ITEM
1 – FINANCIAL STATEMENTS.
COFFEE
HOLDING CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
JANUARY
31, 2022 AND OCTOBER 31, 2021
See
Notes to Condensed Consolidated Financial Statements
COFFEE
HOLDING CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE
MONTHS ENDED JANUARY 31, 2022 AND 2021
(Unaudited)
See
Notes to Condensed Consolidated Financial Statements
COFFEE
HOLDING CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE
MONTHS ENDED JANUARY 31, 2022 AND 2021
(Unaudited)
See
Notes to Condensed Consolidated Financial Statements
COFFEE
HOLDING CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE
MONTHS ENDED JANUARY 31, 2022 AND 2021
(Unaudited)
See
Notes to Condensed Consolidated Financial Statements
COFFEE
HOLDING CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE
MONTHS ENDED JANUARY 31, 2022 AND 2021
(Unaudited)
| |
2022 | | |
2021 | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA: | |
| | | |
| | |
Interest paid | |
$ | 36,853 | | |
$ | 31,406 | |
Income taxes paid | |
$ | 1,298 | | |
$ | 69 | |
See
Notes to Condensed Consolidated Financial Statements
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2022
(UNAUDITED)
NOTE
1 - BUSINESS ACTIVITIES:
Coffee
Holding Co., Inc. (the “Company”) conducts wholesale coffee operations, including manufacturing, roasting, packaging, marketing
and distributing roasted and blended coffees for private labeled accounts and its own brands, and it sells green coffee. The Company
also manufactures and sells coffee roasters. The Company’s core product, coffee, can be summarized and divided into three product
categories (“product lines”) as follows:
Wholesale
Green Coffee: unroasted raw beans imported from around the world and sold to large and small roasters and coffee shop operators;
Private
Label Coffee: coffee roasted, blended, packaged and sold under the specifications and names of others, including supermarkets
that want to have their own brand name on coffee to compete with national brands; and
Branded
Coffee: coffee roasted and blended to the Company’s own specifications and packaged and sold under the Company’s
eight proprietary and licensed brand names in different segments of the market.
The
Company’s private label and branded coffee sales are primarily to customers that are located throughout the United States with
limited sales in Canada and certain countries in Asia. Such customers include supermarkets, wholesalers, and individually-owned and multi-unit
retailers. The Company’s unprocessed green coffee, which includes over 90 specialty coffee offerings, is sold primarily to specialty
gourmet roasters and to coffee shop operators in the United States with limited sales in Australia, Canada, England and China.
The
Company’s wholesale green, private label, and branded coffee product categories generate revenues and cost of sales individually
but incur selling, general and administrative expenses in the aggregate. There are no individual product managers and discrete financial
information is not available for any of the product lines. The Company’s product portfolio is used in one business and it operates
and competes in one business activity and economic environment. In addition, the three product lines share customers, manufacturing resources,
sales channels, and marketing support. Thus, the Company considers the three product lines to be one single reporting segment.
COVID-19
The
global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government
in March 2020 and has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel
and transport restrictions, mandated closures and stay-at-home orders, and created significant disruption of the financial markets.
The
continuing impact on the Company’s business, including the decrease in our sales, the length and impact of stay-at-home orders
and/or regional quarantines, labor shortages and employment trends, disruptions to supply chains, including its ability to obtain products
from global suppliers, higher operating costs, the form and impact of economic stimulus and general overall economic instability, has
contributed to and may continue to have a material adverse effect on the Company’s business, results of operations, financial condition
and cash flows. At this time the full impact could not be determined.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2022
(UNAUDITED)
NOTE
2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICY:
The
Company’s fiscal year ends on October 31, of each calendar year. The accompanying interim condensed consolidated financial
statements are unaudited and have been prepared on substantially the same basis as our annual consolidated financial statements for
the fiscal year ended October 31, 2021. In the opinion of the Company’s management, these interim condensed consolidated
financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair
statement of our financial position, results of operations and cash flows for the periods presented. The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual
results could differ from these estimates. The October 31, 2021 year-end condensed consolidated balance sheet data in this document
was derived from audited consolidated financial statements. These condensed consolidated financial statements and notes included in
this quarterly report on Form 10-Q does not include all disclosures required by U.S. generally accepted accounting principles
(“U.S. GAAP”) and should be read in conjunction with the Company’s audited consolidated financial statements as of
and for the year ended October 31, 2021 and notes thereto included in the Company’s fiscal 2021 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission (“SEC”) on January 31, 2022 (the “2021 10-K”). The results
of operations and cash flows for the interim periods included in these condensed consolidated financial statements are not
necessarily indicative of the results to be expected for any future period or the entire fiscal year.
