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,” “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 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; ● 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; ● 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; ● the imposition of tariffs; ● 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. 1 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. 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. On November 6, 2024, Second Empire, a wholly owned subsidiary of the Company, entered into a Secured Creditor Sale Agreement with Bridge Business Credit, LLC (“Seller”). The sale was a Uniform Commercial Code (“UCC”) Chapter 9 sale to purchase equipment, accounts receivable and inventory of Empire Coffee Company, Inc. (“Empire Coffee Company”). Critical Accounting Policies and Estimates There have been no changes to our critical accounting policies during the three and six months ended April 30, 2025. 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 2024 10-K. 2 Three Months Ended April 30, 2025 Compared to the Three Months Ended April 30, 2024 Net Sales. Net sales totaled $23,320,061 for the three months ended April 30, 2025, an increase of $4,324,148, or 23%, from $18,995,913 for the three months ended April 30, 2024. The increase in net sales was due to increased sales of our private label and Cafe Caribe and Cafe Supremo products brands to our wholesale and retail customers. Cost of Sales. Cost of sales for the three months ended April 30, 2025 was $18,901,189, or 81.1% of net sales, as compared to $15,291,933, or 80.5% of net sales, for the three months ended April 30, 2024, an increase of $3,609,256. Cost of sales consists primarily of the cost of green coffee and packaging materials. The increase in cost of sales relates to the increase in net sales of our private label and branded products to both wholesale and retail customers. Gross Profit. Gross profit for the three months ended April 30, 2025 amounted to $4,418,872 or 18.9% of net sales, as compared to $3,703,980 or 19.5% of net sales, for the three months ended April 30, 2024. The increase in gross profits on a percentage and dollar basis was attributable to the factors listed above. Operating Expenses. Total operating expenses decreased by $240,373 to $3,530,257 for the three months ended April 30, 2025 from $3,770,630 for the three months ended April 30, 2024. Selling and administrative expenses decreased by $342,595 and officers’ salaries increased by $102,222. The decrease in selling and administrative expenses was due to lower payroll costs and professional fees. Other Income (Expense). Other income for the three months ended April 30, 2025 was $17,487, a decrease of $15,336 from other income of $32,823 for the three months ended April 30, 2024. The change was attributable to a decrease in interest expense of $55,701. Income Taxes. Our expense for income taxes for the three months ended April 30, 2025 totaled $227,073 compared to our benefit of $77,632 for the three months ended April 30, 2024. The change was primarily attributable to the difference in the income for the quarter ended April 30, 2025, versus the loss in the quarter ended April 30, 2024. Net Income (Loss). We had net income of $644,055, or $0.11 per share basic and diluted, for the three months ended April 30, 2025, compared to a net loss of $21,841, or $0.00 per share basic and diluted, for the three months ended April 30, 2024. Six Months Ended April 30, 2025, Compared to the Six Months Ended April 30, 2024 Net Sales. Net sales totaled $44,625,346 for the six months ended April 30, 2025, an increase of $6,089,031, or 16%, from $38,536,315 for the six months ended April 30, 2024. The increase in net sales was due to increased sales of our private label and Cafe Caribe and Cafe Supremo products brands to our wholesale and retail customers. Cost of Sales. Cost of sales for the six months ended April 30, 2025 was $34,474,548, or 77.3% of net sales, as compared to $31,352,036, or 81.4% of net sales, for the six months ended April 30, 2024. Cost of sales consists primarily of the cost of green coffee and packaging materials and realized and unrealized gains or losses on hedging activity. This increase in gross margin was due to favorable green coffee prices that were initiated during the six months ended April 30, 2025, for our roasted coffee customers and the cost of goods sold was favorably impacted by improved inventory management, along with increased prices to both our wholesale and retail customers, reflecting higher market conditions. Additionally, net sales increased due to higher sales of our private label and branded products to both wholesale and retail customers. Gross Profit. Gross profit for the six months ended April 30, 2025 amounted to $10,150,798 or 22.8% of net sales, as compared to $7,184,279 or 18.6% of net sales, for the six months ended April 30, 2024. The increase in gross profits