10-Q 1 form10-q.htm
0001007019 false --10-31 Q3 0001007019 2021-11-01 2022-07-31 0001007019 2022-09-13 0001007019 2022-07-31 0001007019 2021-10-31 0001007019 2020-11-01 2021-07-31 0001007019 2022-05-01 2022-07-31 0001007019 2021-05-01 2021-07-31 0001007019 us-gaap:CommonStockMember 2020-10-31 0001007019 us-gaap:TreasuryStockMember 2020-10-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2020-10-31 0001007019 us-gaap:RetainedEarningsMember 2020-10-31 0001007019 us-gaap:NoncontrollingInterestMember 2020-10-31 0001007019 2020-10-31 0001007019 us-gaap:CommonStockMember 2021-01-31 0001007019 us-gaap:TreasuryStockMember 2021-01-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2021-01-31 0001007019 us-gaap:RetainedEarningsMember 2021-01-31 0001007019 us-gaap:NoncontrollingInterestMember 2021-01-31 0001007019 2021-01-31 0001007019 us-gaap:CommonStockMember 2021-04-30 0001007019 us-gaap:TreasuryStockMember 2021-04-30 0001007019 us-gaap:AdditionalPaidInCapitalMember 2021-04-30 0001007019 us-gaap:RetainedEarningsMember 2021-04-30 0001007019 us-gaap:NoncontrollingInterestMember 2021-04-30 0001007019 2021-04-30 0001007019 us-gaap:CommonStockMember 2021-10-31 0001007019 us-gaap:TreasuryStockMember 2021-10-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2021-10-31 0001007019 us-gaap:RetainedEarningsMember 2021-10-31 0001007019 us-gaap:NoncontrollingInterestMember 2021-10-31 0001007019 us-gaap:CommonStockMember 2022-01-31 0001007019 us-gaap:TreasuryStockMember 2022-01-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2022-01-31 0001007019 us-gaap:RetainedEarningsMember 2022-01-31 0001007019 us-gaap:NoncontrollingInterestMember 2022-01-31 0001007019 2022-01-31 0001007019 us-gaap:CommonStockMember 2022-04-30 0001007019 us-gaap:TreasuryStockMember 2022-04-30 0001007019 us-gaap:AdditionalPaidInCapitalMember 2022-04-30 0001007019 us-gaap:RetainedEarningsMember 2022-04-30 0001007019 us-gaap:NoncontrollingInterestMember 2022-04-30 0001007019 2022-04-30 0001007019 us-gaap:CommonStockMember 2020-11-01 2021-01-31 0001007019 us-gaap:TreasuryStockMember 2020-11-01 2021-01-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2020-11-01 2021-01-31 0001007019 us-gaap:RetainedEarningsMember 2020-11-01 2021-01-31 0001007019 us-gaap:NoncontrollingInterestMember 2020-11-01 2021-01-31 0001007019 2020-11-01 2021-01-31 0001007019 us-gaap:CommonStockMember 2021-02-01 2021-04-30 0001007019 us-gaap:TreasuryStockMember 2021-02-01 2021-04-30 0001007019 us-gaap:AdditionalPaidInCapitalMember 2021-02-01 2021-04-30 0001007019 us-gaap:RetainedEarningsMember 2021-02-01 2021-04-30 0001007019 us-gaap:NoncontrollingInterestMember 2021-02-01 2021-04-30 0001007019 2021-02-01 2021-04-30 0001007019 us-gaap:CommonStockMember 2021-05-01 2021-07-31 0001007019 us-gaap:TreasuryStockMember 2021-05-01 2021-07-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2021-05-01 2021-07-31 0001007019 us-gaap:RetainedEarningsMember 2021-05-01 2021-07-31 0001007019 us-gaap:NoncontrollingInterestMember 2021-05-01 2021-07-31 0001007019 us-gaap:CommonStockMember 2021-11-01 2022-01-31 0001007019 us-gaap:TreasuryStockMember 