COFFEE HOLDING CO INC 10-Q

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 “Operations” “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; ● our expectations regarding, and the stability of, our supply chain, including potential shortages or interruptions in the supply or delivery of green coffee; ● the macro global economic environment; ● our ability to maintain and develop our brand recognition; ● the impact of rapid or persistent fluctuations in the price of coffee beans; ● fluctuations in the supply of coffee beans; ● the volatility of our common stock; and ● other risks which we identify in future filings with the Securities and Exchange Commission (the “SEC”). In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate” and similar expressions (or the negative of such expressions). Any or all of our forward looking statements in this quarterly report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. In addition we undertake no responsibility to update any forward-looking statement to reflect events or circumstances that occur after the date of this quarterly report. Overview We are an integrated wholesale coffee roaster and dealer in the United States and one of the few coffee companies that offers a broad array of coffee products across the entire spectrum of consumer tastes, preferences and price points. As a result, we believe that we are well-positioned to increase our profitability and endure potential coffee price volatility throughout varying cycles of the coffee market and economic conditions. Our operations have primarily focused on the following areas of the coffee industry: ● the sale of wholesale specialty green coffee; ● the roasting, blending, packaging and sale of private label coffee; ● the roasting, blending, packaging and sale of our eight brands of coffee; and ● sales of our tabletop coffee roasting equipment. 16 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. Our sales are affected by the price of green coffee. We purchase our green coffee from dealers located primarily within the United States. The dealers supply us with coffee beans from many countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. For example, in Brazil, which produces approximately 40% of the world’s green coffee, the coffee crops are historically susceptible to frost in June and July and drought in September, October and November. However, because we purchase coffee from a number of countries and are able to freely substitute one country’s coffee for another in our products, price fluctuations in one country generally have not had a material impact on the price we pay for coffee. Accordingly, price fluctuations in one country generally have not had a material effect on our results of operations, liquidity and capital resources. Historically, because we generally have been able to pass green coffee price increases through to customers, increased prices of green coffee generally result in increased net sales, irrespective of sales volume. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. Historically, we have used, and intend to continue to use in a limited capacity, short-term coffee futures and options contracts primarily for the purpose of partially hedging the effects of changing green coffee prices. In addition, we acquired, and expect to continue to acquire, futures contracts with longer terms, generally three to four months, primarily for the purpose of guaranteeing an adequate supply of green coffee. Realized and unrealized gains or losses on options and futures contracts are reflected in our cost of sales. Gains on options and futures contracts reduce our cost of sales and losses on options and futures contracts increase our cost of sales. The use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices. We believe that, in normal economic times, our hedging policies remain a vital element to our business model not only in controlling our cost of sales, but also giving us the flexibility to obtain the inventory necessary to continue to grow our sales while trying to minimize margin compression during a time of historically high coffee prices. However, no strategy can entirely eliminate pricing risks and we generally remain exposed to losses on futures contracts when prices decline significantly in a short period of time, and we would generally remain exposed to supply risk in the event of non-performance by the counterparties to any of our futures contracts. Although we have had net gains on options and futures contracts in the past, we have incurred significant losses on options and futures contracts during some recent reporting periods. In these cases, our cost of sales has increased, resulting in a decrease in our profitability or increase our losses. Such losses have and could in the future materially increase our cost of sales and materially decrease our profitability and adversely affect our stock price. If our hedging policy is not effective, we may not be able to control our coffee costs, we may be forced to pay greater than market value for green coffee and our profitability may be reduced. Failure to properly design and implement an effective hedging strategy may materially adversely affect our business and operating results. If the hedges that we enter do not adequately offset the risks of coffee bean price volatility or our hedges result in losses, our cost of sales may increase, resulting in a decrease in profitability or increased losses. As previously announced, as a result of the volatile nature of the commodities markets, we have and are continuing to scale back our use of hedging and short-term trading of coffee futures and options contracts, and intend to continue to use these practices in a limited capacity going forward. 