COFFEE HOLDING CO., INC.
On February 17, 2009, the Company entered into a financing agreement with Sterling National Bank (“Sterling”) for a $5,000,000 credit facility. The credit facility is a revolving $5,000,000 line of credit and the Company can draw on the line at an amount up to 85% of eligible accounts receivable and 25% of eligible inventory consisting of green coffee beans and finished coffee not to exceed $1,000,000. Sterling shall have the right from time to time to adjust the foregoing percentages based upon, among other things, dilution, its sole determination of the value or likelihood of collection of eligible accounts receivables owed to the Company and considerations regarding inventory. The credit facility is payable monthly in arrears on the average unpaid balance of the line of credit at an interest rate equal to a per annum reference rate (3.75%(3.25% and 3.75%) at JanuaryJuly 31, 2015 and October 31, 2014).2014, respectively.
On July 22, 2010, the credit facility was increased to $7,000,000. In addition, OPTCO was added as a co-borrower and the inventory sublimit was raised from $1,000,000 to $2,000,000. Subsequent to July 31, 2010, $1,800,000 of the credit facility was allocated to OPTCO.
On February 3, 2011, the Company amended their credit facility regarding the creation of a sublimit within the revolving line of credit in the form of a $300,000 term loan for the benefit of GCC. The Company provided a corporate guarantee to Sterling in connection with the amendment.
The initial term of the credit facility was for three years and expired on February 17, 2012. The initial terms of the credit facility provided that the credit facility may be automatically extended for successive periods of one year each unless one party shall have provided the other party with a written notice of termination at least ninety days prior to the expiration of the then current term. Prior to the expiration of the initial term, and effective as of February 12, 2012, the term was extended until February 17, 2014 and the interest rate was reduced to the Wall Street Journal Prime rate (which is currently 3.25%) plus one percent (1%). On May 10, 2013, the credit facility was extended until February 17, 2015.
On February 12,March 10, 2015, the term ofCompany entered into a loan modification agreement (the “Modification Agreement”) with Sterling. Pursuant to the Modification Agreement, the credit facility was further extended until March 31, 2015. The Company is currently in discussions with Sterlingmodified to, among other things, (i) extend the term of the credit facility andfinancing agreement until February 28, 2017; (ii) increase the Company expects to finalize a long term extension prior to March 31, 2015. The Company anticipates that its existing working capital will be adequate to fund its operating, investing and financing needs for the next twelve months. However, if the credit facility is not extended, the Company may need to pursue additional financing arrangements, including new credit facilities, issuance of debt, reduce expenditures, or a combination of the preceding, to meet the Company’s cash requirements. The Company can provide no assurance that additional financing will be available at all or, if available, that the Company will be able to obtain additional financing on terms favorable to it. There is currently no assurance that the termmaximum amount of the credit facility will be extended or iffrom $7,000,000 to $9,000,000; (iii) reduce the extended terminterest rate on the average unpaid balance of the line of credit from an interest rate equal to a per annum reference rate of 3.75% to an interest rate per annum equal to the Wall Street Journal Prime Rate (currently 3.25%); and (iv) require the Company to pay, upon the occurrence of certain termination events, a prepayment premium of .50% of the maximum amount of the credit facility will be acceptable toin effect as of the Company. date of the termination event. The credit facility is secured by all tangible and intangible assets of the Company.
The credit facility contains covenants that place annual restrictions on the Company’s operations, including covenants relating to debt restrictions, capital expenditures, minimum deposit restrictions, tangible net worth, net profit, leverage, employee loan restrictions, distribution restrictions (common stock and preferred stock), dividend restrictions, and restrictions on intercompany transactions. The credit facility also requires that the Company maintain a minimum working capital at all times. The Company was in compliance with all required financial covenants at JanuaryJuly 31, 2015 and October 31, 2014.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2015 AND 2014
(UNAUDITED)
On February 3, 2011, the Company amended their credit facility regarding the creation of a sublimit within the revolving line of credit in the form of a $300,000 term loan for the benefit of GCC. The Company provided a corporate guarantee to Sterling in connection with the amendment.NOTE 8 - LINE OF CREDIT (cont’d):
As of JanuaryJuly 31, 2015 and October 31, 2014, the outstanding balance under the bank line of credit was $5,498,458$3,031,458 and $2,498,458, respectively.
