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 quarterly 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 quarterly report 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; ● 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 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 primarily 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. 16 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 and 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 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. On November 11, 2024, we acquired substantially all of the assets of Empire Coffee Company, a New York-based long-running private-label roaster. 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 condensed consolidated financial statements in this quarterly 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 “Part II. 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. 17 Critical Accounting Policies and Estimates There have been no changes to our critical accounting policies during the three months ended January 31, 2026. 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 and Estimates” 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 notes thereto, each in our 2025 10-K. RESULTS OF OPERATIONS Three Months Ended January 31, 2026 Compared to the Three Months Ended January 31, 2025 Net Sales. Net sales totaled $25,565,840 for the three months ended January 31, 2026, an increase of $4,260,555, or 20%, from $21,305,285 for the three months ended January 31, 2025. The increase in net sales was driven by higher sales to legacy customers, incremental sales to new customers, and a full quarter of Second Empire customer sales in the current period, partially offset by the loss of Comfort Foods customer sales. Cost of Sales. Cost of sales for the three months ended January 31, 2026, was $18,536,823, or 73% of net sales, as compared to $15,573,359, or 73% of net sales, for the three months ended January 31, 2025. Cost of sales consists primarily of the cost of green coffee and packaging materials and realized and unrealized gains or losses on hedging activity. For the three months ended January 31, 2026, the net result of our hedging activities resulted in a gain of approximately $376,338, compared to the three months ended January 31, 2025, in which the net result of our hedging activities resulted in a gain of approximately $1.7 million. The increase in cost of sales was due to higher sales volume, increased salaries, and higher packaging material costs. Gross Profit. Gross profit for the three months ended January 31, 2026, was $7,029,017, an increase of $1,297,091 from $5,731,926 for the three months ended January 31, 2025. Gross profit as a percentage of net sales was 27% for both periods. Operating Expenses. Total operating expenses increased by $511,380 to $4,652,275 for the three months ended January 31, 2026, from $4,140,895 for the three months ended January 31, 2025. Selling and administrative expenses increased from $3,929,598 for the three months ended January 31, 2025, to $4,443,286 for the three months ended January 31, 2026. Overall, operating expenses remained relatively consistent year over year, with the increase primarily reflecting timing and normal fluctuations in operating activities. Other Income (Expense). Other expense for the three months ended January 31, 2026 was $65,732, an increase of $34,049 from other income of $31,683 for the three months ended January 31, 2025. The increase in expense was primarily attributable to higher interest expense related to increased borrowings outstanding under the Company’s line of credit during the current period. Income Before Provision For Income Taxes. We had income of $2,311,010 before income taxes for the three months ended January 31, 2026, compared to income of $1,559,348 for the three months ended January 31, 2025, resulting in a net change of $751,662 for the three months ended January 31, 2026. The increase was primarily attributable to improved gross margins and higher operating efficiencies during the current period. Income Taxes. Our expense for income taxes for the three months ended January 31, 2026 totaled $662,690, compared to an expense of $406,092 for the three months ended January 31, 2025. The change was attributable to the difference in the income for the three months ended January 31, 2026 versus the three months ended January 31, 2025. Net Income. We had net income of $1,648,320 or $0.29 per share basic and diluted, for the three months ended January 31, 2026 compared to net income of $1,153,256, or $0.20 per share basic and diluted, for the three months ended January 31, 2025. The change in net income was due to our results of operations as described above. 18 Liquidity and Capital Resources and Going Concern As of January 31, 2026, we had working capital of $22,553,899, which represented a $79,393 decrease from our working capital of $22,633,292 as of October 31, 2025. Our working capital remained relatively consistent during the period. On April 25, 2017, we and OPTCO (together with us, 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 us and Sterling, dated February 17, 2009, as modified, (the “Company Financing Agreement”) and (ii) the financing agreement between us, as guarantor, OPTCO and Sterling, dated March 10, 2015 (the “OPTCO Financing Agreement”), amongst other things. On June 27, 2024, we reached an agreement for a new loan modification agreement with Webster which (i) provided for a new loan maturity date of June 29, 2025, (ii) provided that the applicable margin requirement for any revolving loan outstanding under the A&R Loan Agreement be 2.25%, (iii) provided that the maximum facility amount shall be $10,000,000 and (iv) adjusted certain definitions and terms related to the borrowing base and leverage ratios applicable to the A&R Loan Agreement. On April 17, 2025, the Borrowers entered into the Eleventh Loan Modification Agreement with Webster which (i) amended the A&R Loan Agreement to provide for a new loan maturity date of June 28, 2026 and (ii) provided limited consent for the Company to declare dividends to shareholders for its fiscal year ending October 31, 2025. On March 4, 2026, the Borrowers entered into a Twelfth Loan Modification Agreement with Webster, which amended the A&R Loan Agreement to extend the maturity date to December 28, 2026. All other terms of the Loan Agreement remain unchanged and in full force and effect. 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 the Company’s line of credit was $2,650,000 and $6,050,000 as of January 31, 2026, and October 31, 2025, respectively. For the three months ended January 31, 2026, our operating activities provided net cash of $6,608,764 as compared to the three months ended January 31, 2025, when operating activities used net cash of $401,899. The increase primarily relates to decreases to inventory and accounts receivable. For the three months ended January 31, 2026, our investing activities used net cash of $1,164,145 as compared to the three months ended January 31, 2025, when net cash used in investing activities was $817,906. The change is primarily attributable to capital expenditures related to leasehold improvements at the Second Empire location, as well as the purchase of an investment during the quarter. For the three months ended January 31, 2026, our financing activities had net cash used of $3,400,000 compared to net cash provided by financing activities of $2,200,000 for the three months ended January 31, 2025. The year-over-year change in cash flows from financing activities was primarily attributable to activity on the Company’s line of credit. 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. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.