UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended:
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed from last report)
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required
to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
shares of common stock, par value $0.001 per share, are outstanding at September 13, 2021.
TABLE OF CONTENTS
| Page | ||
| PART I | 3 | |
| ITEM 1 | FINANCIAL STATEMENTS | 3 |
| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 17 |
| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 23 |
| ITEM 4 | CONTROLS AND PROCEDURES | 23 |
| PART II | 24 | |
| ITEM 1 | LEGAL PROCEEDINGS | 24 |
| ITEM 1A | RISK FACTORS | 24 |
| ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 24 |
| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES | 24 |
| ITEM 4 | MINE SAFETY DISCLOSURES | 24 |
| ITEM 5 | OTHER INFORMATION | 24 |
| ITEM 6 | EXHIBITS | 24 |
| -2- |
PART I
ITEM 1 – FINANCIAL STATEMENTS.
COFFEE HOLDING CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| July 31, 2021 | October 31, 2020 | |||||||
| (Unaudited) | ||||||||
| - ASSETS - | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowances of $ | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Prepaid and refundable income taxes | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Buildings, machinery and equipment, at cost, net of accumulated depreciation of $ | ||||||||
| Customer list and relationships, net of accumulated amortization of $ | ||||||||
| Trademarks and tradenames | ||||||||
| Non-compete, net of accumulated amortization of $ | ||||||||
| Goodwill | ||||||||
| Equity method investments | ||||||||
| Deferred income tax asset | ||||||||
| Right of use asset | ||||||||
| Deposits and other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| - LIABILITIES AND STOCKHOLDERS’ EQUITY - | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Line of credit – current portion | - | |||||||
| Lease liability – current portion | ||||||||
| Note payable – current portion | ||||||||
| Due to broker | ||||||||
| Income taxes payable | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Deferred income tax liabilities | ||||||||
| Line of credit net of current portion | - | |||||||
| Lease liability net of current portion | ||||||||
| Note payable net of current portion | ||||||||
| Deferred compensation payable | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and Contingencies (see Note 8) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Coffee Holding Co., Inc. stockholders’ equity: | ||||||||
| Preferred stock, par value $ per share; shares authorized; issued | - | - | ||||||
| Common stock, par value $ per share; shares authorized, shares issued for 2021 and 2020; shares outstanding for 2021 and 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Less: Treasury stock, common shares, at cost for 2021 and 2020 | ( | ) | ( | ) | ||||
| Total Coffee Holding Co., Inc. stockholders’ equity | ||||||||
| Non-controlling interest | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
| -3- |
COFFEE HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED JULY 31, 2021 AND 2020
(Unaudited)
Nine Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| NET SALES | $ | $ | $ | $ | ||||||||||||
| COST OF SALES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling and administrative | ||||||||||||||||
| Officers’ salaries | ||||||||||||||||
| TOTAL | ||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Loss from equity method investment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| TOTAL | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES AND NON-CONTROLLING INTEREST IN SUBSIDIARY | ( | ) | ||||||||||||||
| Provision for (benefit) from income taxes | ( | ) | ||||||||||||||
| NET INCOME (LOSS) BEFORE NON-CONTROLLING INTEREST IN SUBSIDIARY | ( | ) | ||||||||||||||
| Less: Net (income) loss attributable to the non-controlling interest | ( | ) | ||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO COFFEE HOLDING CO., INC. | $ | $ | $ | ( | ) | $ | ||||||||||
| Basic and diluted earnings (loss) per share | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
| -4- |
COFFEE HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE AND NINE MONTHS ENDED JULY 31, 2021 AND 2020
(Unaudited)
| Common Stock | Treasury Stock | Additional Paid-in | Retained | Non- Controlling | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Interest | Total | |||||||||||||||||||||||||
| Balance, October 31, 2019 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Stock Compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Income from non-Controlling Interest | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Balance, January 31, 2020 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Stock Compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Income from non-Controlling Interest | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Balance, April 30, 2020 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Stock Compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Loss from non-Controlling Interest | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, July 31, 2020 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Balance, October 31, 2020 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Stock Compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Income from non-Controlling Interest | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Balance, January 31, 2021 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Stock Compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Loss from non-Controlling Interest | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, April 30, 2021 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Stock Compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( |