The
condensed consolidated financial statements include the accounts of the Company, the Company’s subsidiaries, Organic Products Trading
Company, LLC (“OPTCO”), Sonofresco, LLC (“SONO”), Comfort Foods, Inc. (“CFI”) and Generations Coffee
Company, LLC (“GCC”), the entity formed as a result of the Company’s joint venture with Caruso’s Coffee, Inc.
The Company owns a 60% equity interest in GCC. All significant inter-company transactions and balances have been eliminated in consolidation.
Significant
Accounting Policy
The
significant accounting policies used in the preparation of these condensed consolidated financial statements are disclosed in our 2021
10-K, and there have been no changes to the Company’s significant accounting policies during the three months ended January 31,
2022.
Revenue
Recognition
The
Company recognizes revenue in accordance with the five-step model as prescribed by the Financial Accounting Standards Board (“FASB”)
Accounting Codification (“ASC”) Topic 606 (“ASC 606”) in which the Company evaluates the transfer of promised
goods or services and recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the
consideration which the Company expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition
for the arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five 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.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2022
(UNAUDITED)
NOTE
2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICY (cont’d):
The
following table presents revenues by product line in the three months ended January 31, 2022 and 2021
SCHEDULE OF REVENUE
| |
January 31, 2022 | | |
January 31, 2021 | |
Green | |
$ | 6,951,573 | | |
$ | 6,603,875 | |
Packaged | |
$ | 9,753,287 | | |
$ | 11,529,962 | |
Totals | |
$ | 16,704,860 | | |
$ | 18,133,837 | |
NOTE
3 - INVENTORIES:
Inventories
at January 31, 2022 and October 31, 2021 consisted of the following:
SCHEDULE OF INVENTORIES
| |
January 31, 2022 | | |
October 31, 2021 | |
Packed coffee | |
$ | 2,181,987 | | |
$ | 2,705,356 | |
Green coffee | |
| 12,203,811 | | |
| 10,890,091 | |
Roasters and parts | |
| 400,113 | | |
| 422,858 | |
Packaging supplies | |
| 2,030,329 | | |
| 1,943,561 | |
Totals | |
$ | 16,816,240 | | |
$ | 15,961,866 | |
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2022
(UNAUDITED)
NOTE
4 - COMMODITIES HELD BY BROKER:
The
Company has used, and intends to continue to use in a limited capacity, short term coffee futures and options contracts primarily for
the purpose of partially hedging and minimizing the effects of changing green coffee prices and to reduce our cost of sales. The commodities
held at broker represent the market value of the Company’s trading account, which consists of options and future contracts for
coffee held with a brokerage firm. The Company uses options and futures contracts, which are not designated or qualifying as hedging
instruments, to partially hedge the effects of fluctuations in the price of green coffee beans. Options and futures contracts are recognized
at fair value in the condensed consolidated financial statements with current recognition of gains and losses on such positions. The
Company’s accounting for options and futures contracts may increase earnings volatility in any particular period. We record all
open contract positions on our consolidated balance sheets at fair value in the due from and due to broker line items and typically do
not offset these assets and liabilities.
The
Company classifies its options and future contracts as trading securities and accordingly, unrealized holding gains and losses are included
in earnings and not reflected as a net amount as a separate component of stockholders’ equity.
The
Company recorded realized and unrealized gains and losses respectively, on these contracts as follows:
SCHEDULE OF REALIZED AND UNREALIZED GAINS AND LOSSES ON CONTRACTS
| |
2022 | | |
2021 | |
| |
Three Months Ended January 31, | |
| |
2022 | | |
2021 | |
Gross realized gains | |
$ | 322,140 | | |
$ | 261,987 | |
Gross realized losses | |
| (378,919 | ) | |
| (76 | ) |
Unrealized gain (loss) | |
| (66,766 | ) | |
| 415,075 | |
Total | |
$ | (123,545 | ) | |
$ | 676,986 | |
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2022
(UNAUDITED)
NOTE
5 - LINE OF CREDIT:
On
April 25, 2017 the Company and OPTCO (together with the Company, collectively referred to herein as the “Borrowers”) entered
into an Amended and Restated Loan and Security Agreement (the “A&R Loan Agreement”) and Amended and Restated Loan Facility
(the “A&R Loan Facility”) with Sterling National Bank (“Sterling”), which consolidated (i) the financing
agreement between the Company and Sterling, dated February 17, 2009, as modified, (the “Company Financing Agreement”) and
(ii) the financing agreement between Company, as guarantor, OPTCO and Sterling, dated March 10, 2015 (the “OPTCO Financing Agreement”),
amongst other things.
On
March 13, 2020, the Company reached an agreement for a new loan modification agreement and credit facility with Sterling. The terms of
the new agreement, among other things: (i) provided for a new maturity date of March
31, 2022 and (ii) decreased the interest
rate per annum to LIBOR plus 1.75%
(with such interest rate not to be lower than 3.50%).
All other terms of the A&R Loan Agreement and A&R Loan Facility remain substantially the same. On March 17, 2022, the Company
reached an agreement for a new loan modification agreement and credit facility which extended the maturity date to June 29, 2022. All
other terms of the A&R Loan Agreement and A&R Loan Facility remain the same.
Each
of the A&R Loan Facility and A&R Loan Agreement contains covenants, subject to certain exceptions, that place annual restrictions
on the Borrowers’ operations, including covenants relating to debt restrictions, capital expenditures, indebtedness, minimum deposit
restrictions, tangible net worth, net profit, leverage, employee loan restrictions, dividend and repurchase restrictions (common stock
and preferred stock), and restrictions on intercompany transactions. The Company was in compliance with all covenants as of January 31,
2022 and October 31, 2021. The
outstanding balance on the Company’s lines of credit were $5,400,850
and $3,800,850
as of January 31, 2022 and October 31, 2021,
respectively.
NOTE
6 - INCOME TAXES:
The
Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities
to be computed for temporary differences between the financial statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected
to be realized. The income tax provision or benefit is the tax incurred for the period plus or minus the change during the period in
deferred tax assets and liabilities.
As
of January 31, 2022 and October 31, 2021, the Company did not have any unrecognized tax benefits or open tax positions. The Company’s
practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 31, 2022 and October
31, 2021, the Company had no accrued interest or penalties related to income taxes. The Company currently has no federal or state tax
examinations in progress.
The
Company files a U.S. federal income tax return and California, Colorado, Connecticut, Idaho, Kansas, Michigan, New Jersey, New York,
New York City, Virginia, Texas, Rhode Island, South Carolina, and Oregon state tax returns. The Company’s federal income tax return
is no longer subject to examination by the federal taxing authority for years before fiscal 2018. The Company’s California, Colorado
and New Jersey and Texas income tax returns are no longer subject to examination by their respective taxing authorities for the years
before fiscal 2018. The Company’s Oregon, New York, Kansas, South Carolina, Rhode Island, Connecticut and Michigan income tax returns
are no longer subject to examination by their respective taxing authorities for the years before fiscal 2018.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2022
(UNAUDITED)
NOTE
7 - EARNINGS PER SHARE:
The
Company presents “basic” and “diluted” earnings per common share pursuant to the provisions included in the authoritative
guidance issued by FASB, “Earnings per Share,” and certain other financial accounting pronouncements. Basic earnings per
common share were computed by dividing net income by the sum of the weighted-average number of common shares outstanding. Diluted earnings
per common share is computed by dividing the net income by the weighted-average number of common shares outstanding plus the dilutive
effect of common shares issuable upon exercise of potential sources of dilution.
The
weighted average common shares outstanding used in the computation of basic and diluted earnings per share were 5,708,599
for the three months ended January 31, 2022 and
2021. The Company had granted 1,000,000
options in the second quarter of 2019, which
have not been included in the calculation of diluted earnings per share due to these options being out of the money.
NOTE
8 - COMMITMENTS AND CONTINGENCIES:
CLASS
ACTION COMPLAINT
The
Company was named as a defendant in a putative class action lawsuit filed in the United States District Court for the Northern District
of Illinois (the “Court”) on or about December 21, 2020. The plaintiffs, Eileen Brodsky and Rhonda Diamond, purported to
represent a class of individuals who purchased coffee products at Aldi, Inc. (“Aldi”), a supermarket chain, generally allege
that Aldi sold private label coffee products manufactured by us and by Pan American Coffee Co., LLC (“Pan American”), which
falsely described the number of cups of coffee that could be made from the amount of product purchased. Aldi and Pan American were also
named as defendants in the action. The complaint asserted a variety of claims under New York and California consumer protection laws,
and sought unspecified monetary damages, including disgorgement and restitution, as well as other forms of relief including class certification,
declaratory and injunctive relief, attorneys’ fees, and interest. On September 28, 2021, the Court entered an order granting the
Company’s motion to dismiss with prejudice (the “Dismissal Order”). In the Dismissal Order, the Court stated that no
reasonable coffee drinker would be deceived by the Company’s packaging. The plaintiffs filed an appeal with the 7th
Circuit Court of Appeals (the “Appeal”). After the Appeal was filed, the Company and the plaintiffs’ settled the matter
during mediation in late January 2022 and the Appeal was dismissed.
A
significant customer of the Company was named as a defendant in a putative class action lawsuit filed in the United States District Court
for the District of Massachusetts (the “Massachusetts District Court”) on or about February 2, 2021, concerning the
labeling on private label coffee productions we sold to the customer. The plaintiff, David Cohen, purporting to represent a class of
individuals who purchased coffee products from our customer, generally allege that the customer sold private label coffee products manufactured
by the Company which falsely described the number of cups of coffee that could be made from the amount of product purchased. The Company
is not named as a defendant in the action, but has agreed to indemnify the customer for the costs and expenses incurred in defending
the lawsuit and for any liability the customer may suffer as a result. The complaint asserts a variety of claims under Massachusetts
consumer protection laws, and seeks unspecified monetary damages as well as other forms of relief including class certification, declaratory
and injunctive relief, attorneys’ fees, and interest. The Company believes the allegations in the complaint are wholly without
merit and that the claims asserted are legally deficient, and intends to vigorously support the customer in defending the action.
On February 28, 2022, the Company and the plaintiff, in his individual capacity and not on behalf of a presumptive class, resolved
the matter in principle and have reported the agreement in principle to the Massachusetts District Court. The parties are presently negotiating
the final details of a settlement agreement to finalize the settlement.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2022
(UNAUDITED)
NOTE
8 - COMMITMENTS AND CONTINGENCIES (cont’d):
The
Company has a 401(k) Retirement Plan, which covers all the full time employees who have completed one year of service and have reached
their 21st birthday. The Company matches 100% of the aggregate salary reduction contribution up to the first 3% of compensation
and 50% of aggregate contribution of the next 2% of compensation. Contributions to the plan aggregated $16,031 and $72,558 for the three
months ended January 31, 2022 and for the year ended October 31, 2021, respectively.
NOTE
9 - LEASES:
The
following summarizes the Company’s operating leases:
SCHEDULE OF OPERATING LEASES
| |
2022 | | |
2021 | |
Right-of-use operating lease assets | |
$ | 3,443,105 | | |
$ | 3,545,786 | |
| |
| | | |
| | |
Current lease liability | |
| 311,475 | | |
| 340,400 | |
Non-current lease liability | |
| 3,239,638 | | |
| 3,299,784 | |
Total lease liability | |
$ | 3,551,113 | | |
$ | 3,640,184 | |
The
amortization of the right-of-use asset for the three months ended January 31, 2022 and 2021was $102,681 and $112,587, respectively.
Maturities
of lease liabilities by year for our operating leases are as follows:
SCHEDULE OF MINIMUM FUTURE LEASE PAYMENTS
| | |
| | |
2022 | | |
$ | 450,732 | |
2023 | | |
| 492,385 | |
2024 | | |
| 474,670 | |
2025 | | |
| 354,528 | |
2026 | | |
| 360,108 | |
Thereafter | | |
| 2,701,088 | |
Total lease payments | | |
$ | 4,833,511 | |
Less: imputed interest | | |
| (1,282,398 | ) |
Present value of operating lease liabilities | | |
$ | 3,551,113 | |
In
June 2021, the Company purchased a facility in Colorado for $900,321 that it was previously leasing. On the date of purchase, the Company
wrote off the carrying value of the right-of-use asset and lease liability associated with this facility of $242,888.
In
September 2021, the Company extended its headquarters lease in Staten Island, New York through September 2036. As a result, on the date
of the modification the Company increased its right-of-use asset and lease liability by $2,025,316 as of October 31, 2021.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2022
(UNAUDITED)
NOTE
10 - RELATED PARTY TRANSACTIONS:
The
Company has engaged its 40% partner in GCC as an outside contractor (the “Partner”). Included in contract labor expense are
expenses incurred from the Partner during the three months ended January 31, 2022 and 2021 of $58,434 and $74,693, respectively, for
the processing of finished goods.
