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"). 22
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.
22 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.
23
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with
? The Company recognizes revenue in accordance with the five-step model as
prescribed by the Financial Accounting Standards Board ("FASB") Accounting
Codification ("ASC") Topic 606 ("ASC 606") 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 that the Company determines are within the scope of ASC 606,
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.
? 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, 2021 our balance sheet reflected goodwill
and intangible assets as set forth below:
October 31, 2021
Customer list and relationships, net $ 447,869
Non-compete, net 29,700
Goodwill 2,488,785
Trademarks and tradenames 408,000
$ 3,374,354
Because the Company is a single reporting unit, the company used a hybrid
approach to determine the fair market value of the Company, which included an
income approach to conduct the annual impairment assessment.
For the years ending
24
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 increased by
25
Other Income (Expense). Other expense for the fiscal year ended
Income (Loss) Before provision for income Taxes and Non-controlling Interest in
Subsidiary. We had income of
Income Taxes. Our provision for income taxes for the fiscal year ended
Net Income (Loss). We had a net income of
Liquidity and Capital Resources
As of
On
On
26
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
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
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