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.
24
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;
? 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 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. In
April 2018, Generations Coffee Company, the entity formed as a result of our
joint venture with Caruso's Coffee, Inc., purchased substantially all the assets
of Steep & Brew, Inc. As of the fiscal period ending January 31, 2022, we agreed
with Generations to no longer move forward with this joint venture.
In October 2020, we entered into the Jordre Well Agreement to become a 49% owner
in The Jordre Well, a CBD beverage company. Under the terms of the Jordre Well
Agreement, The Jordre Well was to assist us in the development and
commercialization of CBD-infused line extensions for the existing coffee brands
within our portfolio, as well as launch new brands of non-coffee CBD-infused
beverages and products. However, after further analysis, management has decided
not to pursue commercialization or development of any beverages or products of
this nature.
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 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.
Recent Events
On September 29, 2022, we entered into the Merger Agreement, Upon the terms and
subject to the conditions set forth in the Merger Agreement, Merger Sub will
merge with and into the Company, with the Company surviving as a direct,
wholly-owned subsidiary of Pubco. As a result of the Merger, each issued and
outstanding share of our common stock will be cancelled and converted for the
right of the holder thereof to receive one Pubco Ordinary Share.
25
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP"). Our significant accounting
policies are described in Note 2 - Summary of Significant Accounting Policies to
our consolidated financial statements attached hereto. We believe the following
critical accounting policies involve the most significant judgements and
estimates used in the preparation of our consolidated financial statements.
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.
We have intangible assets consisting of our customer lists and relationships and
trademarks acquired from Comfort Foods, OPTCO and SONO. At October 31, 2022 our
balance sheet reflected intangible assets as set forth below:
October 31, 2022
Customer list and relationships, net $ 215,250
Trademarks and tradenames 327,000
$ 542,250
Goodwill and the trademarks which are deemed to have indefinite lives are
subject to annual impairment tests. Goodwill impairment tests require the
comparison of the fair value and carrying value of reporting units. We assess
the potential impairment of goodwill and indefinite lived intangible assets
annually and on an interim basis whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Upon completion of such
review, if impairment is found to have occurred, a corresponding charge will be
recorded. The value assigned to the customer list and relationships is being
amortized over a twenty year period and a recoverability test is performed
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable.
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. Goodwill and the
indefinite lived intangible assets are tested annually at the end of each fiscal
year to determine whether they have been impaired. Upon completion of each
annual review, there can be no assurance that a material charge will not be
recorded. Impairment testing is required more often than annually if an event or
circumstance indicates that an impairment or decline in value may have occurred.
For the year ending October 31, 2022, an impairment charge of $2,488,785 was
recorded as the market capitalization was substantially lower than the carrying
amount of the Company. For the year ending October 31, 2022, we also took an
$81,000 impairment charge for trademark, and a $199,767 impairment charge for
customer lists and non-compete. For the year ended October 31, 2021, no
impairment charges were recorded to the carrying value of goodwill and the
reporting unit has a fair value in excess of its carrying value by approximately
4% as of October 31, 2021. For the year ended October 31, 2021, we recorded
impairment on two of our trademarks totaling $1,080,000 as the carrying amount
of these trademarks exceeded the respective fair values on the test date which
were determined using a relief from royalty method.
26
Year Ended October 31, 2022 (Fiscal Year 2022) Compared to the Year Ended
October 31, 2021 (Fiscal Year 2021)
Net Sales. Net sales totaled $65,706,879 for the fiscal year ended October 31,
2022, an increase of $1,784,477, or 3%, from $63,922,402 for the fiscal year
ended October 31, 2021. The increase in net sales was due to an increase of
sales to our legacy customers along with incremental sales to several
significant new customers during the second half of the year.
Cost of Sales. Cost of sales for the fiscal year ended October 31, 2022 was
$54,692,933, or 83% of net sales, as compared to $47,901,126, or 75% of net
sales, for the fiscal year ended October 31, 2021. 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 fiscal year ended
October 31, 2022, the net result of our hedging activities resulted in a loss of
approximately $100,000, and for the fiscal year ended October 31, 2021, the net
result of our hedging activities resulted in a gain of approximately $1.8
million. The increase in cost of sales was due to increased prices of green
coffee, freight, salaries and packaging materials and the balance of our losses
from our Generations/Steep N Brew subsidiary, which included obsolete inventory
write-off of approximately $718,000.
Gross Profit. Gross profit for the fiscal year ended October 31, 2022 was
$11,013,946, a decrease of $5,007,330 from $16,021,276 for the fiscal year ended
October 31, 2021. Gross profit as a percentage of net sales decreased to 17% for
the fiscal year ended October 31, 2022 from 25% for the fiscal year ended
October 31, 2021. The decrease in gross profit percentage was attributable to
higher raw material costs and the impact of losses from our Generations/Steep N
Brew subsidiary.
Operating Expenses.Total operating expenses increased by $1,776,725 to
$16,352,846 for the fiscal year ended October 31, 2022 from $14,576,121 for the
fiscal year ended October 31, 2021. Selling and administrative expenses
increased $105,704, to $12,989,032 for the fiscal year ended October 31, 2022
from $12,883,328 for the fiscal year ended October 31, 2021. The recording of
$2,769,552 of goodwill and other intangible impairment during fiscal year ended
October 31, 2022 increased by $1,689,552 as compared to $1,080,000 of trademark
impairment during the fiscal year ended October 31, 2021. We also had increases
in professional fees due to the Delta deal. Officers' salary decreased by
$18,531 or 3% to $594,262 for the fiscal year ended October 31, 2022 from
$612,793 for the fiscal year ended October 31, 2021.