An
employee of one of the top five vendors is a director of the Company. Purchases from that vendor totaled approximately $1,159,000 and
$734,000 for the three months ended January 31, 2022 and 2021 respectively. The corresponding accounts payable balance to this vendor
was approximately $4,000 and $199,000 at January 31, 2022 and 2021, respectively.
In
January 2005, the Company established the “Coffee Holding Co., Inc. Non-Qualified Deferred Compensation Plan.” Currently,
there is only one participant in the plan: the Company’s Chief Executive Officer. Within the plan guidelines, this employee is
deferring a portion of his current salary and bonus. The assets are held in a separate trust. The deferred compensation payable represents
the liability due to the Chief Executive Officer of the Company. The assets were $301,976 and $311,872 at January 31, 2022 and October
31, 2021, respectively, and are included in the Deposits and other assets in the accompanying balance sheets. The deferred compensation
liability at January 31, 2022 and October 31, 2021 were $301,976 and $311,872, respectively.
NOTE
11 - STOCKHOLDERS’ EQUITY:
|
a. |
Treasury
Stock. The Company utilizes the cost method of accounting for treasury stock. The cost of reissued shares is determined under
the last-in, first-out method. The Company did not purchase any shares during the three months ended January 31, 2022 and the year
ended October 31, 2021. |
|
|
|
|
b.
|
Stock
Options. The Company has an incentive stock plan, the 2013 Equity Compensation Plan (the “2013 Plan”), and on April
19, 2019, has granted 1,000,000 stock options to employees, officers and non-employee directors from the 2013 Plan each with an exercise
price of $5.43. Options granted under the 2013 Plan may be Incentive Stock Options or Nonqualified Stock Options, as determined by
the Administrator at the time of grant. No options were granted, forfeited or expired during the three months ended January 31, 2022
or for the year ended October 31, 2021. |
|
|
|
|
|
The
Company recorded $189,768 of stock-based compensation for the three months ended January 31, 2022 and 2021. |
|
|
|
|
|
The
unrecognized stock compensation expense as of January 31, 2022 was approximately $216,052 and is expected to be recognized as compensation
expense over the next two quarters. |
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary
Note on Forward-Looking Statements
Some
of the matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,”
“Business,” “Risk Factors” and elsewhere in this annual report include forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements
upon information available to management as of the date of this Form 10-Q and management’s expectations and projections about future
events, including, among other things:
|
● |
our
dependency on a single commodity could affect our revenues and profitability; |
|
● |
our
success in expanding our market presence in new geographic regions; |
|
● |
the
effectiveness of our hedging policy may impact our profitability; |
|
● |
the
success of our joint ventures; |
|
● |
our
success in implementing our business strategy or introducing new products; |
|
● |
our
ability to attract and retain customers; |
|
● |
our
ability to obtain additional financing; |
|
● |
our
ability to comply with the restrictive covenants we are subject to under our current financing; |
|
● |
the
effects of competition from other coffee manufacturers and other beverage alternatives; |
|
● |
the
impact to the operations of our Colorado facility; |
|
● |
general
economic conditions and conditions which affect the market for coffee; |
|
● |
the
potential adverse impact of the COVID-19 pandemic on our operations and results, including as a result of the loss of adequate labor,
any prolonged closures, or series of temporary closures, of our supply chain, or changes in consumer behaviors, when stay-at-home
restriction orders are lifted and/or as a result of the COVID-19 pandemic’s impact on financial markets and economic conditions; |
|
● |
our
expectations regarding, and the stability of, our supply chain, including potential shortages or interruptions in the supply or delivery
of green coffee, as a result of COVID-19 or otherwise; |
|
● |
the
macro global economic environment; |
|
● |
our
ability to maintain and develop our brand recognition; |
|
● |
the
impact of rapid or persistent fluctuations in the price of coffee beans; |
|
● |
fluctuations
in the supply of coffee beans; |
|
● |
the
volatility of our common stock; and |
|
● |
other
risks which we identify in future filings with the Securities and Exchange Commission (the “SEC”). |
In
some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,”
“predict,” “potential,” “continue,” “expect,” “anticipate,” “future,”
“intend,” “plan,” “believe,” “estimate” and similar expressions (or the negative of such
expressions). Any or all of our forward looking statements in this quarterly report and in any other public statements we make may turn
out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently,
no forward-looking statement can be guaranteed. In addition we undertake no responsibility to update any forward-looking statement to
reflect events or circumstances that occur after the date of this quarterly report.