Also on March 10, 2015, the Company, as guarantor, and OPTCO (the “Borrower”), as borrower, entered into a new loan facility agreement with Sterling. The new loan facility is a revolving line of credit for a maximum of $3,000,000 (the “New Loan Facility”). The New Loan Facility terminates on February 28, 2017. The Borrower is able to draw on the New Loan Facility at an amount up to 85% of eligible accounts receivable, not to exceed 25% of all accounts of the Borrower. The New Loan Facility is payable monthly in arrears on the average unpaid balance of the line of credit at an interest rate per annum equal to the Wall Street Journal Prime Rate (currently 3.25%). The New Loan Facility is secured by all tangible and intangible assets of the Company. In connection with the New Loan Facility, the Company entered into a security agreement with Sterling and provided Sterling with a guarantee of the Borrower’s obligations.
As of July 31, 2015, the outstanding balance under the New Loan Facility was $1,237,000.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARYJULY 31, 2015 AND 2014
(Unaudited)(UNAUDITED)
NOTE 9 - INCOME TAXES:
The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be 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 laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision or benefit is the tax incurred for the period plus or minus the change during the period in deferred tax assets and liabilities.
The Company adopted FASB authoritative guidance for accounting for uncertainty in income taxes. As of January 31, 2015 and October 31, 2014, the Company did not have any unrecognized tax benefits or open tax positions. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 31, 2015 and October 31, 2014, the Company had no accrued interest or penalties related to income taxes. The Company currently has no federal or state tax examinations in progress.
The Company files a U.S. federal income tax return and California, Colorado, New Jersey, New York, Kansas, Oregon, Rhode Island, South Carolina, Rhode Island, Virginia, Connecticut, Michigan and Texas state tax returns. The Company’s federal income tax return is no longer subject to examination by the federal taxing authority for the years before fiscal 2011. The Company’s California, Colorado and New Jersey income tax returns are no longer subject to examination by their respective taxing authorities for the years before fiscal 2008. The Company’s Oregon and New York income tax returns are no longer subject to examination by their respective taxing authorities for the years before fiscal 2008.
NOTE 10 - EARNINGS PER SHARE:
The Company presents “basic” and “diluted” earnings per common share pursuant to the provisions included in the authoritative guidance issued by FASB, “Earnings per Share,” and certain other financial accounting pronouncements. Basic earnings per common share were computed by dividing net income by the sum of the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing the net income by the weighted-average number of common shares outstanding plus the dilutive effect of common shares issuable upon exercise of potential sources of dilution.
The weighted average common shares outstanding used in the computation of basic and diluted earnings per share were 6,215,894 and 6,372,309 for the three and nine months ended JanuaryJuly 31, 20152015. The weighted average common shares outstanding used in the computation of basic earnings per share were 6,344,487 and 6,362,933 for the three and nine months ended July 31, 2014. The weighted average common shares outstanding used in the computation of diluted earnings per share were 6,215,8946,611,487 and 6,639,3096,629,933 for the three and nine months ended JanuaryJuly 31, 20152014. In September 2011, the Company issued units to certain purchasers which contained warrants to purchase, in the aggregate, 267,000 shares of the Company’s common stock, all of which warrants are currently exercisable. The 267,000 shares of common stock underlying the warrants have been included in the diluted earnings per share calculation for the three and 2014.
nine months ended July 31, 2014 because of their anti-dilutive impact.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2015 AND 2014
(Unaudited)
NOTE 1110 - ECONOMIC DEPENDENCY:
Approximately 65%57% of the Company’s sales were derived from one customer during the threenine months ended JanuaryJuly 31, 2015. This customer also accounted for approximately $14,730,000$5,400,000 of the Company’s accounts receivable balance at JanuaryJuly 31, 2015. Approximately 55%52% of the Company’s sales were derived from one customer during the threenine months ended JanuaryJuly 31, 2014. This customer also accounted for approximately $4,081,000$7,900,000 of the Company’s accounts receivable balance at JanuaryJuly 31, 2014. Concentration of credit risk with respect to other trade receivables is limited due to the short payment terms generally extended by the Company, by ongoing credit evaluations of customers, and by maintaining an allowance for doubtful accounts that management believes will adequately provide for credit losses.