2021-11-01 2022-01-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2021-11-01 2022-01-31 0001007019 us-gaap:RetainedEarningsMember 2021-11-01 2022-01-31 0001007019 us-gaap:NoncontrollingInterestMember 2021-11-01 2022-01-31 0001007019 2021-11-01 2022-01-31 0001007019 us-gaap:CommonStockMember 2022-02-01 2022-04-30 0001007019 us-gaap:TreasuryStockMember 2022-02-01 2022-04-30 0001007019 us-gaap:AdditionalPaidInCapitalMember 2022-02-01 2022-04-30 0001007019 us-gaap:RetainedEarningsMember 2022-02-01 2022-04-30 0001007019 us-gaap:NoncontrollingInterestMember 2022-02-01 2022-04-30 0001007019 2022-02-01 2022-04-30 0001007019 us-gaap:CommonStockMember 2022-05-01 2022-07-31 0001007019 us-gaap:TreasuryStockMember 2022-05-01 2022-07-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2022-05-01 2022-07-31 0001007019 us-gaap:RetainedEarningsMember 2022-05-01 2022-07-31 0001007019 us-gaap:NoncontrollingInterestMember 2022-05-01 2022-07-31 0001007019 us-gaap:CommonStockMember 2021-07-31 0001007019 us-gaap:TreasuryStockMember 2021-07-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2021-07-31 0001007019 us-gaap:RetainedEarningsMember 2021-07-31 0001007019 us-gaap:NoncontrollingInterestMember 2021-07-31 0001007019 2021-07-31 0001007019 us-gaap:CommonStockMember 2022-07-31 0001007019 us-gaap:TreasuryStockMember 2022-07-31 0001007019 us-gaap:AdditionalPaidInCapitalMember 2022-07-31 0001007019 us-gaap:RetainedEarningsMember 2022-07-31 0001007019 us-gaap:NoncontrollingInterestMember 2022-07-31 0001007019 JVA:GenerationsCoffeeCompanyLLCMember 2022-07-31 0001007019 JVA:GreenCoffeeMember 2021-11-01 2022-07-31 0001007019 JVA:GreenCoffeeMember 2022-05-01 2022-07-31 0001007019 JVA:GreenCoffeeMember 2020-11-01 2021-07-31 0001007019 JVA:GreenCoffeeMember 2021-05-01 2021-07-31 0001007019 JVA:PackagedCoffeeMember 2021-11-01 2022-07-31 0001007019 JVA:PackagedCoffeeMember 2022-05-01 2022-07-31 0001007019 JVA:PackagedCoffeeMember 2020-11-01 2021-07-31 0001007019 JVA:PackagedCoffeeMember 2021-05-01 2021-07-31 0001007019 JVA:PackedCoffeeMember 2022-07-31 0001007019 JVA:PackedCoffeeMember 2021-10-31 0001007019 JVA:GreenCoffeeMember 2022-07-31 0001007019 JVA:GreenCoffeeMember 2021-10-31 0001007019 JVA:RoasterPartsMember 2022-07-31 0001007019 JVA:RoasterPartsMember 2021-10-31 0001007019 JVA:PackagingSuppliesMember 2022-07-31 0001007019 JVA:PackagingSuppliesMember 2021-10-31 0001007019 JVA:NewLoanModificationAgreementAndCreditFacilityMember 2020-03-12 2020-03-13 0001007019 JVA:NewLoanModificationAgreementAndCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember 2020-03-12 2020-03-13 0001007019 JVA:NewLoanModificationAgreementAndCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember srt:MaximumMember 2020-03-12 2020-03-13 0001007019 us-gaap:EmployeeStockOptionMember 2018-11-01 2019-04-30 0001007019 2020-11-01 2021-10-31 0001007019 2021-06-01 2021-06-30 0001007019 JVA:GenerationsCoffeeCompanyLLCMember 2021-11-01 2022-07-31 0001007019 JVA:TwoThousandAndThirteenEquityCompensationPlanMember 2019-04-19 iso4217:USD xbrli:shares iso4217:USD xbrli:shares xbrli:pure

