COFFEE HOLDING CO INC 10-Q/A

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. - 18 - Overview We are an integrated wholesale coffee roaster and dealer in the United States and one of the few coffee companies that offers a broad array of coffee products across the entire spectrum of consumer tastes, preferences and price points. As a result, we believe that we are well-positioned to increase our profitability and endure potential coffee price volatility throughout varying cycles of the coffee market and economic conditions. Our operations have primarily focused on the following areas of the coffee industry: ● the sale of wholesale specialty green coffee; ● the roasting, blending, packaging and sale of private label coffee; ● the roasting, blending, packaging and sale of our eight brands of coffee; and ● sales of our tabletop coffee roasting equipment. Our operating results are affected by a number of factors including: ● the level of marketing and pricing competition from existing or new competitors in the coffee industry; ● our ability to retain existing customers and attract new customers; ● our hedging policy; ● fluctuations in purchase prices and supply of green coffee and in the selling prices of our products; and ● our ability to manage inventory and fulfillment operations and maintain gross margins. Our net sales are driven primarily by the success of our sales and marketing efforts and our ability to retain existing customers and attract new customers. For this reason, we have made, and will continue to evaluate, strategic decisions to acquire and invest in measures that are expected to increase net sales. In addition to our acquisitions, in October 2020, we entered into an agreement to become a 49% owner in The Jordre Well, a CBD beverage company (“The Jordre Well”). Under the terms of the agreement with The Jordre Well, The Jordre Well will assist us in the development and commercialization of CBD-infused line extensions for the existing coffee brands within our portfolio, as well as launch new brands that are intended to serve consumer demand for non-coffee CBD-infused beverages and products. We believe these efforts will allow us to expand our business. Our sales are affected by the price of green coffee. We purchase our green coffee from dealers located primarily within the United States. The dealers supply us with coffee beans from many countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. For example, in Brazil, which produces approximately 40% of the world’s green coffee, the coffee crops are historically susceptible to frost in June and July and drought in September, October and November. However, because we purchase coffee from a number of countries and are able to freely substitute one country’s coffee for another in our products, price fluctuations in one country generally have not had a material impact on the price we pay for coffee. Accordingly, price fluctuations in one country generally have not had a material effect on our results of operations, liquidity and capital resources. Historically, because we generally have been able to pass green coffee price increases through to customers, increased prices of green coffee generally result in increased net sales, irrespective of sales volume. - 19 - The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. Historically, we have used, and intend to continue to use in a limited capacity, short-term coffee futures and options contracts primarily for the purpose of partially hedging the effects of changing green coffee prices. In addition, we acquired, and expect to continue to acquire, futures contracts with longer terms, generally three to four months, primarily for the purpose of guaranteeing an adequate supply of green coffee. Realized and unrealized gains or losses on options and futures contracts are reflected in our cost of sales. Gains on options and futures contracts reduce our cost of sales and losses on options and futures contracts increase our cost of sales. The use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices. We believe that, in normal economic times, our hedging policies remain a vital element to our business model not only in controlling our cost of sales, but also giving us the flexibility to obtain the inventory necessary to continue to grow our sales while trying to minimize margin compression during a time of historically high coffee prices. However, no strategy can entirely eliminate pricing risks and we generally remain exposed to losses on futures contracts when prices decline significantly in a short period of time, and we would generally remain exposed to supply risk in the event of non-performance by the counterparties to any of our futures contracts. Although we have had net gains on options and futures contracts in the past, we have incurred significant losses on options and futures contracts during some recent reporting periods. In these cases, our cost of sales has increased, resulting in a decrease in our profitability or increase our losses. Such losses have and could in the future materially increase our cost of sales and materially decrease our profitability and adversely affect our stock price. If our hedging policy is not effective, we may not be able to control our coffee costs, we may be forced to pay greater than market value for green coffee and our profitability may be reduced. Failure to properly design and implement an effective hedging strategy may materially adversely affect our business and operating results. If the hedges that we enter do not adequately offset the risks of coffee bean price volatility or our hedges result in losses, our cost of sales may increase, resulting in a decrease in profitability or increased losses. As previously announced, as a result of the volatile nature of the commodities markets, we have and are continuing to scale back our use of hedging and short-term trading of coffee futures and options contracts, and intend to continue to use these practices in a limited capacity going forward. COVID-19 Pandemic The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020 and has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel and transport restrictions, mandated closures and stay-at-home orders, and created significant disruption of the financial markets. However, we are classified as an essential business and its factories continued to operate with little to no impact from the pandemic-related closures. To date, we have experienced minimal disruption to our supply chain or distribution network, including the supply of green coffee beans, though it is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact markets around the world. We are also working closely with all of our business partners. As a food producer, we are an essential service and almost all of our employees continue to work within our production and distribution facilities. The COVID-19 pandemic has had a material adverse impact on our condensed consolidated financial statements for the three and six months ended April 30, 2021, and it has resulted, and is expected to continue to result for at least the near and immediate term, in significant economic disruptions and changes to consumer behaviors in the United States, which, has impacted and is expected to continue to negatively impact our business. Many of our customers who purchase green coffee from us for use in cafés, restaurants and food service operations, were forced to temporarily suspend or close operations, adversely impacting our sales to customers in that segment. However, as sales to the café, restaurant and food service segment decreased in the quarter, sales to large wholesaler and retail customers increased, as there was a shift in buying and consumption of coffee products to this segment. The continuing impact on our business, including the length and impact of stay-at-home orders and/or regional quarantines, labor shortages and employment trends, disruptions to supply chains, including our ability to obtain products from global suppliers, higher operating costs, the form and impact of economic stimulus and general overall economic instability, is uncertain at this time and could have a material adverse effect on our business, results of operations, and financial condition. Critical Accounting Policies and Estimates There have been no changes to our critical accounting policies during the three and six months ended April 30, 2021. Critical accounting policies and the significant estimates in accordance with such policies are regularly discussed with our Audit Committee. Those policies are discussed under “Critical Accounting Policies” in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in our consolidated financial statements and footnotes thereto, each included in our annual report on Form 10-K filed with the SEC on February 16, 2021 for the fiscal year ended October 31, 2020. - 20 - Three Months Ended April 30, 2021 Compared to the Three Months Ended April 30, 2020 (restated) Net Sales. Net sales totaled $14,468,558 for the three months ended April 30, 2021, a decrease of $2,877,293, or 16.6%, from $17,345,851 for the three months ended April 30, 2020. The decrease in net sales was due to multiple factors, including a decline of $5.2 million in sales of packed coffee. During April 2021 we experienced a 50% decline, as compared to April 2020, in production at our largest operating facility in Colorado. This reduction was due to supermarkets no longer building their inventories as they did in April 2020 during COVID-19 shutdowns. Further, we experienced a loss of approximately $750,000 in revenue as we dropped Aldi, Inc. (“Aldi”) as a customer due to unacceptably low net margins. The above losses were slightly offset by gains in sales to new private label accounts as well as an increase in sales of our flagship Café Caribe brand. Cost of Sales. Cost of sales for the three months ended April 30, 2021 was $10,699,090, or 74% of net sales, as compared to $12,839,425, or 74% of net sales, for the three months April 30, 2020. Cost of sales consists primarily of the cost of green coffee and packaging materials and realized and unrealized gains or losses on hedging activity. The decrease in cost of sales was due to our decreased sales offset by higher packaging costs due to increases in materials, most notably steel for our cans. Gross Profit. Gross profit for the three months ended April 30, 2021 amounted to $3,769,468 or 26% of net sales, as compared to $4,506,426 or 26% of net sales, for the three months ended April 30, 2020. The decrease in gross profit numerically was attributable to decreased sales for the quarter ended April 30, 2021 as compared to the quarter ended April 30, 2020. Operating Expenses. Total operating expenses decreased by $297,553 to $3,315,324 for the three months ended April 30, 2021 from $3,612,877 for the three months ended April 30, 2020. Selling and administrative expenses decreased by $294,037 and officers’ salaries decreased by $3,516. 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. These efforts were partially offset by the increase in our freight costs as the cost of truckload deliveries to our largest wholesale customers was up approximately 20% year over year. Other Income (Expense). Other expense for the three months ended April 30, 2021 was $17,637, a decrease of $31,816 from $49,453 for the three months ended April 31, 2020. The decrease in other expense was attributable to a decrease in interest expense of $32,886, a decrease in our loss from our equity investments of $363 and a decrease in our interest income of $1,433, during the three months ended April 30, 2021 as compared to the three months ended April 30, 2020. Income Taxes . Our provision for income taxes for the three months ended April 30, 2021 totaled $129,086 compared to a provision of $154,767 for the three months ended April 30, 2020. The change was primarily attributable to the difference in the income for the quarter ended April 30, 2021 versus the income in the quarter ended April 30, 2020, as well as a true up to the provision that was recorded in the three months ended April 30, 2020. Net Income . We had net income of $357,044 or $0.06 per share basic and diluted, for the three months ended April 30, 2021 compared to net income of $498,518, or $0.09 per share basic and diluted for the three months ended April 30, 2020. The decrease in net income was due primarily to the reasons described above. - 21 - Six Months Ended April 30, 2021 Compared to the Six Months Ended April 30, 2020 (restated) Net Sales. Net sales totaled $32,602,395 for the six months ended April 30, 2021, a decrease of $1,870,499, or 5.4%, from $34,472,894 for the six months ended April 30, 2020. The decrease in net sales was due to multiple factors, including the continued loss of sales of packed coffee to our customers who have not fully re-opened due to COVID-19 restrictions. During April 2021 we experienced a 50% decline, as compared to April 2020, in production at our largest operating facility in Colorado. This reduction was due to supermarkets no longer building their inventories as they did in April 2020 during COVID-19 shutdowns. Further, we experienced a loss of approximately $750,000 in revenue as we dropped Aldi as a customer due to unacceptably low net margins. Cost of Sales. Cost of sales for the six months ended April 30, 2021 was $24,353,356, or 74.7% of net sales, as compared to $26,851,714, or 77.9% of net sales, for the six months April 30, 2020. Cost of sales consists primarily of the cost of green coffee and packaging materials and realized and unrealized gains or losses on hedging activity. The decrease in cost of sales was due to our decreased sales partially offset by higher packaging costs due to increases in materials, most notably steel for our cans. Gross Profit. Gross profit for the six months ended April 30, 2021 amounted to $8,249,039 or 25.3% of net sales, as compared to $7,621,092 or 22.1% of net sales, for the six months ended April 30, 2020. The increase in gross profit percentage was attributable to increased margins on our roasted and branded products partially due to the movement of lower cost green coffee inventory built up in previous quarters, partially offset by higher packaging costs due to increases in materials, most notably steel for our cans. Operating Expenses. Total operating expenses decreased by $659,416 to $6,628,514 for the six months ended April 30, 2021 from $7,287,930 for the six months ended April 30, 2020. Selling and administrative expenses decreased by $638,875 and officers’ salaries decreased by $20,541. 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. These efforts were partially offset by the increase in our freight costs as the cost of truckload deliveries to our largest wholesale customers was up approximately 20% year over year. Other Income (Expense). Other expense for the six months ended April 30, 2021 was $46,493, a decrease of $59,261 from $105,754 for the six months ended April 30, 2020. The decrease in other expense was attributable to a decrease in interest expense of $61,952, partially offset by an increase in our loss from our equity investments of $924 and a decrease in our interest income of $1,767, during the six months ended April 30, 2021 as compared to the six months ended April 30, 2020. Income Taxes . Our provision for income taxes for the six months ended April 30, 2021 totaled $510,329 compared to a provision of $89,351 for the six months ended April 30, 2020. The change was primarily attributable to the difference in the income for the six months ended April 30, 2021 versus the income in the six months ended April 30, 2020. Net Income . We had net income of $1,034,355 or $0.18 per share basic and diluted, for the six months ended April 30, 2021 compared to net loss of $101,330, or $0.02 per share basic and diluted for the six months ended April 30, 2020. The increase in net income was due primarily to the reasons described above, as well as a true up to the provision that was recorded in the three months ended April 30, 2020. - 22 - Liquidity and Capital Resources As of April 30, 2021, we had working capital of $21,447,364, which represented a $2,592,174 decrease from our working capital of $24,039,538 as of October 31, 2020, and total stockholders’ equity of $27,932,559 which increased by $1,413,893 from our total stockholders’ equity of $26,518,666 as of October 31, 2020. Our working capital decreased primarily due to decreases of $709,476 in accounts receivable, $1,935,996 in inventories, $91,684 in prepaid and refundable income taxes, increases of $970,875 in accounts payable and accrued expenses, increases of $255,611 in income taxes payable, increase of $16,641 in lease liabilities – current portion, partially offset by increase of $653,017 in cash, $173,177 in prepaid expenses, $559,408 in due to broker. As of April 30, 2021, the outstanding balance on our line of credit was $2,500 compared to $3,796,822 as of October 31, 2020. On April 25, 2017, we and Organic Products Trading Company, LLC (“OPTCO”)(collectively, the “Borrowers”) entered into an Amended and Restated Loan and Security Agreement (the “A&R Loan Agreement”) and Amended and Restated Loan Facility (the “A&R Loan Facility”) with Sterling National Bank (“Sterling”), which consolidated (i) the financing agreement between 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 April 30, 2021 and October 31, 2020. Each of the A&R Loan Facility and the A&R Loan Agreement is secured by all of our tangible and intangible assets. Other than as amended and restated by the A&R Loan Agreement, the Company Financing Agreement and the OPTCO Financing Agreement remains in full force and effect. For the six months ended April 30, 2021, our operating activities provided net cash of $5,047,290 as compared to the six months ended April 30, 2020 when operating activities provided net cash of $2,438,729. The increased cash flow from operations for the three months ended April 30, 2021 was primarily due to our inventory usage during the quarter and our net income. For the six months ended April 30, 2021, our investing activities used net cash of $597,444 as compared to the six months ended April 30, 2020 when net cash used by investing activities was $132,967. The increase in our uses of cash in investing activities was due to our increased purchases of machinery and equipment during the six months ended April 30, 2021. For the six months ended April 30, 2021, our financing activities used net cash of $3,796,829 compared to net cash used by financing activities of $2,060,862 for the six months ended April 30, 2020. The change in cash flow from financing activities for the six months ended April 30, 2021 was due to our increased principal payments 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 June 14, 2022 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. - 23 -