For the threenine months ended JanuaryJuly 31, 2015, approximately 64% of the Company’s purchases were from four vendors. These vendors accounted for approximately $5,755,000$2,961,000 of the Company’s accounts payable at JanuaryJuly 31, 2015. For the threenine months ended JanuaryJuly 31, 2014, approximately 61%62% of the Company’s purchases were from four vendors. These vendors accounted for approximately $3,058,000$2,844,000 of the Company’s accounts payable at JanuaryJuly 31, 2014. Management does not believe the loss of any one vendor would have a material adverse effect of the Company’s operations due to the availability of many alternate suppliers.
Approximately 48% of the Company’s sales were derived from one customer during the three months ended July 31, 2015. Approximately 52% of the Company’s sales were derived from one customer during the three months ended July 31, 2014.
For the three months ended July 31, 2015, approximately 60% of the Company’s purchases were from four vendors. For the three months ended July 31, 2014, approximately 58% of the Company’s purchases were from three vendors. Management does not believe the loss of any one vendor would have a material adverse effect on the Company’s operations due to the availability of many alternate suppliers.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2015 AND 2014
(UNAUDITED)
NOTE 12 - RELATED11 -RELATED PARTY TRANSACTIONS:
The Company has engaged its 40% partner in GCC as an outside contractor (the “Partner”). Included in contract labor expense are expenses incurred fromby the Partner during the three and nine months ended JanuaryJuly 31, 2015 of $97,694 and 2014 of $85,239 and $107,067,$313,729, respectively, for the processing of finished goods.
An employee of one of the top four vendors is a director of the Company. Purchases from that vendor totaled approximately $9,800,000$17,900,000 and $5,000,000$3,000,000 for the nine and three months ended JanuaryJuly 31, 2015 and 2014, respectively.$13,200,000 and $4,100,000 for the nine and three months ended July 31, 2014. The corresponding accounts payable balance to this vendor was approximately $1,449,000$608,000 and $1,419,000$387,000 at JanuaryJuly 31, 2015 and 2014, respectively.
In January 2005, the Company established the “Coffee Holding Co., Inc. Non-Qualified Deferred Compensation Plan.” Currently, there is only one participant in the plan: Andrew Gordon, the Company’s Chief Executive Officer. Within the plan guidelines, this employee is deferring a portion of his current salary and bonus. The assets are held in a separate trust. The deferred compensation payable represents the liability due to an officer of the Company. The assets are included in the Deposits and other assets in the accompanying balance sheets. The deferred compensation asset and liability at JanuaryJuly 31, 2015 and October 31, 2014 were $503,158$477,478 and $515,549, respectively.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2015 AND 2014
(Unaudited)
NOTE 1312 - STOCKHOLDERS’STOCKHOLDER’ EQUITY:
a. Treasury Stock. The Company utilizes the cost method of accounting for treasury stock. The cost of reissued shares is determined under the last-in, first-out method. The Company did not purchase any shares during the three and nine months ended JanuaryJuly 31, 2015 and 2014.2015.
b.Share Repurchase Program. On January 24, 2014, the Company announced that the Board of Directors had approved a share repurchase program (the “Share Repurchase Program”) pursuant to which the Company may repurchase up to $1 million of the outstanding common stock from time to time on the open market and in privately negotiated transactions subject to market conditions, share price and other factors. The Share Repurchase Program may be discontinued or suspended at any time.
NOTE 14 - FAIR VALUE MEASUREMENTS:
The As of July 31, 2015, pursuant to the terms of the Share Repurchase Program, the Company adopted the authoritative guidance on “Fair Value Measurements.” The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liabilityrepurchased shares of outstanding common stock in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. The guidance also establishes a fairamount equal in value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:$995,728.82.
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company;
Level 2 Inputs – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3 Inputs – Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.
The Company determines fair values for its investment assets as follows:
Investments at fair value consist of commodity securities and deferred compensation plan assets.