- | ( |
||||||||||||||||||||||||
| Loss from non-Controlling Interest | - | - | - | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance, July 31, 2021 | $ | $ | ( |
) | $ | $ | $ | $ | ||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
| -5- |
COFFEE HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2021 AND 2020
(Unaudited)
| 2021 | 2020 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Unrealized (gain) loss on commodities | ( | ) | ( | ) | ||||
| Loss on equity method investments | ||||||||
| Amortization of right of use asset | ||||||||
| Deferred income taxes | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Prepaid and refundable income taxes | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Deposits and other assets | ( | ) | - | |||||
| Change in lease liability | ( | ) | ( | ) | ||||
| Income taxes payable | ||||||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES: | ||||||||
| Purchases of building, machinery and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Advances under bank line of credit | ||||||||
| Proceeds from PPP loan | - | |||||||
| Principal payments on note payable | ( | ) | ( | ) | ||||
| Principal payments under bank line of credit | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| NET INCREASE (DECREASE) IN CASH | ( | ) | ||||||
| CASH, BEGINNING OF PERIOD | ||||||||
| CASH, END OF PERIOD | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
| -6- |
COFFEE HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2021 AND 2020
(Unaudited)
| 2021 | 2020 | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Initial recognition of operating lease right of use asset | $ | $ | ||||||
| Initial recognition of operating lease liabilities | $ | $ | ||||||
| Termination of operating lease right of use asset | $ | - | ||||||
| Termination of operating lease liability | $ | - | ||||||
| Machinery and equipment acquired through financing | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
| -7- |
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2021
(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 of 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 wholesale green coffee sales are included in the “green” revenue stream, and the Company’s private label and branded coffee sales are included in the “packaged revenue stream” and 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 the Company’s sales, the length and impact of stay-at-home orders and/or regional quarantines, labor shortages and employment trends, disruptions to supply chains, including the Company’s 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.
| -8- |
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2021
(UNAUDITED)
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
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, 2020. 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, 2020 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, 2020 and notes thereto included in the Company’s fiscal 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on February 16, 2021 (the “2020 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
Significant Accounting Policies
The significant accounting policies used in the preparation of these condensed consolidated financial statements are disclosed in our 2020 10-K, and there have been no changes to the Company’s significant accounting policies during the three and nine months ended July 31, 2021.
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.
| -9- |
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2021
(UNAUDITED)
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICY (cont’d):
The following table presents revenues by stream for the nine and three months ended July 31, 2021 and 2020.
Nine Months Ended July 31, 2021 | Three Months Ended July 31, 2021 | Nine Months Ended July 31, 2020 | Three Months Ended July 31, 2020 | |||||||||||||
| Green | $ | $ | $ | $ | ||||||||||||
| Packaged | ||||||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
NOTE 3 - INVENTORIES:
Inventories at July 31, 2021 and October 31, 2020 consisted of the following:
July 31, 2021 |
October 31, 2020 |
|||||||
| Packed coffee | $ | $ | ||||||
| Green coffee | ||||||||
| Roasters and parts | ||||||||
| Packaging supplies | ||||||||
| Totals | $ | $ | ||||||
| -10- |
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2021
(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 impact earnings volatility in any particular period.
The Company has open position contracts held by the broker, which are summarized as follows:
| July 31, 2021 | October 31, 2020 | |||||||
| Option Contracts | $ | ( | ) | $ | ( | ) | ||
| Future Contracts | ( | ) | ||||||
| Total Commodities | $ | ( | ) | $ | ( | ) | ||
The Company classifies its options and future contracts as trading securities and accordingly, unrealized holding gains and losses are included in the statement of operations as a component of cost of sales and not reflected as a net amount as a separate component of stockholders’ equity.