Overview
We
are an integrated wholesale coffee roaster and dealer in the United States and one of the few coffee companies that offers a broad array
of coffee products across the entire spectrum of consumer tastes, preferences and price points. As a result, we believe that we are well-positioned
to increase our profitability and endure potential coffee price volatility throughout varying cycles of the coffee market and economic
conditions.
Our
operations have primarily focused on the following areas of the coffee industry:
|
● |
the
sale of wholesale specialty green coffee; |
|
● |
the
roasting, blending, packaging and sale of private label coffee; |
|
● |
the
roasting, blending, packaging and sale of our eight brands of coffee; and |
|
● |
sales
of our tabletop coffee roasting equipment. |
Our
operating results are affected by a number of factors including:
|
● |
the
level of marketing and pricing competition from existing or new competitors in the coffee industry; |
|
● |
our
ability to retain existing customers and attract new customers; |
|
● |
our
hedging policy; |
|
● |
fluctuations
in purchase prices and supply of green coffee and in the selling prices of our products; and |
|
● |
our
ability to manage inventory and fulfillment operations and maintain gross margins. |
Our
net sales are driven primarily by the success of our sales and marketing efforts and our ability to retain existing customers and attract
new customers. For this reason, we have made, and will continue to evaluate, strategic decisions to acquire and invest in measures that
are expected to increase net sales. In addition to our acquisitions, in October 2020, we entered into an agreement to become a 49% owner
in The Jordre Well, a CBD beverage company (“The Jordre Well”). Under the terms of the agreement with The Jordre Well, The
Jordre Well will assist us in the development and commercialization of CBD-infused line extensions for the existing coffee brands within
our portfolio, as well as launch new brands that are intended to serve consumer demand for non-coffee CBD-infused beverages and products.
We believe these efforts will allow us to expand our business.
Our
sales are affected by the price of green coffee. We purchase our green coffee from dealers located primarily within the United States.
The dealers supply us with coffee beans from many countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. The supply
and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. For example,
in Brazil, which produces approximately 40% of the world’s green coffee, the coffee crops are historically susceptible to frost
in June and July and drought in September, October and November. However, because we purchase coffee from a number of countries and are
able to freely substitute one country’s coffee for another in our products, price fluctuations in one country generally have not
had a material impact on the price we pay for coffee. Accordingly, price fluctuations in one country generally have not had a material
effect on our results of operations, liquidity and capital resources. Historically, because we generally have been able to pass green
coffee price increases through to customers, increased prices of green coffee generally result in increased net sales, irrespective of
sales volume.
The
supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. Historically,
we have used, and intend to continue to use in a limited capacity, short-term coffee futures and options contracts primarily for the
purpose of partially hedging the effects of changing green coffee prices. In addition, we acquired, and expect to continue to acquire,
futures contracts with longer terms, generally three to four months, primarily for the purpose of guaranteeing an adequate supply of
green coffee. Realized and unrealized gains or losses on options and futures contracts are reflected in our cost of sales. Gains on options
and futures contracts reduce our cost of sales and losses on options and futures contracts increase our cost of sales. The use of these
derivative financial instruments has generally enabled us to mitigate the effect of changing prices. We believe that, in normal economic
times, our hedging policies remain a vital element to our business model not only in controlling our cost of sales, but also giving us
the flexibility to obtain the inventory necessary to continue to grow our sales while trying to minimize margin compression during a
time of historically high coffee prices.
However,
no strategy can entirely eliminate pricing risks and we generally remain exposed to losses on futures contracts when prices decline significantly
in a short period of time, and we would generally remain exposed to supply risk in the event of non-performance by the counterparties
to any of our futures contracts. Although we have had net gains on options and futures contracts in the past, we have incurred significant
losses on options and futures contracts during some recent reporting periods. In these cases, our cost of sales has increased, resulting
in a decrease in our profitability or increase our losses. Such losses have and could in the future materially increase our cost of sales
and materially decrease our profitability and adversely affect our stock price. If our hedging policy is not effective, we may not be
able to control our coffee costs, we may be forced to pay greater than market value for green coffee and our profitability may be reduced.
Failure to properly design and implement an effective hedging strategy may materially adversely affect our business and operating results.
If the hedges that we enter do not adequately offset the risks of coffee bean price volatility or our hedges result in losses, our cost
of sales may increase, resulting in a decrease in profitability or increased losses. As previously announced, as a result of the volatile
nature of the commodities markets, we have and are continuing to scale back our use of hedging and short-term trading of coffee futures
and options contracts, and intend to continue to use these practices in a limited capacity going forward.