on a percentage basis was attributable to the factors listed above. Operating Expenses. Total operating expenses increased by $1,037,134 to $7,671,152 for the six months ended April 30, 2025 from $6,634,018 for the six months ended April 30, 2024. Selling and administrative expenses increased by $896,956 and officers’ salaries increased by $140,178. Operating expenses increased for the six months ended April 30, 2025 compared to the six months ended April 30, 2024 primarily due to the acquisition of Second Empire adding approximately $1.3 to operating expenses for the six months ended. Other Income (Expense). Other expense for the six months ended April 30, 2025 was $49,170, a decrease of $107,203 from $156,373 for the six months ended April 30, 2024. The decrease was attributable to a decrease in interest income of $34,390 and a decrease in our interest expense of $141,564, during the six months ended April 30, 2024. Income Taxes. Our expense for income taxes for the six months ended April 30, 2025 totaled $633,165 compared to an expense of $64,705 for the six months ended April 30, 2024. The change was primarily attributable to the difference in the income for the six months ended April 30, 2025 versus the income in the six months ended April 30, 2024. Net (Loss) Income. We had net income of $1,797,311 or $0.31 per share basic and diluted, for the six months ended April 30, 2025 compared to net income of $329,183, or $0.06 per share basic and diluted for the six months ended April 30, 2024. The increase in net income was due primarily to the reasons described above. Liquidity, Capital Resources and Going Concern As of April 30, 2025, we had working capital of $25,831,578, which represented a $965,841 increase from our working capital of $21,526,983 as of October 31, 2024. Our working capital increased primarily due to the $1,509,920 increase in inventory, a $1,221,965 increase in due from broker, and a $779,055 increase in accounts receivable offset by a $3,000,000 increase on the line of credit. On April 25, 2017, we and one of our subsidiaries, Organic Products Trading Company, LLC (“OPTCO” and 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, and (ii) the financing agreement between us, as guarantor, OPTCO and Sterling, dated March 10, 2015, 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. 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, 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. 3 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. As further explained in Note 6 to the unaudited condensed consolidated financial statements, we are required to maintain certain financial covenants with respect to our line of credit agreement. We were not in compliance with these requirements as of October 31, 2023. We have since received a waiver from the lender on May 24, 2024 and are in compliance with all requirements. On June 27, 2024, the Borrowers entered into the Tenth Loan Modification Agreement with Webster which amended the A&R Loan Agreement to, among other things: (i) provide for a new loan maturity date of June 29, 2025, (ii) provide that the applicable margin requirement for any revolving loan outstanding under the A&R Loan Agreement to 2.25%, (iii) provide that the maximum facility amount shall be $10,000,000 and (iv) to adjust 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. 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 line of credit was $3,000,000 and $0 as of April 30, 2025 and October 31, 2024, respectively. For the six months ended April 30, 2025, our operating activities used cash of $1,555,954 as compared to the six months ended April 30, 2024 when operating activities provided cash of $3,390,694. The decrease in cash flow from operations was primarily due to the increase in inventory from October 31, 2024 to April 30, 2025. Non-cash charges, including depreciation and amortization, unrealized gain on commodities, amortization of right-of-use assets, and deferred income taxes, resulted in cash used of $603,581 for the six months ended April 30, 2025 compared to non-cash charges provided of $24,165 for the six months ended April 30, 2024. For the six months ended April 30, 2025, our investing activities used cash of $992,907 as compared to the six months ended April 30, 2024 when net cash provided in investing activities was $2,925,927. The decrease in our cash provided by investing activities was due to the proceeds from the sale of an investment of $3,150,000 during the three months ended April 30, 2024. For the six months ended April 30, 2025, our financing activities provided net cash of $3,000,000 compared to net cash used in financing activities of $6,622,909 for the six months ended April 30, 2024. The change in cash flow from financing activities for the six months ended April 30, 2025 was primarily due to our credit line activity. 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. 4 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.