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: July 31, 2022

 

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: 001-32491

 

Coffee Holding Co., Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   11-2238111

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3475 Victory Boulevard, Staten Island, New York   10314
(Address of principal executive offices)   (Zip Code)

 

(718) 832-0800

(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
Common Stock, par value $0.001 per share   JVA   The Nasdaq Capital Market

 

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

 

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). Yes ☒ No ☐.

 

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
Non-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 ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

5,708,599 shares of common stock, par value $0.001 per share, are outstanding at September 13, 2022.

 

 

 

 

 

 

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 16
     
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
     
ITEM 4 CONTROLS AND PROCEDURES 22
     
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 25
     
ITEM 6 EXHIBITS 25

 

-2-

 

 

PART I

 

ITEM 1 – FINANCIAL STATEMENTS.

 

COFFEE HOLDING CO., INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   July 31, 2022   October 31, 2021 
   (Unaudited)     
- ASSETS -          
CURRENT ASSETS:          
Cash  $1,430,477   $3,696,275 
Accounts receivable, net of allowances of $144,000 for 2022 and 2021   7,535,104    9,299,978 
Inventories   19,239,461    15,961,866 
Prepaid expenses and other current assets   707,643    542,224 
Due from broker   417,685    725,000 
Prepaid and refundable income taxes   652,995    75,952 
TOTAL CURRENT ASSETS   29,983,365    30,301,295 
           
Building machinery and equipment, net   3,628,921    2,662,628 
Customer list and relationships, net of accumulated amortization of $263,069 and $237,131 for 2022 and 2021, respectively   421,931    447,869 
Trademarks and tradenames   408,000    408,000 
Non-compete, net of accumulated amortization of $74,250 and $69,300 for 2022 and 2021, respectively   24,750    29,700 
Goodwill   2,488,785    2,488,785 
Equity method investments   359,090    402,245 
Investment - other   2,500,000    2,500,000 
Deferred income tax asset - net   148,586    77,394 
Right of Use Asset   3,287,758    3,545,786 
Deposits and other assets   506,123    449,225 
TOTAL ASSETS  $43,757,309   $43,312,927 
           
- LIABILITIES AND STOCKHOLDERS’ EQUITY -          
CURRENT LIABILITIES:          
Accounts payable and accrued expenses  $4,872,467   $5,047,640 
Line of credit – current portion   -    3,800,850 
Lease liability – current portion   122,456    340,400 
Note payable – current portion   4,200    4,200 
Due to broker   439,247    708,321 
Income taxes payable   1,500    416,449 
TOTAL CURRENT LIABILITIES   5,439,870    10,317,860 
           
Lease liabilities   3,299,951    3,299,784 
Line of credit net of current portion   6,114,000    - 
Note payable – long term   10,461    13,092 
Deferred compensation payable   300,013    311,872 
TOTAL LIABILITIES   15,164,295    13,942,608 
Commitments and Contingencies   -    - 
STOCKHOLDERS’ EQUITY:          
Coffee Holding Co., Inc. stockholders’ equity:          
Preferred stock, par value $.001 per share; 10,000,000 shares authorized; none issued   -    - 
Common stock, par value $.001 per share; 30,000,000 shares authorized, 6,633,930 shares issued as of July 31, 2022 and October 31, 2021; 5,708,599 shares outstanding as of July 31, 2022 and October 31, 2021   6,634    6,634 
Additional paid-in capital   19,094,618    18,688,797 
Retained earnings   14,117,370    14,471,222 
Less: Treasury stock, 925,331 common shares, at cost as of July 31, 2022 and October 31, 2021   (4,633,560)   (4,633,560)
Total Coffee Holding Co., Inc. Stockholders’ Equity   28,585,062    28,533,093 
Non-controlling interest   7,952    837,226 
TOTAL EQUITY   28,593,014    29,370,319 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $43,757,309   $43,312,927 

 

See Notes to Condensed Consolidated Financial Statements

 

-3-

 

 

COFFEE HOLDING CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

NINE AND THREE MONTHS ENDED JULY 31, 2022 AND 2021

(Unaudited)

 

   2022   2021   2022   2021 
  

Nine Months Ended

July 31,

  

Three Months Ended

July 31,

 
   2022   2021   2022   2021 
NET SALES  $50,216,316   $46,236,708   $17,013,286   $13,634,313 
                     
COST OF SALES   40,806,381    35,061,947    13,867,710    10,708,461 
                     
GROSS PROFIT   9,409,935    11,174,761    3,145,576    2,925,852 
                     
OPERATING EXPENSES:                    
Selling and administrative   9,530,817    9,407,199    2,758,995    3,085,679 
Officers’ salaries   449,375    460,501    147,099    153,638 
TOTAL   9,980,192    9,867,700    2,906,094    3,239,317 
                     
(LOSS) INCOME FROM OPERATIONS   (570,257)   1,307,061    239,482    (313,465)
                     
OTHER (EXPENSE) INCOME                    
Interest income   4,095    3,629    2    2,700 
Loss from equity method investment   (43,154)   (7,369)   (7,354)   (3,454)
Interest expense   (143,393)   (48,710)   (53,100)   (5,202)
TOTAL   (182,452)   (52,450)   (60,452)   (5,956)
                     
