COFFEE HOLDING CO INC 10-K/A

ITEM 7. 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-K 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 annual 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 annual report. 20 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 invest in measures that are expected to increase net sales. These transactions include our acquisition of Premier Roasters, LLC, including equipment and a roasting facility in La Junta, Colorado, the addition of a west coast sales manager to increase sales of our private label and branded coffees to new customers, our joint venture with Caruso’s Coffee, Inc. of Brecksville, Ohio, the transaction with OPTCO. On June 29, 2016, we purchased substantially all the assets, including equipment, inventory, customer lists and relationships of Coffee Kinetics, LLC, a Washington limited liability company. On June 29, 2016, we purchased through SONO, substantially all the assets, including equipment, inventory, customer list and relationships of Coffee Kinetics, LLC, a Washington limited liability company. On February 24, 2017, we acquired 100% of the capital stock of Comfort Foods, Inc. (“CFI”), a Massachusetts based medium sized coffee roaster, manufacturing both branded and private label coffee for retail and foodservice customers. In April 2018, Generations Coffee Company, the entity formed as a result of our joint venture with Caruso’s Coffee, Inc., purchased substantially all the assets of Steep & Brew, Inc. In October 2020, we entered into the Jordre Well Agreement to become a 49% owner in The Jordre Well, a CBD beverage company. 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. We believe these efforts will allow us to expand our business. Our net 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, as further explained in Note 2 of the Notes to the Consolidated Financial Statements in this Report. 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. See “Item 1A – Risk Factors - 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. 21 Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventories, assets held for sale, business combinations, carrying amounts of intangible assets and goodwill, deferred taxes, income taxes, commodities held and loss contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, may be impacted significantly by judgment, assumptions and estimates used in the preparation of the financial statements: ● The Company has adopted the new revenue recognition standard ASC 606 on November 1, 2018 using the modified retrospective method. The majority of the Company’s business is ship and bill. The Company recognizes revenue in accordance with the five-step model 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, 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. ● Effective November 1, 2019, we adopted ASC Topic 842, Leases (“ASC 842”). The new guidance increases transparency by requiring the recognition of right to use assets and lease liabilities on the statement of financial condition. The recognition of these lease assets and lease liabilities represents a change from previous US GAAP requirement, which did not require lease assets and lease liabilities to be recognized for most operating leases. The recognition, measurement and presentation of expenses and cash flows arising from a lease, have not significantly changed from previous US GAAP requirements. On November 1, 2019, the effective date of ASC 842, existing leases of ours were required to be recognized and measured. Additionally any leases entered into during the year were also required to recognized and measured. In applying ASC 842, we made an accounting policy election not to recognize the right of use assets and lease liabilities relating to short-term leases. Implementation of ASC 842 included an analysis of contracts, including real estate leases and service contracts to identify embedded leases, to determine the initial recognition of the right to use assets and lease liabilities, which required subjective assessment over the determination of the associated discount rates to apply in determining the lease liabilities. The new standard provides a number of transition practical expedients, which the Company has elected, including: A “package of three” expedients that must be taken together and allow entities to (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification, and (3) not reassess initial direct costs associated with existing leases. ● Our allowance for doubtful accounts is maintained to provide for losses arising from customers’ inability to make required payments. If there is deterioration of our customers’ credit worthiness and/or there is an increase in the length of time that the receivables are past due greater than the historical assumptions used, additional allowances may be required. For example, every additional one percent of our accounts receivable that becomes uncollectible, would decrease our operating income by approximately $74,000 for the year ended October 31, 2020. The reserve for sales discounts represents the estimated discount that customers will take upon payment. The reserve for other allowances represents the estimated amount of returns, slotting fees and volume based discounts estimated to be incurred by us from our customers. ● Inventories are stated at lower of cost (determined on a first-in, first-out basis) or market. Based on our assumptions about future demand and market conditions, inventories are subject to be written-down to market value. If our assumptions about future demand change and/or actual market conditions are less favorable than those projected, additional write-downs of inventories may be required. Each additional one percent of potential inventory write-down would have decreased operating income by approximately $171,000 for the year ended October 31, 2020. 22 ● The commodities held at broker represent the market value of our trading account, which consists of option and futures contracts for coffee held with a brokerage firm. We use 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 consolidated financial statements with current recognition of gains and losses on such positions. We classify options and futures contracts as trading securities and accordingly, unrealized holding gains and losses are included in earnings. We record realized and unrealized gains and losses in our cost of sales in the statement of operations/income. ● We account for income taxes in accordance with the relevant authoritative guidance. Deferred tax assets and liabilities are 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 rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized. ● Our goodwill consists of the cost in excess of the fair market value of the acquired net assets of OPTCO, SONO, CFI and Steep & Brew, through GCC, which has been integrated into a structure that does not provide the basis for separate reporting units. Consequently, we are a single reporting unit for goodwill impairment testing purposes. We also have intangible assets consisting of our customer lists and relationships and trademarks acquired from OPTCO and SONO. At October 31, 2020 our balance sheet reflected goodwill and intangible assets as set forth below: October 31, 2020 Customer list and relationships, net $ 490,621 Non-compete, net 49,500 Goodwill 2,488,785 Trademarks and tradenames 1,488,000 $ 4,516,906 Goodwill and the trademarks which are deemed to have indefinite lives are subject to annual impairment tests. Goodwill impairment tests require the comparison of the fair value and carrying value of reporting units. We assess the potential impairment of goodwill and intangible assets annually and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Upon completion of such review, if impairment is found to have occurred, a corresponding charge will be recorded. The value assigned to the customer list and relationships is being amortized over a twenty year period. Because the Company is a single reporting unit, the closing NASDAQ Capital Market price of our common stock as of the acquisition date was used as a basis to measure the fair value of goodwill. Goodwill and the intangible assets will be tested annually at the end of each fiscal year to determine whether they have been impaired. Upon completion of each annual review, there can be no assurance that a material charge will not be recorded. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment or decline in value may have occurred. 23 Year Ended October 31, 2020 (Fiscal Year 2020) Compared to the Year Ended October 31, 2019 (Fiscal Year 2019) (restated) Net Sales. Net sales totaled $66,031,953 for the fiscal year ended October 31, 2020, a decrease of $10,575,582, or 14%, from $76,607,535 for the fiscal year ended October 31, 2019. The decrease in net sales was due to the COVID-19 pandemic which caused many of our green coffee customers who service the restaurant and food service industry as well as our customers in the food service space to either close or suspend their business operations during the period resulting in lost revenues from that segment of our customer base. Also, supermarket sales returned to more traditional levels, as the stockpiling in the second quarter of the year did not repeat for the remaining six months of the year. Cost of Sales. Cost of sales for the fiscal year ended October 31, 2020 was $52,953,064, or 80.2% of net sales, as compared to $60,848,203, or 79.4% of net sales, for the fiscal year ended October 31, 2019. 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 and increased cost of coffee. Gross Profit. Gross profit for the fiscal year ended October 31, 2020 was $13,078,889, a decrease of $2,680,443 from $15,759,332 for the fiscal year ended October 31, 2019. Gross profit as a percentage of net sales decreased to 19.8% for the fiscal year ended October 31, 2020 from 20.6% for the fiscal year ended October 31, 2019. The decrease in gross profits resulted from a decrease in sales due to the COVID-19 pandemic and inventory adjustments resulting from such decreased sales, lost customers and outdated inventory during the year. Operating Expenses. Total operating expenses decreased by $1,314,596 to $13,904,207 for the fiscal year ended October 31, 2020 from $15,218,803 for the fiscal year ended October 31, 2019. Selling and administrative expenses decreased $1,281,500, or 8.8%, to $13,223,207 for the fiscal year ended October 31, 2020 from $14,504,707 for the fiscal year ended October 31, 2019. Our 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. Officers’ salary decreased by $33,096 or 4.6% to $681,000 for the fiscal year ended October 31, 2020 from $714,096 for the fiscal year ended October 31, 2019. Further, each of our Chief Executive Officer and our Vice President took pay decreases in the fourth quarter, which will continue during fiscal 2021. Other Income (Expense). Other income for the fiscal year ended October 31, 2020 was $447,561, a decrease of $694,876 from other expenses of $247,315 for the fiscal year ended October 31, 2019. The decrease in other expense was attributable to our recognition of the forgiveness of the PPP government grant of $634,400, a decrease in interest expense of $69,415, partially offset by a decrease in interest income of $7,692 and an increase in our loss from our equity investments of $1,247, during the fiscal year ended October 31, 2020. Income (Loss) Before provision for income Taxes and Non-controlling Interest in Subsidiary. We had a loss of $377,757 before income taxes and non-controlling interest in subsidiary for the fiscal year ended October 31, 2020 compared to income of $293,214 for the fiscal year ended October 31, 2019, resulting in a net change of $670,971 for the year ended October 31, 2020. Income Taxes . Our benefit for income taxes for the fiscal year ended October 31, 2020 totaled $41,713 compared to a provision of $29,208 for the fiscal year ended October 31, 2019. The change was attributable to the difference in the income for the year ended October 31, 2020 versus fiscal year ended October 31, 2019. Net (Loss) Income . We had a net loss of $94,301 or $0.02 per share basic and diluted, for the fiscal year ended October 31, 2020 compared to a net loss of $94,598, or $0.02 per share basic and diluted for the fiscal year ended October 31, 2019. The decrease in net income was due to numerous factors which had to be dealt with during our fiscal fourth quarter. For example, for the year ended October 31, 2020, we had a loss before our non-controlling interest in our subsidiary of $336,044 versus net income of $264,006 for the year ended October 31, 2019. Our non-controlling interest for the year ended October 31, 2020 reduced the loss by $366,044 bringing the net loss attributable to Coffee Holding Co. to $94,301, whereas the non-controlling interest for the year ended October 31, 2019 reduced profit by $358,604 bringing the net loss attributable to Coffee Holding Co. to a loss of $94,598. Our consolidated subsidiary, in which we have a 60% interest, had write downs on both inventories and accounts receivable due to COVID-19, including an approximately $85,000 write down of receivables and an approximately $217,000 write down of inventories. 24 Liquidity and Capital Resources As of October 31, 2020, we had working capital of $24,039,538, which represented a $3,811,594 increase from our working capital of $20,227,944 as of October 31, 2019, and total stockholders’ equity of $26,518,666 which increased by $1,254,589 from our total stockholders’ equity of $25,264,077 as of October 31, 2019. Our working capital increased primarily due to an increase of $472,564 in cash, decreases of $1,307,918 in accounts payable and accrued expenses, $3,365,843 in our short term borrowings, partially offset by decreases of $2,012,522 in accounts receivable, $1,738,232 in inventory, $553,356 in due from broker, $97,380 in prepaid expenses and other current assets, $240,629 in prepaid and refundable income taxes, increases of $5,271 in income taxes payable and $484,163 in lease liability – current portion. As of October 31, 2020, the outstanding balance on our line of credit was $3,796,822 compared to $7,167,740 as of October 31, 2019. On April 25, 2017, us and OPTCO (collectively, the “Borrowers”) entered into an Amended and Restated Loan and Security Agreement (the “A&R Loan Agreement”) and Amended and Restated Loan Facility (the “A&R Loan Facility”) with Sterling National Bank (“Sterling”), which consolidated (i) the financing agreement between the Company and Sterling, dated February 17, 2009, as modified, (the “Company Financing Agreement”) and (ii) the financing agreement between us, as guarantor, OPTCO and Sterling, dated March 10, 2015 (the “OPTCO Financing Agreement”), amongst other things. On March 13, 2020, we reached an agreement for a new loan modification agreement and credit facility with Sterling. The terms of the new agreement among other things: (i) provides for a new maturity date of March 31, 2022 and (ii) decreases the interest rate per annum to LIBOR plus 1.75% (with such interest rate not to be lower than 3.50%). 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 October 31, 2020 and October 31, 2019. Each of the A&R Loan Facility and the A&R Loan Agreement is secured by all of our tangible and intangible assets. Other than as amended and restated by the A&R Loan Agreement, the Company Financing Agreement and the OPTCO Financing Agreement remains in full force and effect. Pursuant to the terms of the Jordre Well Agreement, we issued to The Jordre Well 139,250 shares of our Common Stock on the effective date of the Jordre Well Agreement and are obligated to issue an additional 139,250 shares of Common Stock once $500,000 in revenue is generated from the joint venture. 25 For the fiscal year ended October 31, 2020, our operating activities provided net cash of $4,385,757 as compared to the fiscal year ended October 31, 2019 when operating activities used net cash of $2,148,616. The increased cash flow from operations for the fiscal year ended October 31, 2020 was primarily due to our inventories usage during the year ended October 31, 2020. For the fiscal year ended October 31, 2020, our investing activities used net cash of $537,835 as compared to the fiscal year ended October 31, 2019 when net cash used by investing activities was $897,683. The decrease in our uses of cash in investing activities was due to our decreased outlays for purchases of machinery and equipment during the fiscal year ended October 31, 2020. For the fiscal year ended October 31, 2020, our financing activities used net cash of $3,375,358 compared to net cash provided by financing activities of $837,471 for the fiscal year ended October 31, 2019. The change in cash flow from financing activities for the fiscal year ended October 31, 2020 was due to our increased principal reductions on our line of credit. We expect to fund our operations, including paying our liabilities, funding capital expenditures and making required payments on our indebtedness, through October 31, 2021 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. 26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See pages F-1 through F-21 following the Exhibit Index of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27