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 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; ● 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 Recent Developments On September 29, 2022, the Company (or “JVA”) entered into a Merger and Share Exchange Agreement, as amended and supplemented (the “Merger Agreement”), by and among JVA, Delta Corp Holdings Limited, a Cayman Islands exempted company (“Pubco”), Delta Corp Holdings Limited, a company incorporated in England and Wales (“Delta”), CHC Merger Sub Inc., a Nevada corporation and wholly owned subsidiary of Pubco (“Merger Sub”), and each of the holders of ordinary shares of Delta as named therein (the “Sellers”). Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into JVA, with JVA surviving as a direct, wholly-owned subsidiary of Pubco (the “Merger”). On June 29, 2023, JVA, Pubco, Delta, Merger Sub and the Sellers entered into Amendment 1 to the Merger Agreement (the “First Amendment”). On January 4, 2024, JVA, Pubco, Delta, Merger Sub and the Sellers entered into Amendment 2 to the Merger Agreement (the “Second Amendment”). As a result of the Merger, each issued and outstanding share of JVA common stock, $0.001 par value per share (the “JVA Common Stock”), will be cancelled and converted for the right of the holder thereof to receive one ordinary share, par value $0.0001 of Pubco (the “Pubco Ordinary Shares”). As a condition to the Merger, Pubco shall also acquire all of the issued and outstanding Delta securities from the Sellers in exchange for Pubco Ordinary Shares (the “Exchange” and, collectively with the Merger and the other transactions contemplated by the Merger Agreement, the “Transactions”). As a result of the Transactions, JVA and Delta will each become direct, wholly-owned subsidiaries of Pubco, with JVA stockholders receiving approximately $31.5 million (or 4.79%) worth of Pubco Ordinary Shares (the “Merger Consideration”) and Delta stockholders receiving approximately $625 million (or 95.21%) worth of Pubco Ordinary Shares (the “Exchange Consideration” and collectively with the Merger Consideration, the “Business Combination Consideration”), subject to certain adjustments, at an implied diluted value per share of $5.50. The Business Combination Consideration may be adjusted if Delta closes certain acquisitions prior to the closing of the Transactions. The Merger Agreement also includes an earn-out to existing stockholders of Delta, consisting of $50 million of additional Pubco Ordinary Shares, which will be released to Delta stockholders if and when Delta achieves $70 million or greater of net income for fiscal year ending 2023. At the effective time of the Merger (the “Merger Effective Time”), each award of options to purchase JVA Common Stock (each, a “JVA Stock Option”) that is outstanding, whether vested or unvested, will be cancelled and substituted with option(s) to purchase Pubco Ordinary Shares to be granted under the Pubco equity plan (the “Substituted Options”). The Substituted Options will represent the right to purchase that number of shares of Pubco Ordinary Shares equal to the number of shares of JVA Common Stock underlying such JVA Stock Option immediately prior to the Merger Effective Time with a per-share exercise price of such Substituted Option equal to the exercise price per JVA Common Stock subject to such JVA Stock Option immediately prior to the Merger Effective Time. Prior to execution of the Merger Agreement, JVA’s board of directors (the “Board”) unanimously (i) determined that the terms and provisions of the Merger Agreement and the transactions contemplated therein, including the Merger and Transactions, are fair, advisable to and in the best interests of JVA and its stockholders, (ii) approved the Merger Agreement and related Transactions, (iii) directed that the adoption of the Merger Agreement be submitted to a vote at a meeting of the stockholders of JVA, and (iv) resolved to recommend that JVA’s stockholders adopt the Merger Agreement. JVA, Pubco, Delta and the Sellers have made customary representations and warranties in the Merger Agreement and have agreed to customary covenants regarding the operation of their respective businesses prior to the closing of the transactions contemplated thereby. Consummation of the Merger is subject to customary closing conditions, including, without limitation, (i) approval of the Merger Agreement and the transactions contemplated thereunder by a majority of JVA’s stockholders (the “JVA Stockholder Approval”), (ii) the absence of any law or order that prevents or prohibits the consummation of the Transaction, (iii) obtaining all requisite governmental authorizations, (iv) effectiveness of the Registration Statement of Pubco on Form F-4, and (v) approval of the listing of Pubco Ordinary Shares on the Nasdaq Capital Market. 18 From the date of the Merger Agreement until October 19, 2022 (the “Go-Shop Period”), JVA had the right to initiate, solicit, facilitate and encourage any inquiry or the making of any proposals or offers that would constitute an acquisition proposal involving more than fifteen percent (15%) of JVA’s assets or outstanding shares of common stock or in which the stockholders of JVA immediately preceding the contemplated transaction would hold less than eighty-five percent (85%) of the voting equity interest of the surviving company (each or any combination of the foregoing, a “Takeover Proposal”), including by way of providing access to non–public information to any third party pursuant to a non-disclosure agreement. Following the expiration of the Go-Shop Period, JVA ceased such activities and be subject to customary “no-shop” restrictions on its ability to solicit a Takeover Proposal from third parties and to provide non-public information to and engage in discussions with a third party in relation to a Takeover Proposal, except that JVA may continue to engage in the aforementioned activities with third parties from whom JVA has received a Takeover