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES AND NON-CONTROLLING INTEREST IN SUBSIDIARY   (752,709)   1,254,611    179,030    (319,421)
                     
(Benefit) provision for income taxes   (188,626)   419,326    46,649    (91,003)
                     
NET (LOSS) INCOME BEFORE NON-CONTROLLING INTEREST IN SUBSIDIARY   (564,083)   835,285    132,381    (228,418)
Less: Net loss attributable to the non-controlling interest   609,231    72,020    -    101,367 
                     
NET INCOME (LOSS) ATTRIBUTABLE TO COFFEE HOLDING CO., INC.  $45,148   $907,305   $132,381   $(127,051)
                     
Basic and diluted (loss) earnings per share  $.01   $.16   $.02   $(.02)
                     
Weighted average common shares outstanding:                    
Basic and diluted   5,708,599    5,708,599    5,708,599    5,708,599 

 

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, 2022 AND 2021

(Unaudited)

 

                                         
   Common Stock   Treasury Stock   Additional Paid-in   Retained   Non- Controlling     
   Shares   Amount   Shares   Amount   Capital   Earnings   Interest   Total 
                                 
Balance, October 31, 2020   5,708,599   $6,634    925,331   $(4,633,560)  $17,929,724   $13,215,868   $1,224,903   $27,743,569 
                                         
Net income   -    -    -    -         677,312         677,312 
                                         
Stock Compensation   -    -    -    -    189,768              189,768 
                                         
Non-Controlling Interest   -    -    -    -              78,970    78,970 
                                         
Balance, January 31, 2021   5,708,599   $6,634    925,331   $(4,633,560)  $18,119,492   $13,893,180   $1,303,873   $28,689,619 
                                         
Stock Compensation   -    -    -    -    189,769              189,769 
                                         
Non-Controlling Interest   -    -    -    -              (49,623)   (49,623)
                                         
Net income   -    -    -    -         357,044         357,044 
                                         
Balance, April 30, 2021   5,708,599   $6,634    925,331   $(4,633,560)  $18,309,261   $14,250,224   $1,254,250   $29,186,809 
                                         
Stock Compensation   -    -    -    -    189,768              189,768 
                                         
Net loss   -    -    -    -         (127,051)        (127,051)
                                         
Non-Controlling Interest   -    -    -    -              (101,367)   (101,367)
                                         
Balance, July 31, 2021   5,708,599   $6,634    925,331   $(4,633,560)  $18,499,029   $14,123,173   $1,152,883   $29,148,159 
                                         
Balance, October 31, 2021   5,708,599   $6,634    925,331   $(4,633,560)  $18,688,797   $14,471,222   $837,226   $29,370,319 
                                         
Stock Compensation   -    -    -    -    189,768              189,768 
                                         
Net income   -    -    -    -         280,863         280,863 
                                         
Dividend to common shareholders   -    -    -    -         (399,000)        (399,000)
Non-Controlling Interest   -    -    -    -              61,663    61,663 
                                         
Balance, January 31, 2022   5,708,599   $6,634    925,331   $(4,633,560)  $18,878,565   $14,353,085   $898,889   $29,503,613 
                                         
Stock Compensation   -    -    -    -    174,241              174,241 
                                         
Net loss   -    -    -    -         (368,096)        (368,096)
                                         
Distribution to non-controlling interest   -    -    -    -              (220,043)   (220,043)
                                         
Non-Controlling Interest   -    -    -    -              (670,894)   (670,894)
                                         
Balance, April 30, 2022   5,708,599   $6,634    925,331   $(4,633,560)  $19,052,806   $13,984,989   $7,952   $28,418,821 
Stock Compensation   -    -    -    -    41,812         -    41,812 
                                         
Net income   -    -    -    -         132,381    -    132,381 
                                         
Balance, July 31, 2022   5,708,599   $6,634    925,331   $(4,633,560)  $19,094,618   $14,117,370   $7,952   $28,593,014 

 

See Notes to Condensed Consolidated Financial Statements

 

-5-

 

 

COFFEE HOLDING CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED JULY 31, 2022 AND 2021

(Unaudited)

 

   2022   2021 
OPERATING ACTIVITIES:          
           