Other Income (Expense). Other expense for the fiscal year ended October 31, 2022
was $258,750, an increase of $21,452 from other expense of $237,298 for the
fiscal year ended October 31, 2021. The increase in other expense was
attributable to an increase in interest expense of $139,248, partially offset by
an increase in interest income of $6,436 and a decrease in our loss from equity
investment of $111,360, during the fiscal year ended October 31, 2022.
Income (Loss) Before Provision For Income Taxes And Non-Controlling Interest In
Subsidiary. We had a loss of $5,597,650 before income taxes and non-controlling
interest in subsidiary for the fiscal year ended October 31, 2022 compared to
income of $1,207,857 for the fiscal year ended October 31, 2021, resulting in a
net change of $6,805,507 for the year ended October 31, 2022.
Income Taxes. Our benefit for income taxes for the fiscal year ended October 31,
2022 totaled $995,793 compared to a provision of $340,180 for the fiscal year
ended October 31, 2021. The change was attributable to the difference in the
income for the year ended October 31, 2022 versus fiscal year ended October 31,
2021.
Net Income (Loss). We had a net loss of $3,744,785 or $0.66 per share basic and
diluted, for the fiscal year ended October 31, 2022 compared to net income of
$1,255,354, or $0.22 per share basic and diluted for the fiscal year ended
October 31, 2021. The decrease in net income was due to our results as described
above.
27
Liquidity and Capital Resources
As of October 31, 2022, we had working capital of $25,262,224, which represented
a $1,477,939 increase from our working capital of $23,784,285 as of October 31,
2021. Our working capital increased primarily due to increases of $3,290,348 in
inventory, $790,203 in prepaid and refundable taxes, $93,892 in due from broker,
decreases of $1,232,776 in accounts payable and accrued expenses, $416,449 in
income taxes payable and $119,666 in lease liability - current portion,
partially offset by decreases of $1,056,550 in cash, $1,483,505 in accounts
receivable, $110,098 in prepaid expenses and other current assets and an
increase of $815,242 in due to broker and an increase in cash overdraft of
$876,148. As of October 31, 2022, the outstanding balance on our line of credit
was $8,314,000 compared to $3,800,850 as of October 31, 2021.
On April 25, 2017, we and OPTCO (collectively, 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", now Webster Bank, "Webster Bank")), 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 March 13, 2020, we reached an agreement for a new loan modification agreement
and credit facility with Sterling. The terms of the new agreement among other
things: (i) provides for a new maturity date of March 31, 2022 and (ii)
decreases the interest rate per annum to LIBOR plus 1.75% (with such interest
rate not to be lower than 3.50%). On June 28, 2022, we reached an agreement for
a new loan modification agreement and credit facility with Webster Bank. 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 remain the same.
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 remain in full force and effect.
Each of the A&R Loan Facility and A&R Loan Agreement contain 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.
On March 17, 2022, the Company reached an agreement for a new loan modification
agreement and credit facility which extended the maturity date to June 29, 2022.
All other terms of the A&R Loan Agreement and A&R Loan Facility remained the
same.
On June 28, 2022, the Company reached an agreement for a new loan modification
agreement and credit facility with Webster Bank. 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.
The Company was not in compliance with the net profit and non-affiliate borrower
covenants as of October 31, 2022. The Company requested a waiver from the Lender
and the waiver was granted and received on March 15, 2023. The Lender also
extended the due date of the October 31, 2022 financial statements until April
15, 2023. The loan agreement was also modified on March 15, 2023. The amendment,
among other things: (i) requires for subordination agreements to be executed
with the Lender prior to the issuance of any subordinate debt of the Company, if
necessary, (ii) allows for transactions with Affiliates (as defined in the Loan
Agreement) in the ordinary course of business, (iii) establishes a new debt to
tangible net worth ratio covenant, and (iv) establishes a fixed charge coverage
ratio covenant.
28
For the fiscal year ended October 31, 2022, our operating activities used net
cash of $5,437,508 as compared to the fiscal year ended October 31, 2021 when
operating activities provided net cash of $4,709,519. The decreased cash flow
from operations for the fiscal year ended October 31, 2022 was primarily due to
our net loss, and the increase in our inventory.
For the fiscal year ended October 31, 2022, our investing activities used net
cash of $1,059,205 as compared to the fiscal year ended October 31, 2021 when
net cash used by investing activities was $3,887,317. The decrease in our uses
of cash in investing activities was due to our decreased outlays for purchases
of machinery and equipment and our other investment during the fiscal year ended
October 31, 2022.
For the fiscal year ended October 31, 2022, our financing activities provided
net cash of $5,316,311 compared to net cash used in financing activities of
$1,047 for the fiscal year ended October 31, 2021. The change in cash flow from
financing activities for the fiscal year ended October 31, 2022 was due to our
decreased principal reductions on our line of credit.
We expect to fund our operations, including paying our liabilities, funding
capital expenditures and making required payments on our indebtedness, through
October 31, 2023 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.
We believe that if the Merger with Delta closes, the A&R Loan Agreement and A&R
Loan Facility with Webster Bank will continue in the ordinary course.
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