The Company recorded realized and unrealized gains and losses, on these contracts as follows:
| Three Months Ended July 31, | ||||||||
| 2021 | 2020 | |||||||
| Gross realized gains | $ | $ | ||||||
| Gross realized losses | ( |
( |
) | |||||
| Unrealized (loss) gain | ( |
|||||||
| Total | $ | $ | ||||||
| Nine Months Ended July 31, | ||||||||
| 2021 | 2020 | |||||||
| Gross realized gains | $ | $ | ||||||
| Gross realized losses | ( |
) | ( |
) | ||||
| Unrealized gain | ||||||||
| Total | $ | $ | ||||||
| -11- |
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2021
(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) provides for a new maturity date of
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 July 31,
2021 and October 31, 2020. The outstanding balance on the Company’s lines of credit were $
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 July 31, 2021 and October 31, 2020, the Company did
The Company files a U.S. federal income tax return and California, Colorado, Connecticut, Idaho, Kansas, Louisiana, Montana, Massachusetts, Michigan, New Jersey, New York, New York City, Oregon, Rhode Island, South Carolina, Tennessee, Virginia, and Texas state tax returns. The Company’s federal income tax return is no longer subject to examination by the federal taxing authority for the years before fiscal 2017. The Company’s California, Colorado and New Jersey income tax returns are no longer subject to examination by their respective taxing authorities for the years before fiscal 2017. The Company’s Oregon and New York income tax returns are no longer subject to examination by their respective taxing authorities for the years before fiscal 2017.
| -12- |
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2021
(UNAUDITED)
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 and for the three and nine months ended July 31, 2021 and 2020, respectively. The Company has granted options which have not been included in the calculation of diluted earnings per share due to their anti-dilutive nature.
NOTE 8 – COMMITMENTS AND CONTINGENCIES:
CLASS ACTION COMPLAINTS
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 on or about December 21, 2020. The plaintiffs, Eileen Brodsky and Rhonda Diamond, purporting 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 the Company and another coffee roasting company, which falsely described the number of cups of coffee that could be made from the amount of product purchased. Aldi and Pan American are also named as defendants in the action. The complaint asserts a variety of claims under New York and California consumer protection laws, and seeks 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. The Company believes the allegations in the complaint are wholly without merit and that the claims asserted are legally deficient, and the company intends to vigorously defend the action. The Company has filed a motion to dismiss, and the plaintiff has sought leave to file an amended complaint. At this time, the Company is unable to predict the ultimate outcome of this lawsuit.
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 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. As of the filing of this Form 10-Q, the Company is unable to predict the ultimate outcome of this lawsuit.
| -13- |
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2021
(UNAUDITED)
NOTE 8 – COMMITMENTS AND CONTINGENCIES (cont’d):
CLASS ACTION COMPLAINTS (cont’d)
A number of lawsuits similar to those above have been filed in recent years against coffee sellers in the industry in which the Company competes. Many of these lawsuits have yet to be finally adjudicated. The Company believes the lawsuits filed against it are without merit.
LEASES
The following summarizes the Company’s operating leases:
| July 31, 2021 | ||||
| Right-of-use operating lease assets | $ | |||
| Current lease liability | $ | |||
| Non-current lease liability | ||||
| Total lease liability | $ | |||
The
amortization of the right-of-use asset for the nine and three months ended July 31, 2021 was $
| July 31, 2021 | ||||
| Average remaining lease term | ||||
| Discount rate | % | |||
Maturities of lease liabilities by year for our operating leases are as follows:
| 2021 (remaining three months) | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total lease payments | $ | ||||
| Less: imputed interest | ( | ) | |||
| Present value of operating lease liabilities | $ |
The
aggregate cash payments under these leasing agreements was $
In
June 2021, the Company purchased a facility in Colorado for $
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COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2021
(UNAUDITED)
NOTE 9 - ECONOMIC DEPENDENCY:
Approximately
Approximately
NOTE 10 - RELATED PARTY TRANSACTIONS:
The
Company has engaged its
An
employee of one of the top five vendors is a director of the Company. Purchases from that vendor totaled approximately $
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 an officer of the Company. The assets are included in the Deposits and other assets in the accompanying balance
sheets. The deferred compensation asset and liability at July 31, 2021 and October 31, 2020 were $
| -15- |
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2021
(UNAUDITED)
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 and nine months ended July 31, 2021 and the year ended October 31, 2020. | |
| 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 stock options to employees, officers and non-employee directors from the 2013 Plan. 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. As of January 31, 2021, the Board of Directors approved options. As of July 31, 2021 all options are outstanding. | |
The Company recorded $ and $ of stock-based compensation for the three and nine months ended July 31, 2021 and $ and $ for the three and nine months ended July 31, 2020, respectively. | ||
| The
remaining unamortized stock compensation expense as of July 31, 2021 was approximately $ |
NOTE 12 - SUBSEQUENT EVENTS:
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the
evaluation, the Company did identify a subsequent event that requires disclosure in the condensed consolidated financial statements.
The Company made an investment of $
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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.
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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 assists 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. In July 2021, we and The Jordre Well commenced commercial sales of our first CBD-infused line extension for our flagship dark roast Latin espresso brand, Café Caribe, as well as our first CBD-infused line extension for our gourmet coffee brand, Harmony Bay. 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.
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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 minimal 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 and nine months ended July 31, 2021, 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 current 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.
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Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies during the three and nine months ended July 31, 2021. 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 February 16, 2021 for the fiscal year ended October 31, 2020.
Three Months Ended July 31, 2021 Compared to the Three Months Ended July 31, 2020
Net Sales. Net sales totaled $13,634,313 for the three months ended July 31, 2021, a decrease of $3,709,696, or 21.3%, from $17,344,009 for the three months ended July 31, 2020. The decrease in net sales was due to multiple factors, including a 35% decline in cases shipped from our largest production facility in Colorado, as sales to supermarket and wholesale accounts declined significantly during the quarter due to the post Covid-19 demand along with an approximately $1,400,000 decline in sales from our Generations/Steep N Brew subsidiary.
Cost of Sales. Cost of sales for the three months ended July 31, 2021 was $10,708,461, or 78.5% of net sales, as compared to $13,517,482, or 77.9% of net sales, for the three months July 31, 2020. 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 partially offset by higher packaging costs due to increases in materials, most notably steel for our cans.
Gross Profit. Gross profit for the three months ended July 31, 2021 amounted to $2,925,852 or 21.5% of net sales, as compared to $3,826,527 or 22.1% of net sales, for the three months ended July 31, 2020. The decrease in gross profit percentage was attributable to decreased margins on our roasted and branded products due to higher packaging and green coffee costs as most of our wholesale and retail accounts were still operating under the pricing structures in place prior to the rise in green coffee prices towards the end of the quarter which was partially offset by higher selling prices at the end of the quarter to our green coffee customers.
Operating Expenses. Total operating expenses decreased by $12,918 to $3,239,317 for the three months ended July 31, 2021 from $3,252,235 for the three months ended July 31, 2020. Selling and administrative expenses increased by $3,694 and officers’ salaries decreased by $16,612. Our continued efforts to control costs through the elimination of redundancy in our operations and the elimination of certain unnecessary variable costs were the primary reasons for this decrease. These efforts were partially offset by the continued increase in our freight costs as the cost of truckload and LTL (less than full truckloads) deliveries to our largest wholesale customers continued to increase during the quarter.
Other Income (Expense). Other expense for the three months ended July 31, 2021 was $5,956, a decrease of $40,627 from $46,583 for the three months ended July 31, 2020. The decrease in other expense was attributable to a decrease in interest expense of $40,081, an increase in our loss from our equity investments of $1,907 and an increase in our interest income of $2,453, during the three months ended July 31, 2021 as compared to the three months ended July 31, 2020.
Income Taxes. Our benefit for income taxes for the three months ended July 31, 2021 totaled $91,003 compared to a provision of $161,454 for the three months ended July 31, 2020. The change was primarily attributable to the difference in the income for the quarter ended July 31, 2021 versus the income in the quarter ended July 31, 2020.
Net Income. We had a net loss of $127,051 or $0.02 per share basic and diluted, for the three months ended July 31, 2021 compared to net income of $391,324, or $0.07 per share basic and diluted for the three months ended July 31, 2020. This was driven primarily by losses out of our Generations subsidiary of approximately $152,000 along with the non-cash cost of our stock option program of approximately $189,768 for the quarter.