Net (loss) income  $(564,083)  $835,285 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:          
Depreciation and amortization   421,661    504,280 
Stock-based compensation   405,821    569,305 
Unrealized loss (gain) on commodities   38,241    (315,569)
Loss on equity method investments   43,155    7,369 
Write-off of accounts receivable   415,096    - 
Write-down of obsolete inventory   718,353    - 
Amortization of right of use asset   258,028    321,921 
Deferred income taxes   (71,192)   4,849 
Changes in operating assets and liabilities:          
Accounts receivable   1,349,778    1,156,932 
Inventories   (4,215,991)   750,468 
Prepaid expenses and other current assets   (165,419)   (339,855)
Prepaid and refundable income taxes   (577,043)   92,597 
Accounts payable and accrued expenses   (175,173)   1,048,073 
Deposits and other assets   (68,757)   (128,353)
Change in lease liability   (217,777)   (367,458)
Income taxes payable   (414,949)   288,294 
Net cash (used in) provided by operating activities   (2,820,251)   4,428,138 
           
INVESTING ACTIVITIES:          
Purchases of machinery and equipment   (1,357,066)   (1,491,233)
Net cash used in investing activities   (1,357,066)   (1,491,233)
           
FINANCING ACTIVITIES:          
Advances under bank line of credit   3,027,654    2,515,563 
Principal payments on note payable   (2,631)   (3,783)
Payment of dividend   (399,000)   - 
Principal payments under bank line of credit   (714,504)   (3,812,385)
Net cash provided by (used in) financing activities   1,911,519    (1,300,605)
           
NET (DECREASE) INCREASE IN CASH   (2,265,798)   1,636,300 
           
CASH, BEGINNING OF PERIOD   3,696,275    2,875,120 
           
CASH, END OF PERIOD  $1,430,477   $4,511,420 

 

See Notes to Condensed Consolidated Financial Statements

 

-6-

 

 

COFFEE HOLDING CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED JULY 31, 2022 AND 2021

(Unaudited)

 

   2022   2021 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:          
Interest paid  $136,682   $55,389 
Income taxes paid  $519,229   $10,307 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
           
Purchase of inventory by non-controlling interest  $220,043      
Initial recognition of operating lease right of use asset   -   $65,999 
Initial recognition of operating lease liabilities   -   $65,999 

 

See Notes to Condensed Consolidated Financial Statements

 

-7-

 

 

COFFEE HOLDING CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 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.

 

The Company during the quarter ended April 30, 2022 had begun a restructuring process with its Generations subsidiary. As part of this restructuring approximately $550,000 of its inventory was sold to the joint venture partner for $330,000 in cash and the balance was treated as a distribution to the non-controlling interest. As part of the restructuring process, the Company recorded a write-down of obsolete inventory of $718,353 and a write-off of accounts receivable of $415,096.

 

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.

 

-8-

 

 

COFFEE HOLDING CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 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 and nine months ended July 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.

 

-9-

 

 

COFFEE HOLDING CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2022

(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, 2022 and 2021.

 

  

Nine Months
Ended

July 31, 2022

  

Three Months

Ended

July 31, 2022

  

Nine Months
Ended

July 31, 2021

  

Three Months

Ended

July 31, 2021

 
Green  $21,163,637   $7,014,783   $18,054,298   $6,003,521 
Packaged  $29,052,679   $9,998,503   $28,182,410   $7,630,792 
Totals  $50,216,316   $17,013,286   $46,236,708   $13,634,313 

 

NOTE 3 - INVENTORIES:

 

Inventories at July 31, 2022 and October 31, 2021 consisted of the following:

 

  

July 31, 2022

   October 31, 2021 
Packed coffee  $2,620,028   $2,705,356 
Green coffee   14,962,403    10,890,091 
Roasters and parts   425,674    422,858 
Packaging supplies   1,231,356    1,943,561 
Totals  $19,239,461   $15,961,866 

 

-10-

 

 

COFFEE HOLDING CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 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:

 

   2022   2021 
   Three Months Ended July 31, 
   2022   2021 
Gross realized gains  $635,570   $288,785 
Gross realized losses   -    (29,077)
Unrealized loss   (150,687)   (243,838)
Total  $484,883   $15,870 

 

   2022   2021 
   Nine Months Ended July 31, 
   2022   2021 
Gross realized gains  $1,958,618   $791,897 
Gross realized losses   (1,257,359)   (29,152)
Unrealized (loss) gain   (38,241)   315,569 
Total  $663,018   $1,078,314 

 

-11-

 

 

COFFEE HOLDING CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 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 June 28, 2022, the Company reached an agreement for a new loan modification agreement and credit facility with Webster Bank. The terms of the new agreement, among other things: (i) provided for a new maturity date of June 30, 2024, and (ii) changed the interest rate per annum to SOFR 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 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 July 31, 2022 and October 31, 2021. The outstanding balance on the Company’s lines of credit were $6,114,000 and $3,800,850 as of July 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 July 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 July 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.