17 Critical Accounting Policies and Estimates There have been no changes to our critical accounting policies during the three and nine months ended July 31, 2023. 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 March 29, 2023 for the fiscal year ended October 31, 2022. Three Months Ended July 31, 2023 Compared to the Three Months Ended July 31, 2022 Net Sales. Net sales totaled $15,764,365 for the three months ended July 31, 2023, a decrease of $1,248,921, or 7.3%, from $17,013,286 for the three months ended July 31, 2022. The decrease in net sales was due to a decrease in sales from our Generations/Steep N Brew subsidiary and lower selling prices of green coffee to our wholesale green coffee customer base partially offset by an increase of sales to our legacy customers. Cost of Sales. Cost of sales for the three months ended July 31, 2023 was $13,315,602, or 84.5% of net sales, as compared to $13,867,710, or 81.5% of net sales, for the three months July 31, 2022. 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 a small loss in our hedging operation compared to a gain in hedging in 2022. Gross Profit. Gross profit for the three months ended July 31, 2023 amounted to $2,448,763 or 15.5% of net sales, as compared to $3,145,576 or 18.5% of net sales, for the three months ended July 31, 2022. The decrease in gross profits on a percentage basis was attributable to the factors listed above. Operating Expenses. Total operating expenses decreased by $54,084 to $2,852,010 for the three months ended July 31, 2023 from $2,906,094 for the three months ended July 31, 2022. Selling and administrative expenses decreased by $49,757 and officers’ salaries decreased by $4,327. Operating expenses decreased primarily due to our Generations joint venture not generating expenses for the three months ended July 2023 compared to the three months ended July 31, 2022, partially offset by increase in various other categories Other Income (Expense). Other income for the three months ended July 31, 2023 was $251,116, an increase of $311,568 from other expense of $60,452 for the three months ended July 31, 2022. The increase in other income was attributable to an increase in other income of $400,140 due to an insurance claim, partially offset by an increase in interest expense of $90,924. Income Taxes . Our benefit for income taxes for the three months ended July 31, 2023 totaled $40,250 compared to a provision of $46,649 for the three months ended July 31, 2022. The change was primarily attributable to the difference in the loss for the quarter ended July 31, 2023 versus the income in the quarter ended July 31, 2022. Net (Loss) Income . We had a net loss of $111,881 or $(0.02) per share basic and diluted, for the three months ended July 31, 2023 compared to net income of $132,381, or $0.02 per share basic and diluted for the three months ended July 31, 2022. 18 Nine Months Ended July 31, 2023 Compared to the Nine Months Ended July 31, 2022 Net Sales. Net sales totaled $49,411,183 for the nine months ended July 31, 2023, a decrease of $805,133, or 1.6%, from $50,216,316 for the nine months ended July 31, 2022. The decrease in net sales was due to a decrease in sales from our Generations/Steep N Brew subsidiary and lower selling prices of green coffee to our wholesale green coffee customer base partially offset by an increase of sales to our legacy customers. Cost of Sales. Cost of sales for the nine months ended July 31, 2023 was $41,810,204, or 84.6% of net sales, as compared to $40,806,381, or 81.3% of net sales, for the nine months July 31, 2022. Cost of sales consists primarily of the cost of green coffee and packaging materials and realized and unrealized gains or losses on hedging activity. Gross Profit. Gross profit for the nine months ended July 31, 2023 amounted to $7,600,979 or 15.4% of net sales, as compared to $9,409,935 or 18.7% of net sales, for the nine months ended July 31, 2022. The decrease in gross profits on a percentage basis was attributable to the factors listed above. Operating Expenses. Total operating expenses decreased by $790,488 to $9,189,704 for the nine months ended July 31, 2023 from $9,980,192 for the nine months ended July 31, 2022. Selling and administrative expenses decreased by $808,661 and officers’ salaries increased by $18,173. Operating expenses decreased primarily due to our Generations joint venture not generating expenses for the nine months ended July 2023 compared to the nine months ended July 31, 2022, partially offset by increase in various other categories. Other Income (Expense). Other income for the nine months ended July 31, 2023 was $229,401, an increase of $411,853 from other expense of $182,452 for the nine months ended July 31, 2022. The increase was attributable to an increase in other income of $634,181 due to an insurance claim, a decrease in our loss from our equity investments of $28,844, partially offset by an increase in our interest expense of $250,197 and a decrease in our interest income of $975, during the nine months ended July 31, 2023. Income Taxes . Our