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Nine Months Ended July 31, 2021 Compared to the Nine Months Ended July 31, 2020
Net Sales. Net sales totaled $46,236,708 for the nine months ended July 31, 2021, a decrease of $10,488,678, or 18.5%, from $56,725,386 for the nine months ended July 31, 2020. The decrease in net sales was due to multiple factors, including an approximate $2,500,000 decrease in sales from our Generations/Steep N Brew subsidiary, a decline in sales of green coffee during the first half of the year as many of our customers remained closed or impaired by continued COVID-19 restrictions as well as a decline in sales to supermarkets on private label products during the quarter.
Cost of Sales. Cost of sales for the nine months ended July 31, 2021 was $35,061,947, or 75.8% of net sales, as compared to $45,287,198, or 79.8% of net sales, for the nine months July 31, 2020. 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 partially offset by higher packaging costs due to increases in materials, most notably steel for our cans.
Gross Profit. Gross profit for the nine months ended July 31, 2021 amounted to $11,174,761 or 24.2% of net sales, as compared to $11,438,188 or 20.2% of net sales, for the nine months ended July 31, 2020. The increase in gross profit percentage was attributable to increased margins on our roasted and branded products and green coffee sales in the last year, partially due to the movement of lower cost green coffee inventory built up in previous quarters, partially offset by higher packaging costs due to increases in materials, most notably steel for our cans.
Operating Expenses. Total operating expenses decreased by $662,947 to $9,867,700 for the nine months ended July 31, 2021 from $10,530,647 for the nine months ended July 31, 2020. Selling and administrative expenses decreased by $625,794 and officers’ salaries decreased by $37,153. Our continued efforts to control costs through the elimination of redundancy in our operations and the elimination of certain unnecessary variable costs were the primary reasons for this decrease. These efforts were partially offset by the continued increase in our freight costs as the cost of truckload and LTL (less than full truckloads) deliveries to our largest wholesale customers was up approximately 20% year over year.
Other Income (Expense). Other expense for the nine months ended July 31, 2021 was $52,450, a decrease of $99,887 from $152,337 for the nine months ended July 31, 2020. The decrease in other expense was attributable to a decrease in interest expense of $102,032 and an increase in our interest income of $685, partially offset by an increase in our loss from our equity investments of $2,830, during the nine months ended July 31, 2021 as compared to the nine months ended July 31, 2020.
Income Taxes. Our provision for income taxes for the nine months ended July 31, 2021 totaled $419,326 compared to a provision of $250,804 for the nine months ended July 31, 2020. The change was primarily attributable to the difference in the income for the nine months ended July 31, 2021 versus the income in the nine months ended July 31, 2020.
Net Income. We had net income of $907,305 or $0.16 per share basic and diluted, for the nine months ended July 31, 2021 compared to net income of $289,994, or $0.05 per share basic and diluted for the nine months ended July 31, 2020. The increase in net income was due primarily to the reasons described above.
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Liquidity and Capital Resources
As of July 31, 2021, we had working capital of $20,573,060, which represented a $3,466,478 decrease from our working capital of $24,039,538 as of October 31, 2020, and total stockholders’ equity of $27,995,276 which increased by $1,476,610 from our total stockholders’ equity of $26,518,666 as of October 31, 2020. Our working capital decreased primarily due to decreases of $1,156,932 in accounts receivable, $750,468 in inventories, $92,597 in prepaid and refundable income taxes, increases of $1,048,073 in accounts payable and accrued expenses, increases in our line of credit – current portion of $2,500,000, increases of $288,294 in income taxes payable, partially offset by increase of $1,636,300 in cash, $339,855 in prepaid expenses, decreases in lease liability – current portion of $77,287, note payable – current portion of $875, and due to broker of $315,569. As of July 31, 2021, the outstanding balance on our line of credit was $2,500,000 compared to $3,796,822 as of October 31, 2020.
On April 25, 2017, we and Organic Products Trading Company, LLC (“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 us 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%).
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 July 31, 2021 and October 31, 2020.
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 remain in full force and effect.
For the nine months ended July 31, 2021, our operating activities provided net cash of $4,428,138 as compared to the nine months ended July 31, 2020 when operating activities provided net cash of $2,921,973. The increased cash flow from operations for the nine months ended July 31, 2021 was primarily due to our inventory usage during the quarter and our net income.
For the nine months ended July 31, 2021, our investing activities used net cash of $1,491,233 as compared to the nine months ended July 31, 2020 when net cash used by investing activities was $392,023. The increase in our uses of cash in investing activities was due to our increased purchases of building, machinery and equipment. In June 2021, the Company purchased a facility in Colorado for $900,321 that it was previously leasing.
For the nine months ended July 31, 2021, our financing activities used net cash of $1,300,605 compared to net cash used by financing activities of $2,739,728 for the nine months ended July 31, 2020. The change in cash flow from financing activities for the nine months ended July 31, 2021 was due to our decreased principal payments on our credit line, partially offset by increased proceeds.
The Company believes that, based on its current cash position, and its current projection of revenue, expenses, capital expenditures and cash flows, it has sufficient resources to fund its operations for at least the next twelve months following the filing of this Report.
| -22- |
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, which includes our President, Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our President, Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were not effective. We specifically identified a combination of control deficiencies relating to the accuracy and completeness of our accounting for stock-based compensation awards and inventories at one of our subsidiaries, which constitute material weaknesses in internal control over financial reporting. Notwithstanding such material weaknesses, we believe the financial information presented herein is materially correct and fairly presents the financial position and operating results of the quarter ended July 31, 2021 in conformity with U.S. generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of the SEC.
As previously disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020, management has identified material weaknesses as of that date. The identified material weaknesses related to the accounting for stock-based compensation awards and inventories at one of our subsidiaries. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. To remediate the material weakness, we are initiating controls and procedures in order to:
| ● | Reinforce the importance of a strong control environment, to emphasize the technical requirements for controls that are designed, implemented and operating effectively and to set the appropriate expectations on internal controls through establishing the related policies and procedures; and | |
| ● | Review the processes for documenting and alerting key personnel, including our board members, officers, auditors and outside accountants, of non-reoccurring events related to stock-based compensation awards to ensure such events are timely and adequately recorded and communicated to the appropriate parties. | |
| ● | We have replaced and hired new employees in the accounting department at the subsidiary where the inventory analysis issue occurred and have made upgrades to the computer systems at the subsidiary. Further, we hired a new director of finance at the subsidiary that is responsible for overseeing inventory counts and we are enhancing controls in the inventory business process over (i) inventory count procedures by requiring more frequent physical audits of our inventory, and (ii) review of inventory adjustments and approvals. |
The material weaknesses identified above will not be considered remediated until our remediation efforts have been fully implemented and we have concluded that these controls are operating effectively.
Management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
Changes in Internal Control over Financial Reporting
Other than the changes intended to remediate the material weakness as discussed above and in Part II, Item 9A of our Annual Report on Form 10-K for the year ended October 31, 2020, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended July 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Information regarding reportable legal proceedings is contained in Part I, Item 3, “Legal Proceedings,” in our Annual Report on Form 10-K for the year ended October 31, 2020. There have been no material changes to the legal proceedings previously disclosed in the Annual Report on Form 10-K for the year ended October 31, 2020, which are incorporated by reference herein.
ITEM 1A. RISK FACTORS.
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended October 31, 2020 filed with the Securities and Exchange Commission on February 16, 2021. There have been no material changes to our risk factors since the Company’s Annual Report on Form 10-K for the year ended October 31, 2020.
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.
| 31.1 | Principal Executive Officer and Principal Financial Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| 32.1 | Principal Executive Officer and Principal Financial Officer’s Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document * | |
| 101.SCH | XBRL Taxonomy Extension Schema Document * | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document * | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document * | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document * | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document * |
* Filed herewith
** Furnished herewith
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Signatures
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.
| Coffee Holding Co., Inc. | ||
| Date: September 13, 2021 | By: | /s/ Andrew Gordon |
| Andrew Gordon President | ||
| Chief Executive Officer and Chief Financial Officer | ||
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