COFFEE HOLDING CO., INC. 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-K 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 annual 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 annual report.
20 Overview
We are an integrated wholesale coffee roaster and dealer in
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 invest in measures that are expected to increase net sales. These
transactions include our acquisition of
Our net sales are affected by the price of green coffee. We purchase our green
coffee from dealers located primarily within
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 Consolidated Financial Statements in this 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 "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.
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Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in
We believe the following critical accounting policies, among others, may be impacted significantly by judgment, assumptions and estimates used in the preparation of the financial statements:
? The Company has adopted the new revenue recognition standard ASC 606 on
November 1, 2018 using the modified retrospective method. The majority of the
Company's business is ship and bill. The Company recognizes revenue in
accordance with the five-step model in which the Company evaluates the
transfer of promised goods or services and recognizes revenue when its
customer obtains control of promised goods or services in an amount that
reflects the consideration which the Company expects to be entitled to receive
in exchange for those goods or services. To determine revenue recognition for
the arrangements, the Company performs the following five steps: (1) identify
the contract(s) with a customer, (2) identify the performance obligations in
the contract, (3) determine the transaction price, (4) allocate the
transaction price to the performance obligations in the contract and (5)
recognize revenue when (or as) the entity satisfies a performance obligation.
? Effective November 1, 2019 , we adopted ASC Topic 842, Leases ("ASC 842"). The
new guidance increases transparency by requiring the recognition of right to
use assets and lease liabilities on the statement of financial condition. The
recognition of these lease assets and lease liabilities represents a change
from previous US GAAP requirement, which did not require lease assets and
lease liabilities to be recognized for most operating leases. The recognition,
measurement and presentation of expenses and cash flows arising from a lease,
have not significantly changed from previous US GAAP requirements. On November
1, 2019 , the effective date of ASC 842, existing leases of ours were required
to be recognized and measured. Additionally any leases entered into during the
year were also required to recognized and measured. In applying ASC 842, we
made an accounting policy election not to recognize the right of use assets
and lease liabilities relating to short-term leases. Implementation of ASC 842
included an analysis of contracts, including real estate leases and service
contracts to identify embedded leases, to determine the initial recognition of
the right to use assets and lease liabilities, which required subjective
assessment over the determination of the associated discount rates to apply in
determining the lease liabilities. The new standard provides a number of
transition practical expedients, which the Company has elected, including: A
"package of three" expedients that must be taken together and allow entities
to (1) not reassess whether existing contracts contain leases, (2)
carryforward the existing lease classification, and (3) not reassess initial
direct costs associated with existing leases.
? Our allowance for doubtful accounts is maintained to provide for losses
arising from customers' inability to make required payments. If there is
deterioration of our customers' credit worthiness and/or there is an increase
in the length of time that the receivables are past due greater than the
historical assumptions used, additional allowances may be required. For
example, every additional one percent of our accounts receivable that becomes
uncollectible, would decrease our operating income by approximately $74,000
for the year ended October 31, 2020 . The reserve for sales discounts
represents the estimated discount that customers will take upon payment. The
reserve for other allowances represents the estimated amount of returns,
slotting fees and volume based discounts estimated to be incurred by us from
our customers.
? Inventories are stated at lower of cost (determined on a first-in, first-out
basis) or market. Based on our assumptions about future demand and market
conditions, inventories are subject to be written-down to market value. If our
assumptions about future demand change and/or actual market conditions are
less favorable than those projected, additional write-downs of inventories may
be required. Each additional one percent of potential inventory write-down
would have decreased operating income by approximately $171,000 for the year
ended October 31, 2020 .
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? The commodities held at broker represent the market value of our trading
account, which consists of option and futures contracts for coffee held with a
brokerage firm. We use options and futures contracts, which are not designated
or qualifying as hedging instruments, to partially hedge the effects of
fluctuations in the price of green coffee beans. Options and futures contracts
are recognized at fair value in the consolidated financial statements with
current recognition of gains and losses on such positions. We classify options
and futures contracts as trading securities and accordingly, unrealized
holding gains and losses are included in earnings. We record realized and
unrealized gains and losses in our cost of sales in the statement of
operations/income.
? We account for income taxes in accordance with the relevant authoritative
guidance. Deferred tax assets and liabilities are computed for temporary
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets are reflected on the balance sheet
when it is determined that it is more likely than not that the asset will be
realized.
? Our goodwill consists of the cost in excess of the fair market value of the
acquired net assets of OPTCO, SONO, CFI and Steep & Brew, through GCC, which
has been integrated into a structure that does not provide the basis for
separate reporting units. Consequently, we are a single reporting unit for
goodwill impairment testing purposes. We also have intangible assets
consisting of our customer lists and relationships and trademarks acquired
from OPTCO and SONO. At October 31, 2020 our balance sheet reflected goodwill
and intangible assets as set forth below:
October 31, 2020
Customer list and relationships, net $ 490,621
Non-compete, net 49,500
Goodwill 2,488,785
Trademarks and tradenames 1,488,000
$ 4,516,906
Because the Company is a single reporting unit, the closing NASDAQ Capital
Market price of our common stock as of the acquisition date was used as a basis
to measure the fair value of goodwill.
23
Year Ended
Cost of Sales. Cost of sales for the fiscal year ended
Gross Profit. Gross profit for the fiscal year ended
Operating Expenses. Total operating expenses decreased by
Other Income (Expense). Other income for the fiscal year ended
Income (Loss) Before provision for income Taxes and Non-controlling Interest in
Subsidiary. We had a loss of
Income Taxes. Our benefit for income taxes for the fiscal year ended
Net (Loss) Income. We had a net loss of
24
Liquidity and Capital Resources
As of
On
On
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
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.
Pursuant to the terms of the Jordre Well Agreement, we issued to The Jordre Well
139,250 shares of our Common Stock on the effective date of the Jordre Well
Agreement and are obligated to issue an additional 139,250 shares of Common
Stock once
25
For the fiscal year ended
For the fiscal year ended
For the fiscal year ended
We expect to fund our operations, including paying our liabilities, funding
capital expenditures and making required payments on our indebtedness, through
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.
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