Proposal that the Board has determined constitutes or is reasonably likely to lead to a Superior Proposal (as defined below) and has determined that the failure to take such actions would be inconsistent with the Board’s fiduciary duties. Prior to obtaining JVA Stockholder Approval, the Board may change its recommendation that stockholders vote to adopt the Merger Agreement (a “Change in Recommendation”) (i) in response to any material event or change in circumstances with respect to JVA that was not actually known or reasonably foreseeable by JVA prior to the date of the Merger Agreement (an “Intervening Event”) that the Board determines in good faith (after consultation with its financial advisor and outside legal counsel) that the failure to change its recommendation in such circumstances would be reasonably likely to violate its fiduciary duties to the stockholders of JVA under applicable law or (ii) if JVA has received a Takeover Proposal involving more than fifty percent (50%) of JVA’s assets or outstanding shares of common stock or in which the stockholders of JVA immediately preceding the contemplated transaction would hold less than fifty percent (50%) of the voting equity interest of the surviving company, that the Board determines in good faith (after consultation with its financial advisor and outside legal counsel) is reasonably likely to be consummated in accordance with its terms and, among other things, if consummated, would be more favorable from a financial point of view to JVA’s stockholders than the Transactions (a “Superior Proposal”) (in which case JVA may also terminate the Merger Agreement to enter into such Superior Proposal, subject to certain conditions including payment of the JVA Termination Fee, as described below). Before the Board may change its recommendation in connection with an Intervening Event or a Superior Proposal, or terminate the Merger Agreement to accept a Superior Proposal, JVA must provide Delta prompt written notice of its decision to make a Change in Recommendation and for at least five (5) business days after such notice, JVA will negotiate with Delta to enable Delta to revise the terms of the Merger Agreement so that the Takeover Proposal no longer constitutes a Superior Proposal. Each time modifications to any material term of such alternative acquisition proposal determined to be a Superior Proposal are made, JVA must notify Pubco of such modification and such five (5) business day period will recommence. The Merger Agreement may be terminated by each of Delta and of JVA under certain circumstances, including, among others by either Delta or JVA if the Merger has not been consummated by April 1, 2024 (the “Outside Date”). If the Merger Agreement is terminated under certain circumstances, including, among others, as a result of breach by either JVA or Delta of their respective representations, warranties or covenants in the Merger Agreement, whereby JVA or Delta, respectively, may be entitled to a termination fee in the amount of $750,000 plus disbursements of all documented, out-of-pocket expenses up to $250,000. In addition, if JVA terminates the Merger Agreement to accept a Takeover Proposal or the Board (i) adversely changes its recommendation to the stockholders of JVA regarding the adoption of the Merger Agreement or (ii) supports the approval of any JVA Takeover Proposal, then Delta shall be entitled to a termination fee of $1.3 million and plus a disbursement of reasonable expenses up to $2 million (the “JVA Termination Fee”). The equityholders of Delta and JVA will have certain customary registration rights with respect to the Pubco Ordinary Shares to be received in the transaction pursuant to the terms of a registration rights agreement, dated September 29, 2022 (the “Registration Rights Agreement”). On September 29, 2022, concurrently with the entry into the Merger Agreement, Delta, Pubco and JVA entered into Voting and Support Agreements (the “JVA Voting Agreement”) with Andrew Gordon, President and Chief Executive Officer of JVA, and David Gordon, Executive Vice President and Chief Operating Officer of JVA, pursuant to which Messrs. Gordon have agreed to vote in favor of adopting the Merger Agreement and the related transactions as contemplated thereunder. JVA Voting Agreements will terminate upon the earliest to occur of (i) the mutual written consent of each of Delta, Pubco, JVA and Messrs. Gordon, (ii) the Merger Effective Time, and (iii) the date of termination of the Merger Agreement in accordance with its terms. 19 JVA has scheduled a special meeting of its stockholders, to be held on March 28, 2024, to approve the Merger Agreement and the other related proposals related to the Merger. The foregoing description of the Merger Agreement, the Registration Rights Agreement and JVA Voting Agreements does not purport to be complete and is qualified in its entirety by reference to the full text of (i) the Merger Agreement, (ii) the Registration Rights Agreement, and (iii) the form of Voting and Support Agreement, copies of which are filed as exhibits to the Company’s Annual Report on Form 10-K, filed with the SEC on February 9, 20224. Critical Accounting Policies and Estimates There have been no changes to our critical accounting policies during the three months ended January 31, 2024. 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 9, 2024 for the fiscal year ended October 31, 2023. Three Months Ended January 31, 2024 Compared to the Three Months Ended January 31, 2023 Net Sales. Net sales totaled $19,540,402 for the three months ended January 31, 2024, an increase of $1,214,288, or 6.6%, from $18,326,114 for the three months ended January 31, 2023. The increase in net sales was mostly due to additions of new private label customers partially offset by lower green coffee sales to our green coffee customer base. Cost of Sales. Cost of sales for the three months ended January 31, 2024 was $16,060,103, or 82% of net sales, as compared to $16,005,814, or 87% of net sales, for the three months January 31, 2023. 