 

-12-

 

 

COFFEE HOLDING CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 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 nine and three months ended July 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. After the end of the period, the parties finalized the details of a settlement agreement. The final settlement amount was immaterial to the Company’s operations and results of operations.

 

-13-

 

 

COFFEE HOLDING CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 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 $56,038 and $72,558 for the nine months ended July 31, 2022 and for the year ended October 31, 2021, respectively.

 

NOTE 9 - LEASES:

 

The following summarizes the Company’s operating leases:

 

   2022   2021 
Right-of-use operating lease assets  $3,287,758   $3,545,786 
            
Current lease liability   122,456    340,400 
Non-current lease liability   3,299,951    3,299,784 
Total lease liability  $3,422,407   $3,640,184 

 

The amortization of the right-of-use asset for the three months ended July 31, 2022 and 2021 was $78,079 and $95,766, respectively. The amortization of the right-of-use asset for the nine months ended July 31, 2022 and 2021 was $258,028 and $321,921, respectively.

 

Weighted average remaining lease term   11.0 
Weighted average discount rate   4.9%

 

Maturities of lease liabilities by year for our operating leases are as follows:

 

      
2022 remaining  $239,912 
2023   499,377 
2024   474,670 
2025   354,528 
2026   360,108 
Thereafter   2,701,088 
Total lease payments  $4,629,683 
Less: imputed interest   (1,207,276)
Present value of operating lease liabilities  $3,422,407 

 

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.

 

-14-

 

 

COFFEE HOLDING CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 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 and nine months ended July 31, 2022 and 2021 of $58,490 and $210,961 and $91,207 and $253,932, respectively, for the processing of finished goods.

 

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 $300,013 and $311,872 at July 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 July 31, 2022 and October 31, 2021 were $300,013 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 and nine months ended July 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 and nine months ended July 31, 2022 or for the year ended October 31, 2021.
     
    The Company recorded $41,812 and $405,821 of stock-based compensation for the three and nine months ended July 31, 2022 and $189,768 and $569,305 for the three and nine months ended July 31, 2021.
     
    Stock compensation expense was fully recognized as of July 31, 2022.

 

-15-

 

 

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.

 

-16-

 

 

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 (the “ Jordre Well Agreement”) to become a 49% owner in The Jordre Well, a CBD beverage company (“The Jordre Well”). Under the terms of the Jordre Well Agreement, 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.

 

-17-

 

 

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 our 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. 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 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 and nine months ended July 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.

 

-18-

 

 

Three Months Ended July 31, 2022 Compared to the Three Months Ended July 31, 2021

 

Net Sales. Net sales totaled $17,013,286 for the three months ended July 31, 2022, an increase of $3,378,973, or 24.8%, from $13,634,313 for the three months ended July 31, 2021. The increase in net sales was due to an increase of sales to our legacy customers along with incremental sales to several significant new customers in the quarter.

 

Cost of Sales. Cost of sales for the three months ended July 31, 2022 was $13,867,710, or 81.5% of net sales, as compared to $10,708,461, or 78.5% of net sales, for the three months July 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 increase in cost of sales was due to our increased sales to our customers, increased prices of green coffee and packaging materials.

 

Gross Profit. Gross profit for the three months ended July 31, 2022 amounted to $3,145,576 or 18.5% of net sales, as compared to $2,925,852 or 21.5% of net sales, for the three months ended July 31, 2021. The decrease in gross profits on a percentage basis was attributable to the factors listed above.

 

Operating Expenses. Total operating expenses decreased by $333,223 to $2,906,094 for the three months ended July 31, 2022 from $3,239,317 for the three months ended July 31, 2021. Selling and administrative expenses decreased by $326,684 and officers’ salaries decreased by $6,539.

