
 
CRYSTAL ROCK HOLDINGS, INC.
 
 
 
By: /s/ David Jurasek                                             
 
David Jurasek
  Chief Financial Officer/Treasurer
  (Principal Accounting Officer and
  Principal Financial Officer)
   
23
Exhibits Filed Herewith
 
 
Exhibit
Number
Description
 

31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101
Interactive Data Files regarding (a) our Consolidated Balance Sheets as of January 31, 2017 and October 31, 2016, (b) our Consolidated Statements of Operations for the Three Months Ended January 31, 2017 and 2016, (c) our Consolidated Statements of Comprehensive Loss for the Three Months Ended January 31, 2017 and 2016, (d) our Consolidated Statements of Cash Flows for the Three Months Ended January 31, 2017 and 2016, and (e) the Notes to such Consolidated Financial Statements.

 
24
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