COVID-19
Pandemic
The
global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government
in March 2020 and has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel
and transport restrictions, mandated closures and stay-at-home orders, and created significant disruption of the financial markets. However,
we are classified as an essential business and its factories continued to operate with little to no impact from the pandemic-related
closures.
To
date, we have experienced disruption to our supply chain or distribution network, including the supply of green coffee beans, though
it is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact markets around the world. We
are also working closely with all of our business partners. As a food producer, we are an essential service and almost all of our employees
continue to work within our production and distribution facilities.
The
COVID-19 pandemic has had a material adverse impact on our condensed consolidated financial statements for the three months ended January
31, 2022, and it has resulted, and is expected to continue to result for at least the near and immediate term, in significant economic
disruptions and changes to consumer behaviors in the United States, which, has impacted and is expected to continue to negatively impact
our business. Many of our customers who purchase green coffee from us for use in cafés, restaurants and food service operations,
were forced to temporarily suspend or close operations, adversely impacting our sales to customers in that segment. However, as sales
to the café, restaurant and food service segment decreased in the quarter, sales to large wholesaler and retail customers increased,
as there was a shift in buying and consumption of coffee products to this segment.
The
continuing impact on our business, including the length and impact of stay-at-home orders and/or regional quarantines, labor shortages
and employment trends, disruptions to supply chains, including our ability to obtain products from global suppliers, higher operating
costs, the form and impact of economic stimulus and general overall economic instability, is uncertain at this time and could have a
material adverse effect on our business, results of operations, and financial condition.
Critical
Accounting Policies and Estimates
There
have been no changes to our critical accounting policies during the three months ended January 31, 2022. Critical accounting policies
and the significant estimates in accordance with such policies are regularly discussed with our Audit Committee. Those policies are discussed
under “Critical Accounting Policies” in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” as well as in our consolidated financial statements and footnotes thereto, each included in our annual
report on Form 10-K filed with the SEC on January 31, 2022 for the fiscal year ended October 31, 2021.
Three
Months Ended January 31, 2022 Compared to the Three Months Ended January 31, 2021
Net
Sales. Net sales totaled $16,704,860 for the three months ended January 31, 2022, a decrease of $1,428,977, or 7.9%, from $18,133,837
for the three months ended January 31, 2021. The decrease in net sales was due to an approximately $1,323,000 decline in sales from our
Generations/Steep N Brew subsidiary due to loss of customers.
Cost
of Sales. Cost of sales for the three months ended January 31, 2022 was $12,433,252, or 74.4% of net sales, as compared to $13,654,169,
or 75.3% of net sales, for the three months January 31, 2021. Cost of sales consists primarily of the cost of green coffee and packaging
materials and realized and unrealized gains or losses on hedging activity. The decrease in cost of sales was due to our decreased sales.
On a percentage basis cost of sales decreased by 0.9% due to our favorable green coffee position in our inventory partially offset by
higher costs of our packaging materials, specifically the cost of steel and the approximately $475,000 change in our open hedging positions.
Gross
Profit. Gross profit for the three months ended January 31, 2022 amounted to $4,271,608 or 25.6% of net sales, as compared to
$4,479,668 or 24.7% of net sales, for the three months ended January 31, 2021. The increase in gross profits on a percentage basis was
attributable to the factors listed above.
Operating
Expenses. Total operating expenses increased by $407,592 to $3,720,878 for the three months ended January 31, 2022 from $3,313,286
for the three months ended January 31, 2021. Selling and administrative expenses increased by $409,680 and officers’ salaries decreased
by $2,088. Operating expenses increased primarily due to increases of approximately $213,000 in professional fees, $55,000 in freight
costs and $139,000 in labor costs, partially offset by decreases in various other operating expense categories
Other
Income (Expense). Other expense for the three months ended January 31, 2022 was $70,798, an increase of $41,941 from $28,857
for the three months ended January 31, 2021. The increase in other expense was attributable to an increase in interest expense of $13,941,
an increase in our loss from our equity investments of $29,127, partially offset by an increase in our interest income of $1,127, during
the three months ended January 31, 2022.
Income
Taxes. Our provision for income taxes for the three months ended January 31, 2022 totaled $137,406 compared to a provision of
$381,243 for the three months ended January 31, 2021. The change was primarily attributable to the difference in the income for the quarter
ended January 31, 2022 versus the income in the quarter ended January 31, 2021.