 

Other Income (Expense). Other expense for the three months ended July 31, 2022 was $60,452, an increase of $54,496 from $5,956 for the three months ended July 31, 2021. The increase in other expense was attributable to an increase in interest expense of $47,898 due to our additional advances, an increase in our loss from our equity investments of $3,900 and a decrease in our interest income of $2,698, during the three months ended July 31, 2022.

 

Income Taxes. Our provision for income taxes for the three months ended July 31, 2022 totaled $46,649 compared to a benefit of $91,003 for the three months ended July 31, 2021. The change was primarily attributable to the difference in the loss for the quarter ended July 31, 2022 versus the income in the quarter ended July 31, 2021.

 

Net (Loss) Income. We had net income of $132,381 or $0.02 per share basic and diluted, for the three months ended July 31, 2022 compared to a net loss of $127,051, or $(0.02) per share basic and diluted for the three months ended July 31, 2021. The increase in net income was due to the factors listed above.

 

-19-

 

 

Nine Months Ended July 31, 2022 Compared to the Nine Months Ended July 31, 2021

 

Net Sales. Net sales totaled $50,216,316 for the nine months ended July 31, 2022, an increase of $3,979,608, or 8.6%, from $46,236,708 for the nine months ended July 31, 2021. The increase in net sales was due to an increase of sales to our customers partially offset by a decrease in sales from our Generations/Steep N Brew subsidiary.

 

Cost of Sales. Cost of sales for the nine months ended July 31, 2022 was $40,806,381, or 81.3% of net sales, as compared to $35,061,947, or 75.8% of net sales, for the nine months July 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 increase in cost of sales was due to increased prices of green coffee and packaging materials and the balance of our losses from our Generations/Steep N Brew subsidiary, which included obsolete inventory write-off of approximately $718,000.

 

Gross Profit. Gross profit for the nine months ended July 31, 2022 amounted to $9,409,935 or 18.7% of net sales, as compared to $11,174,761 or 24.2% of net sales, for the nine months ended July 31, 2021. The decrease in gross profit percentage was attributable to higher raw material costs and the impact of losses from our Generations/Steep N Brew subsidiary through April 30, 2022.

 

Operating Expenses. Total operating expenses increased by $112,492 to $9,980,192 for the nine months ended July 31, 2022 from $9,867,700 for the nine months ended July 31, 2021. Selling and administrative expenses increased by $123,618 and officers’ salaries decreased by $11,126. Our efforts to control costs through the elimination of redundancy in our operations and the elimination of certain unnecessary variable costs was offset by the increase in our freight costs and an increase of $415,096 in bad debt expense related to our Generations subsidiary.

 

Other Income (Expense). Other expense for the nine months ended July 31, 2022 was $182,452, an increase of $130,002 from $52,450 for the nine months ended July 31, 2021. The increase in other expense was attributable to an increase in interest expense of $94,683 due to additional advances on our line of credit, an increase in our loss from our equity investments of $35,785, partially offset by an increase in our interest income of $466, during the nine months ended July 31, 2022 as compared to the nine months ended July 31, 2021.

 

Income Taxes. Our benefit for income taxes for the nine months ended July 31, 2022 totaled $188,626 compared to a provision of $419,326 for the nine months ended July 31, 2021. The change was primarily attributable to the difference in the loss for the nine months ended July 31, 2022 versus the income in the nine months ended July 31, 2021.

 

Net (Loss) Income. We had net income of $45,148 or $0.01 per share basic and diluted, for the nine months ended July 31, 2022 compared to net income of $907,305, or $0.16 per share basic and diluted for the nine months ended July 31, 2021. The decrease in net income was due primarily to the reasons described above.

 

-20-

 

 

Liquidity and Capital Resources

 

As of July 31, 2022, we had working capital of $24,543,495, which represented a $4,560,060 increase from our working capital of $19,983,435 as of October 31, 2021. Our working capital increased primarily due to increases in inventory of $3,277,595, $165,419 in prepaid expenses and other current assets, $577,043 in prepaid and refundable taxes, decreases of $175,173 in accounts payable and accrued expenses, decrease of $3,800,850 in our line of credit current portion, decreases of $269,074 in due to broker, decrease of $217,944 in lease liabilities – current portion, and $414,949 in income taxes payable, partially offset by decreases of $2,265,798 in cash, $1,764,874 in accounts receivable, $307,315 in due from broker. As of July 31, 2022, the outstanding balance on our line of credit was $6,114,000 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 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%). On June 28, 2022, we reached an agreement for a new loan modification agreement and credit facility with Webster Bank. The terms of the new agreement, among other things: (i) provided for a new maturity date of June 30, 2024, and (ii) changed the interest rate per annum to SOFR 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 the same.