benefit for income taxes for the nine months ended July 31, 2023 totaled $355,500 compared to a benefit of $188,626 for the nine months ended July 31, 2022. The change was primarily attributable to the difference in the income for the nine months ended July 31, 2023 versus the income in the nine months ended July 31, 2022. Net (Loss) Income . We had a net loss of $1,003,824 or ($0.18) per share basic and diluted, for the nine months ended July 31, 2023 compared to net income of $45,148, or $0.01 per share basic and diluted for the nine months ended July 31, 2022. The decrease in net income was due primarily to the reasons described above. Liquidity and Capital Resources Going Concern These condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The Company prepared a forecast representing their business plans for fiscal 2024. However, the Company has yet to achieve increased revenues at higher margins and there is no assurance they will be successful. The line of credit expires within 12 months and there have been no discussions with the financial institution to extend the line of credit ($9 million at July 31, 2023). The Company’s ability to execute its operating plan through fiscal 2024 and beyond depends on its ability to renew or replace its line of credit. The Company expects to renew the line of credit or, if necessary, seek alternative financing on similar terms. There can be no assurance that the Company will be able to renew the line of credit in a timely manner and or that any such renewal will contain commercially acceptable terms. Therefore, as of July 31, 2023, the Company has concluded there is substantial doubt about their ability to continue as a going concern. 19 As of July 31, 2023, we had working capital of $15,501,828, which represented a $9,760,396 decrease from our working capital of $25,262,224 as of October 31, 2022. Our working capital decreased primarily due to decreases of $97,323 in cash and cash equivalents, $1,334,319 in accounts receivable, $2,113,830 in inventories, $261,536 in due from broker and our line of credit of $9,020,000 being shown as current,partially offset by an increase of $9,306 in prepaid expenses and other current assets, decreases of $991,411 in accounts payable and accrued expenses, $876,148 in cash overdrafts, $1,038,057 in due to broker and $151,690 in lease liability – current portion. As of July 31, 2023, the outstanding balance on our line of credit was $9,020,000 compared to $8,314,000 as of October 31, 2022. 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 was later acquired by Webster Financial Corp. (“Webster”), 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 17, 2022, we reached an agreement for a new loan modification agreement and credit facility which extended the maturity date to June 29, 2022. All other terms of the A&R Loan Agreement and A&R Loan Facility remained the same. On June 28, 2022, we reached an agreement for a new loan modification agreement and credit facility with Webster. 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 remained the same. As further explained in Note 5 to the condensed consolidated financial statements, we are subject to certain covenants with respect to our line of credit agreement and we were not in compliance with the net profit and non-borrower affiliate covenants as of October 31, 2022. We requested a waiver from the lender and the waiver was granted and received on March 15, 2023. The lender also extended the due date of the October 31, 2022 financial statements until April 15, 2023. On March 15, 2023, the A&R Loan Agreement was also modified to, among other things: (i) provide for a requirement for subordination agreements if necessary, (ii) change the terms of transactions with affiliates from a dollar limitation to allowable in the ordinary course of business, and (iii) establish a new covenant for a fixed charge coverage ratio. 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 outstanding balance on our lines of credit were $9,020,000 and $8,314,000 as of July 31, 2023 and October 31, 2022, respectively. For the nine months ended July 31, 2023, our operating activities provided net cash of $799,162 as compared to the nine months ended July 31, 2022 when operating activities used net cash of $2,820,251. The increased cash flow from operations for the nine months ended July 31, 2023 was primarily due to our inventory position. For the nine months ended July 31, 2023, our investing activities used net cash of $721,696 as compared to the nine months ended July 31, 2022 when net cash used by investing activities was $1,357,066. The decrease in our uses of cash in investing activities was due to our decreased purchases of machinery and equipment during the nine months ended July 31, 2023. For the nine months ended July 31, 2023, our financing activities used net cash of $174,789 compared to net cash provided by financing activities of $1,911,519 for the nine months ended July 31, 2022. The change in cash flow from financing activities for the nine months ended July 31, 2023 was due to our credit line activity. 20 We expect to fund our operations, including paying our liabilities, funding capital expenditures and making required payments on our indebtedness, through at least the next twelve months from the date these condensed consolidated financial statements are 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.