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 higher margins on sales of our roasted and packaged products partially offset by a decrease in sales of green coffee with the net effect of higher gross profit on our total business. Gross Profit. Gross profit for the three months ended January 31, 2024 amounted to $3,480,299 or 18% of net sales, as compared to $2,320,300 or 13% of net sales, for the three months ended January 31, 2023. The increase in gross profits on a percentage basis was attributable to the factors listed above. Operating Expenses. Total operating expenses decreased by $257,937 to $2,863,388 for the three months ended January 31, 2024 from $3,121,325 for the three months ended January 31, 2023. Selling and administrative expenses decreased by $251,390 and officers’ salaries decreased by $6,547. Other Income (Expense). Other expense for the three months ended January 31, 2024 was $123,550, a decrease of $225,222 from other income of $101,672 for the three months ended January 31, 2023. The decrease was attributable to a decrease in other income of $234,041, a decrease in interest income of $3,100, an increase in our loss from our equity investments of $1,007, partially offset by a decrease in our interest expense of $12,926, during the three months ended January 31, 2024. Income Taxes . Our provision for income taxes for the three months ended January 31, 2024 totaled $142,337 compared to a benefit of $167,250 for the three months ended January 31, 2023. The change was primarily attributable to the difference in the income for the quarter ended January 31, 2024 versus the income in the quarter ended January 31, 2023. 20 Net Income . We had net income of $351,024 or $0.06 per share basic and diluted, for the three months ended January 31, 2024 compared to a net loss of ($532,103), or ($0.09) per share basic and diluted for the three months ended January 31, 2023. The increase in net income was due primarily to the reasons described above. Liquidity, Capital Resources and Going Concern As of January 31, 2024, we had working capital of $18,901,482, which represented a $301,220 increase from our working capital of $18,600,262 as of October 31, 2023. Our working capital increased primarily due to increases of $87,395 in accounts receivable, $556,360 in due from broker, $79,767 in prepaid expenses and other current assets, decreases of $760,103 in accounts payable and accrued expenses, $4,920,000 in our line of credit, partially offset by decreases of $326,114 in cash, $2,700,000 in receivable from sale of investment, $1,974,274 in inventories, $54,970 in prepaid and refundable taxes, increases of $739,198 in due to broker and $307,849 in lease liability – current portion. As of January 31, 2024, the outstanding balance on our line of credit was $4,700,000 compared to $9,620,000 as of October 31, 2023. 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 (later acquired by Webster Bank N.A.) (“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 17, 2022, the Company reached an agreement for a new loan modification agreement and credit facility which extended the maturity date to June 29, 2022. The facility was then approved for a two-year extension. All other terms of the A&R Loan Agreement and A&R Loan Facility remained 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 remained 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 fixed charge coverage ratio, debt to tangible net worth and tangible net worth. The Company as of October 31, 2023 has failed to comply with one of these covenants and resulted in an event of default under the loan agreement. The lender has various defenses that it can apply against the Company, which includes up to and calling the line of credit. There is no guarantee that the lender will issue a waiver or not call the line of credit. The outstanding balance on the Company’s lines of credit were $4,700,000 and $9,620,000 as of January 31, 2024 and October 31, 2023, respectively. For the three months ended January 31, 2024, our operating activities provided net cash of $4,594,849 as compared to the three months ended January 31, 2023 when operating activities provided net cash of $2,803,512. The increased cash flow from operations for the three months ended January 31, 2024 was primarily due to our receivable from sale of investment. For the three months ended January 31, 2024, our investing activities used net cash of $0 as compared to the three months ended January 31, 2023 when net cash used by investing activities was $202,018. The decrease in our uses of cash in investing activities was due to our decreased purchases of machinery and equipment during the three months ended January 31, 2024. For the three months ended January 31, 2024, our financing activities used net cash of $4,920,963 compared to net cash used by financing activities of $862,739 for the three months ended January 31, 2023. The change in cash flow from financing activities for the three months ended January 31, 2024 was due to our credit line activity. 21 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 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. As of October 31, 2023, we were not in compliance with the terms of the credit agreement however as of January 31, 2024, the Company was back in compliance with the terms of the credit agreement. The Company did not receive a waiver from the lender when it was not in compliance. The lender has reserved its rights to exercise its rights and remedies at any time at its sole discretion. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Our audited consolidated financial statements do not include any adjustment for the recovery and classification of assets to the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. If we are unable to continue as a going concern, our shareholders would likely lose some or all their investment in our securities. 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.