 

Each of the A&R Loan Facility and A&R Loan Agreement contain 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, 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 remain in full force and effect.

 

-21-

 

 

For the nine months ended July 31, 2022, our operating activities used net cash of $2,820,251 as compared to the nine months ended July 31, 2021 when operating activities provided net cash of $4,428,138. The decreased cash flow from operations for the nine months ended July 31, 2022 was primarily due to our net loss, and the increase in our inventory.

 

For the nine months ended July 31, 2022, our investing activities used net cash of $1,357,066 as compared to the nine months ended July 31, 2021 when net cash used by investing activities was $1,491,233. The increase in our uses of cash in investing activities was due to our increased purchases of machinery and equipment during the nine months ended July 31, 2022.

 

For the nine months ended July 31, 2022, our financing activities provided net cash of $1,911,519 compared to net cash used by financing activities of $1,300,605 for the nine months ended July 31, 2021. The change in cash flow from financing activities for the nine months ended July 31, 2022 was due to our increased advances on our credit line.

 

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 of 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.

 

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. During the year ended October 31, 2021, we identified inappropriate system access controls over the financial reporting system. These controls were not designed to prevent or detect unauthorized changes to source information, or implement an appropriate level of segregation of duties which ultimately led us to conclude that this was a material weakness. Further, during the year ended October 31, 2021, we determined that we lacked adequate controls with respect to identifying and accounting for material contracts. This was evidenced by our failure to properly identify and account for a material lease amendment. Accordingly, management has determined that this is a control deficiency that constitutes a material weakness. 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, 2022 in conformity with U.S. generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of the SEC.

 

-22-

 

 

Remediation Plan for the Material Weakness

 

As previously disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021, management has identified material weaknesses as of that date. The identified material weaknesses related to inappropriate system access controls over the financial reporting system and failure to properly identify and account for a material lease amendment. 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 weaknesses identified above, we are initiating controls and procedures in order to:

 

  educating control owners concerning the principles and requirements of each control, with a focus on those related to user access to our financial reporting systems impacting financial reporting;
  developing and maintaining documentation to promote knowledge transfer upon personnel and function changes;
  developing enhanced controls and reviews related to our financial reporting systems; and
  performing an in-depth analysis of who should have access to perform key functions within our financial reporting system that impact financial reporting and redesigning aspects of the system to better allow the access rights to be implemented.

 

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, 2021, 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, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

-23-

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

We were 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 one of our supermarket customers, generally allege that such client sold private label coffee products manufactured by us and one of our partners, which falsely described the number of cups of coffee that could be made from the amount of product purchased. These parties were also named as defendants in the action. The complaint asserted 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. We believe the allegations in the complaint are wholly without merit and that the claims asserted are legally deficient, and we intend to vigorously defend the action. On September 28, 2021, the Court entered an order granting our motion to dismiss with prejudice (the “Dismissal Order”). In the Dismissal Order, the Court stated that no reasonable coffee drinker would be deceived by our packaging. The plaintiffs filed an appeal with the 7th Circuit Court of Appeals (the “Appeal”). After the Appeal was filed, we settled the matter during mediation in late January 2022 and the Appeal was dismissed.

 

A significant customer of ours 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 us which falsely described the number of cups of coffee that could be made from the amount of product purchased. We are not named as a defendant in the action, but we have 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. We believe the allegations in the complaint are wholly without merit and that the claims asserted are legally deficient, and we intend to vigorously support the customer in defending the action. On February 28, 2022, us 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. Subsequent to the end of the period, the parties finalized the details of a settlement agreement. The final settlement amount was immaterial to our operations and results from operation.

 

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, 2021 filed with the Securities and Exchange Commission on January 31, 2022. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended October 31, 2021.

 

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.

 

-24-

 

 

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   Inline XBRL Instance Document *
101.SCH   Inline XBRL Taxonomy Extension Schema Document *
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document *
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document *
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Filed herewith

** Furnished herewith

 

-25-

 

 

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 14, 2022 By: /s/ Andrew Gordon
    Andrew Gordon President
    Chief Executive Officer and Chief Financial Officer

 

-26-