Net
Income. We had net income of $280,863 or $0.05 per share basic and diluted, for the three months ended January 31, 2022 compared
to net income of $677,312, or $0.12 per share basic and diluted for the three months ended January 31, 2021. The decrease in net income
was due primarily to the reasons described above.
Liquidity
and Capital Resources
As
of January 31, 2022, we had working capital of $20,216,164, which represented a $232,729 increase from our working capital of $19,983,435
as of October 31, 2021. Our working capital increased primarily due to increases of $320,500 in cash, $854,374 in inventories, $107,069
in prepaid expenses and other current assets, decreases of $1,897,340 in accounts payable and accrued expenses, decreases of $76,852
in due to broker, decrease of $28,925 in lease liabilities – current portion, partially offset by decreases of $757,812 in accounts
receivable, $143,619 in due from broker, $3,750 in prepaid and refundable taxes, increase of $1,600,000 in line of credit increase in
dividend payable of $399,000 and $148,150 in income taxes payable. As of January 31, 2022, the outstanding balance on our line of credit
was $5,400,850 compared to $3,800,850 as of October 31, 2021.
On
April 25, 2017, we and OPTCO (collectively, the “Borrowers”) entered into an Amended and Restated Loan and Security Agreement
(the “A&R Loan Agreement”) and Amended and Restated Loan Facility (the “A&R Loan Facility”) with Sterling
National Bank (“Sterling”), which consolidated (i) the financing agreement between the Company and Sterling, dated February
17, 2009, as modified, (the “Company Financing Agreement”) and (ii) the financing agreement between us, as guarantor, OPTCO
and Sterling, dated March 10, 2015 (the “OPTCO Financing Agreement”), amongst other things.
On
March 13, 2020, we reached an agreement for a new loan modification agreement and credit facility with Sterling. The terms of the new
agreement among other things: (i) provides for a new maturity date of March 31, 2022 and (ii) decreases the interest rate per annum to
LIBOR plus 1.75% (with such interest rate not to be lower than 3.50%). On March 17, 2022, we reached an agreement for a new loan modification
agreement and credit facility which extended the maturity date to June 29, 2022. All other terms of the A&R Loan Agreement and A&R
Loan Facility remain the same.
Each
of the A&R Loan Facility and A&R Loan Agreement contains covenants, subject to certain exceptions, that place annual restrictions
on the Borrowers’ operations, including covenants relating to debt restrictions, capital expenditures, indebtedness, minimum deposit
restrictions, tangible net worth, net profit, leverage, employee loan restrictions, dividend and repurchase restrictions (common stock
and preferred stock), and restrictions on intercompany transactions. We were in compliance with all covenants as of January 31, 2022 and October 31, 2021.
Each
of the A&R Loan Facility and the A&R Loan Agreement is secured by all of our tangible and intangible assets. Other than as amended
and restated by the A&R Loan Agreement, the Company Financing Agreement and the OPTCO Financing Agreement remains in full force and
effect.
Pursuant
to the terms of the Jordre Well Agreement, we issued to The Jordre Well 139,250 shares of our Common Stock on the effective date of the
Jordre Well Agreement and are obligated to issue an additional 139,250 shares of Common Stock once $500,000 in revenue is generated from
the joint venture.
For
the three months ended January 31, 2022, our operating activities used net cash of $1,233,464 as compared to the three months ended January
31, 2021 when operating activities provided net cash of $2,765,148. The decreased cash flow from operations for the three months ended
January 31, 2022 was primarily due to our paydown of our accounts payable and accrued expenses.
For
the three months ended January 31, 2022, our investing activities used net cash of $44,729 as compared to the three months ended January
31, 2021 when net cash used by investing activities was $66,151. The decrease in our uses of cash in investing activities was due to
our reduced purchases of machinery and equipment during the three months ended January 31, 2022.
For
the three months ended January 31, 2022, our financing activities provided net cash of $1,598,693 compared to net cash used by financing
activities of $2,845,336 for the three months ended January 31, 2021. The change in cash flow from financing activities for the three
months ended January 31, 2022 was due to our credit line activity.
We
expect to fund our operations, including paying our liabilities, funding capital expenditures and making required payments on our indebtedness,
through at least the next twelve months from the date these consolidated financial statements were available to be issued, with cash
provided by operating activities and the use of our credit facility. In addition, an increase in eligible accounts receivable and inventory
would permit us to make additional borrowings under our line of credit.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to investors.