The Company maintains a deferred compensation plan. The fair value of the plan assets are classified within Level 1 as the assets are valued using quoted prices in active markets. The assets are included with Deposits and other assets in the accompanying balance sheets. Additional information related to the Company’s deferred compensation plan is disclosed in Note 12 to the condensed consolidated financial statements.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2015 AND 2014
(Unaudited)
NOTE 14 - FAIR VALUE MEASUREMENTS (cont’d):
The Company’s commodity securities are classified within Level 2 and include coffee futures and options contracts. To determine fair value, the Company utilizes the market approach valuation technique for the coffee futures and options contracts. The Company uses Level 2 inputs that are based on market data of similar instruments that are in observable markets. All commodities on the balance sheet are recorded at fair value with changes in fair value included in earnings.
The following tables present the Company’s assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.
| | | | | Fair Value Measurements as of January 31, 2015 | |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Assets: | | | | | | | | | | | | |
Money market | | | 503,158 | | | | 503,158 | | | | – | | | | – | |
Total Assets | | $ | 503,158 | | | $ | 503,158 | | | | – | | | | – | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Commodities – Options | | | (700,064 | ) | | | | | | | (700,064 | ) | | | | |
Commodities – Futures | | | (1,146,669 | ) | | | – | | | | (1,146,669 | ) | | | – | |
Total Liabilities | | $ | (1,846,733 | ) | | | – | | | $ | (1,846,733 | ) | | | – | |
| | | | | Fair Value Measurements as of October 31, 2014 | |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Assets: | | | | | | | | | | | | |
Money market | | | 515,549 | | | | 515,549 | | | | – | | | | – | |
Total Assets | | $ | 515,549 | | | $ | 515,549 | | | | – | | | | – | |
Liabilities: | | | | | | | | | | | | |
Commodities – Options | | | (217,624 | ) | | | | | | (217,624 | ) | | | |
Commodities – Futures | | | (267,300 | ) | | | – | | | | (267,300 | ) | | | – | |
Total Liabilities | | $ | (484,924 | ) | | | – | | | $ | (484,924 | ) | | | – | |
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2015 AND 2014
(Unaudited)
NOTE 15 - SUBSEQUENT EVENTS:
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required further adjustment or disclosure in the condensed consolidated financial statements.
Cautionary Note on Forward-Looking Statement
Statements
Some of the matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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;
● 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 retain key personnel;
● 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
● | ● | 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 retain key personnel; |
| | |
| ● | 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 SEC. |
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “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; and |
| | |
| ● | the roasting, blending, packaging and sale of our eight brands of coffee. |
● the roasting, blending, packaging and sale of private label coffee; and
● the roasting, blending, packaging and sale of our eight brands of coffee.
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, the supply of green coffee and the selling prices of our products; and |
| | |
| ● | our ability to manage inventory and operations and maintain gross margins. |
● our ability to retain existing customers and attract new customers;
● our hedging policy;
● fluctuations in purchase prices, the supply of green coffee and the selling prices of our products; and
● our ability to manage inventory and 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 forattract 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 acquisitions of certain assets of Premier Roasters, LLC, which included equipment and a roasting facility in La Junta, Colorado, the engagement of a West Coast Brand Manager to market our S&W brand and to increase sales of S&W coffee to new customers, our joint venture with Caruso’s Coffee, Inc. of Brecksville, Ohio, the transaction with Organic ProductsOPTCO and the addition of three sales persons from the Café Bustelo division of Folgers to assist with the expansion of our Café Caribe and Supremo brands. We believe these efforts will allow us to expand our business.
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 effectcoffee or 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.
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 and minimizing the effects of changing green coffee prices and to reduce our cost of sales. In addition, we acquire futures contracts with longer terms, generally three to four months, primarily for the purpose of guaranteeing an adequate supply of green coffee at favorable prices. Although the use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices, no strategy can entirely eliminate pricing risks and we generally remain exposed to loss when prices decline significantly in a short period of time. In addition, we would remain exposed to supply risk in the event of non-performance by the counterparties to any of our futures contracts. If the hedges that we enter into 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 increase of our 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. See Item 3, Quantitative and Qualitative Disclosures About Market Risk.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventories, assets held for sale, income taxes and loss contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.
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: