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EX-32.2 - EXHIBIT 32.2 - Crystal Rock Holdings, Inc.exh32_2.htm
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EX-31.2 - EXHIBIT 31.2 - Crystal Rock Holdings, Inc.exh31_2.htm
EX-31.1 - EXHIBIT 31.1 - Crystal Rock Holdings, Inc.exh31_1.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2016
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _________

  Commission File Number: 000-31797

CRYSTAL ROCK HOLDINGS, INC.
 (Exact name of registrant as specified in Its charter)
 
 
 
Delaware
                03-0366218
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer
Identification No.)
1050 Buckingham St., Watertown, CT
06795
(Address of principal executive offices)
(Zip Code)
(860) 945-0661
(Registrant's telephone number, including area code)
 
                                                                                                                                                                          
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   X       No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes    X      No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____ Accelerated filer ___
Non-accelerated filer ___                                                                                                                      Smaller reporting company   X    
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No   X     

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

                    Shares outstanding at
Class                      June 9, 2016
Common Stock, $.001 Par Value                                                                                         21,358,411

 
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY
  
 
Table of Contents
 
     
PART I - FINANCIAL INFORMATION
 
Page
     
Item 1.
Financial Statements.
 
     
 
Consolidated Balance Sheets as of April 30, 2016 and October 31, 2015
3
 
 
 
 
Consolidated Statements of Operations for the Three and Six Months Ended April 30, 2016 and 2015
4
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended April 30, 2016 and 2015
5
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2016 and 2015
6
 
 
 
 
Notes to Consolidated Financial Statements
7-14
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
15–23
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
23
 
 
 
Item 4.
Controls and Procedures.
23-24
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
Item 1.
Legal Proceedings.
25
 
 
 
Item 1A.
Risk Factors.
25
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
25
 
 
 
Item 3.
Defaults Upon Senior Securities.
25
 
 
 
Item 4.
Mine Safety Disclosures.
25
 
 
 
Item 5.
Other Information.
25
 
 
 
Item 6.
Exhibits.
25-26
 
 
 
SIGNATURE
 
27


2

 
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
             
   
April 30,
   
October 31,
 
   
2016
   
2015
 
   
(Unaudited) 
 
             
                                                                                 ASSETS
           
             
CURRENT ASSETS:
           
    Cash and cash equivalents
 
$
4,134,648
   
$
3,091,471
 
    Accounts receivable, trade - net of reserve of $275,619 and
               
     $306,140 for 2016 and 2015, respectively
   
8,823,486
     
9,215,042
 
    Inventories
   
2,350,202
     
2,611,681
 
    Current portion of deferred tax asset
   
461,550
     
461,550
 
    Other current assets
   
861,633
     
888,957
 
                 
        TOTAL CURRENT ASSETS
   
16,631,519
     
16,268,701
 
                 
PROPERTY AND EQUIPMENT - net
   
6,332,941
     
6,869,986
 
                 
OTHER ASSETS:
               
    Goodwill
   
12,156,790
     
12,156,790
 
    Other intangible assets - net
   
1,835,173
     
2,165,234
 
    Deferred tax asset
   
145,110
     
145,110
 
    Other assets
   
39,000
     
39,000
 
                 
        TOTAL OTHER ASSETS
   
14,176,073
     
14,506,134
 
                 
TOTAL ASSETS
 
$
37,140,533
   
$
37,644,821
 
                 
                                                                                        LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
    Current portion of long term debt
 
$
1,599,996
   
$
1,599,996
 
    Accounts payable
   
2,844,813
     
3,149,964
 
    Accrued expenses
   
2,340,651
     
2,490,752
 
    Current portion of customer deposits
   
660,208
     
668,472
 
    Current portion of unrealized loss on derivatives
   
33,521
     
8,912
 
        TOTAL CURRENT LIABILITIES
   
7,479,189
     
7,918,096
 
                 
    Long term debt, less current portion
   
8,933,341
     
9,733,339
 
    Deferred tax liability
   
4,150,506
     
4,150,506
 
    Subordinated debt
   
9,832,034
     
9,270,000
 
    Customer deposits, less current portion
   
2,575,129
     
2,602,891
 
    Long term portion of unrealized loss on derivatives
   
17,418
     
-
 
                 
        TOTAL LIABILITIES
   
32,987,617
     
33,674,832
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY:
               
    Common stock - $.001 par value, 50,000,000 authorized shares,
               
    21,960,229 issued and 21,358,411 outstanding shares as of
               
    April 30, 2016 and October 31, 2015
   
21,960
     
21,960
 
    Additional paid in capital
   
58,462,496
     
58,464,076
 
    Treasury stock, at cost, 601,818 shares as of April 30, 2016
               
    and October 31, 2015
   
(900,360
)
   
(900,360
)
    Accumulated deficit
   
(53,400,616
)
   
(53,610,339
)
    Accumulated other comprehensive loss
   
(30,564
)
   
(5,348
)
        TOTAL STOCKHOLDERS' EQUITY
   
4,152,916
     
3,969,989
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
37,140,533
   
$
37,644,821
 
 
See the notes to the consolidated financial statements.
 
3

 
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
                         
   
Three months ended April 30,
   
Six months ended April 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(unaudited) 
   
(unaudited) 
 
                         
NET SALES
 
$
16,710,816
   
$
18,728,733
   
$
32,842,376
   
$
36,426,661
 
                                 
COST OF GOODS SOLD
   
8,481,945
     
10,616,675
     
17,024,062
     
20,280,136
 
                                 
GROSS PROFIT
   
8,228,871
     
8,112,058
     
15,818,314
     
16,146,525
 
                                 
OPERATING EXPENSES:
                               
    Selling, general and administrative expenses
   
7,150,233
     
8,435,616
     
14,099,096
     
16,384,918
 
    Advertising expenses
   
115,492
     
143,293
     
251,461
     
397,271
 
    Amortization
   
170,789
     
184,031
     
330,061
     
368,754
 
    Gain on disposal of property and equipment
   
(820
)
   
-
     
(4,120
)
   
(49,821
)
                                 
TOTAL OPERATING EXPENSES
   
7,435,694
     
8,762,940
     
14,676,498
     
17,101,122
 
                                 
INCOME (LOSS) FROM OPERATIONS
   
793,177
     
(650,882
)
   
1,141,816
     
(954,597
)
                                 
OTHER EXPENSE:
                               
    Interest expense
   
406,108
     
383,527
     
803,553
     
767,893
 
                                 
INCOME (LOSS) BEFORE INCOME TAXES
   
387,069
     
(1,034,409
)
   
338,263
     
(1,722,490
)
                                 
INCOME TAX EXPENSE (BENEFIT)
   
147,818
     
(393,075
)
   
128,540
     
(654,546
)
                                 
NET INCOME (LOSS)
 
$
239,251
   
$
(641,334
)
 
$
209,723
   
$
(1,067,944
)
                                 
NET INCOME (LOSS) PER SHARE - BASIC
 
$
0.01
   
$
(0.03
)
 
$
0.01
   
$
(0.05
)
                                 
NET INCOME (LOSS) PER SHARE - DILUTED
 
$
0.01
   
$
(0.03
)
 
$
0.01
   
$
(0.05
)
                                 
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC
   
21,358,411
     
21,358,411
     
21,358,411
     
21,358,411
 
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED
   
21,358,411
     
21,358,411
     
21,358,411
     
21,358,411
 
                                 
See the notes to the consolidated financial statements.
 
4

 
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                         
   
Three months ended April 30,
   
Six months ended April 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(unaudited) 
   
(unaudited) 
 
                         
                         
NET INCOME (LOSS)
 
$
239,251
   
$
(641,334
)
 
$
209,723
   
$
(1,067,944
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
                         
  Cash Flow Hedges:
                               
  Unrealized gain (loss) on derivatives designated as cash flow hedges
   
2,510
     
3,165
     
(25,216
)
   
6,059
 
  Other Comprehensive Income (Loss), net of tax
   
2,510
     
3,165
     
(25,216
)
   
6,059
 
TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
241,761
   
$
(638,169
)
 
$
184,507
   
$
(1,061,885
)
 
See the notes to the consolidated financial statements.
 
5

CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY
 
             
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
   
Six months ended April 30,
 
   
2016
   
2015
 
   
(Unaudited)
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
209,723
   
$
(1,067,944
)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
               
Depreciation
   
1,379,445
     
1,398,432
 
Provision for bad debts on accounts receivable
   
115,926
     
157,669
 
Amortization
   
330,061
     
368,754
 
Non cash interest expense on subordinated debt
   
562,034
     
-
 
Gain on disposal of property and equipment
   
(4,120
)
   
(49,821
)
Non cash share-based compensation
   
(1,580
)
   
1,942
 
Change in contingent consideration liability
   
-
     
(4,764
)
Changes in operating assets and liabilities:
               
Accounts receivable
   
275,630
     
(147,481
)
Inventories
   
261,479
     
(532,493
)
Other current assets
   
44,135
     
(841,887
)
Accounts payable
   
(305,151
)
   
(776,342
)
Accrued expenses
   
(150,101
)
   
(160,164
)
Customer deposits
   
(36,026
)
   
42,414
 
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
   
2,681,455
     
(1,611,685
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
   
(854,396
)
   
(1,134,834
)
Proceeds from sale of property and equipment
   
16,116
     
59,474
 
Cash used for acquisitions
   
-
     
(66,196
)
NET CASH USED IN INVESTING ACTIVITIES
   
(838,280
)
   
(1,141,556
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net line of credit borrowings
   
-
     
1,779,251
 
Principal payments on long term debt
   
(799,998
)
   
(840,948
)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
   
(799,998
)
   
938,303
 
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
1,043,177
     
(1,814,938
)
                 
CASH AND CASH EQUIVALENTS - beginning of period
   
3,091,471
     
1,841,044
 
                 
CASH AND CASH EQUIVALENTS  - end of period
 
$
4,134,648
   
$
26,106
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
                 
Cash paid for interest
 
$
225,720
   
$
770,874
 
                 
Cash paid for income taxes
 
$
279,750
   
$
5,750
 
                 
NON-CASH FINANCING AND INVESTING ACTIVITIES:
               
                 
Notes payable issued in acquisitions
 
$
-
   
$
7,500
 
 
See the notes to the consolidated financial statements.
 
6

 
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with Form 10-Q instructions and in the opinion of management contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position, results of operations, and cash flows for the periods presented.  The results have been determined on the basis of generally accepted accounting principles and practices of the United States of America ("GAAP"), applied consistently with the Annual Report on Form 10-K of Crystal Rock Holdings, Inc. (the "Company") for the year ended October 31, 2015.

Certain information and footnote disclosures normally included in audited consolidated financial statements presented in accordance with GAAP have been condensed or omitted. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2015.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

The financial statements herewith reflect the consolidated operations and financial condition of Crystal Rock Holdings, Inc. and its wholly owned subsidiary Crystal Rock LLC.

2.             GOODWILL AND OTHER INTANGIBLE ASSETS

Major components of other intangible assets consisted of:
   
April 30, 2016
   
October 31, 2015 
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Wgt.
Avg.
Amort.
Years
   
Gross Carrying Amount
   
Accumulated Amortization
   
Wgt.
Avg.
Amort.
Years
 
Amortized Intangible Assets:
                                   
Covenants Not to Compete
 
$
2,536,488
   
$
2,411,763
     
2.20
   
$
2,536,488
   
$
2,382,570
     
2.54
 
Customer Lists
   
10,313,819
     
8,924,373
     
2.49
     
10,313,819
     
8,639,685
     
2.95
 
Other Identifiable Intangibles
   
608,393
     
287,391
     
23.52
     
608,393
     
271,211
     
24.00
 
Total
 
$
13,458,700
   
$
11,623,527
           
$
13,458,700
   
$
11,293,466
         


Amortization expense for the three month periods ending April 30, 2016 and 2015 was $170,789 and $184,031, respectively.  Amortization expense for the six month periods ending April 30, 2016 and 2015 was $330,061 and $368,754, respectively.
7


There were no changes in the carrying amount of goodwill for the three and six month periods ending April 30, 2016 and 2015.

3.             DEBT

On May 20, 2015 the Company amended its Credit Agreement (the "Agreement") with Bank of America to provide a senior financing facility consisting of term debt and a revolving line of credit.  Under the Agreement, the Company became obligated on $12,000,000 of debt in the form of a term note to refinance the previous senior term debt and to fund repayment of a portion of its outstanding subordinated debt. Additionally, the Agreement includes a $5,000,000 revolving line of credit that can be used for the purchase of fixed assets, to fund acquisitions, to collateralize letters of credit, and for operating capital.

The Agreement amortizes the term debt over a five year period with 59 equal monthly installments of $133,333 and a final payment of $4,133,333 due in May 2020. The revolving line of credit matures in May 2018.  There are various restrictive covenants under the Agreement, and the Company is prohibited from entering into other debt agreements without the bank's consent.  The Agreement also prohibits the Company from paying dividends without the prior consent of the bank.

At April 30, 2016, there was no balance outstanding on the line of credit and a letter of credit was issued for $1,415,000 to collateralize the Company's liability insurance program as of that date.  Consequently, as of April 30, 2016, there was $3,585,000 available to borrow from the revolving line of credit. There was $10,533,000 outstanding on the term note as of April 30, 2016.

On September 16, 2015, the Company amended its Credit Agreement with Bank of America (as so amended, the "Amendment"), effective as of July 31, 2015.  Under the Amendment, interest is paid at a rate of one-month LIBOR plus a margin based on the achievement of a specified leverage ratio.  As of April 30, 2016, the margin was 3.50% for the term note and 3.25% for the revolving line of credit.  The Company fixed the interest rate on a portion of its term debt by purchasing an interest rate swap as of the date of the Agreement. As of April 30, 2016, the Company had $5,266,669 of the term debt subject to variable interest rates.  The one-month LIBOR was .4352% on the last business day of April 2016 resulting in total variable interest rates of 3.9352% and 3.6852%, for the term note and the revolving line of credit, respectively, as of April 30, 2016.

The Amendment requires the Company to be in compliance with certain financial covenants at the end of each quarter.  The covenants include rolling four quarter EBITDA of $4,000,000 as of April 30, 2016 and minimum liquidity (as defined) of at least $1,000,000.  The Amendment also requires specific EBITDA goals each quarter through the quarter ending October 31, 2016 and minimum liquidity (as defined) of no less than $1,000,000 through January 30, 2017.  As of April 30, 2016, the Company was in compliance with these covenants and the terms of the Amendment.
8

Effective for the quarter ending January 31, 2017, the quarterly covenants will include senior debt service coverage as defined of greater than 1.25 to 1, total debt service coverage, as defined, of greater than 1.05 to 1, and senior debt to EBITDA of less than 2.50 to 1.

The Amendment also restricts payments of interest on Subordinated Notes and Company acquisitions until certain conditions are met.

In addition to the senior debt, as of April 30, 2016, the Company has subordinated debt owed to Henry, Peter and John Baker in the aggregate principal amount of $9,832,000 that is due November 20, 2020.  The interest rate on each of these notes is 12% per annum.  On September 16, 2015, the Company amended its Subordinated Notes held by related parties.  Future interest payments on the notes will not be paid but will be added to the principal balance of the Subordinated Notes as of the date the payment is due until the following conditions are met: (1) the ratio of consolidated operating cash flow to consolidated total debt service is not less than 1.2 to 1 and (2) historical consolidated EBITDA of greater than $6,000,000 for two consecutive reference periods.  As of April 30, 2016, $833,000 of accrued interest had been added to the principal balance of the Subordinated Notes.

4. INVENTORIES
Inventories consisted of the following at:
     
April 30,
     
October 31,
 
   
2016
   
2015
 
Finished Goods
 
$
2,232,290
   
$
2,453,974
 
Raw Materials
   
117,912
     
157,707
 
Total Inventories
 
$
2,350,202
   
$
2,611,681
 
 
Finished goods inventory consists of products that the Company sells such as, but not limited to, coffee, cups, soft drinks, and snack foods.  Raw material inventory consists primarily of bottle caps.  The amount of raw and bottled water on hand does not represent a material amount of inventory.  The Company estimates that value as of April 30, 2016 and October 31, 2015 to be $53,000 and $65,000, respectively.  This value includes the cost of allocated overhead.  Bottles are accounted for as fixed assets.
5.          ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Financial Instruments

The Company has stand-alone derivative financial instruments in the form of an interest rate swap agreement, which derives its value from underlying interest rates. This transaction involves both credit and market risk.  The notional amount is an amount on which calculations, payments, and the value of the derivative are based.  The notional amount does not represent direct credit exposure.  Direct credit exposure is limited to the net difference between the calculated amount to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company's consolidated balance sheet as an unrealized gain or loss on derivatives.
 
9


The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements.  The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and currently has no reason to believe that any counterparties will fail to fulfill their obligations.

This interest rate swap agreement is considered a cash flow hedge to hedge against the variability of interest rates on outstanding debt.  The net unrealized loss relating to interest rate swaps was recorded in current and long term liabilities with an offset to other comprehensive income for the effective portion of the hedge. At April 30, 2016, these cash flow hedges were deemed 100% effective.  The portion of the net unrealized loss in current liabilities is the amount expected to be reclassified to income within the next twelve months.

The following information pertains to the Company's outstanding interest rate swap at April 30, 2016.  The pay rate is fixed and the receive rate is one month LIBOR.

Instrument Rate
Notional Amount
Pay Rate
Receive Rate
Interest rate swap
$5,266,668
1.25%
.4352%


The table below details the adjustments to other comprehensive income (loss), on a before tax and net-of tax basis, for the fiscal quarters ended April 30, 2016 and 2015.
   
Before-Tax
   
Tax Benefit
   
Net-of-Tax
 
Three Months Ended April 30, 2015
                 
Loss on interest rate swap
 
$
(2,169
)
 
$
868
   
$
(1,301
)
Reclassification adjustment for loss in income
   
7,444
     
(2,978
)
   
4,466
 
Net unrealized gain
 
$
5,274
   
$
(2,110
)
 
$
3,165
 
Three Months Ended April 30, 2016
                       
Loss on interest rate swap
 
$
(3,899
)
 
$
1,560
   
$
(2,339
)
Reclassification adjustment for loss in income
   
8,082
     
(3,233
)
   
4,849
 
Net unrealized gain
 
$
4,183
   
$
(1,673
)
 
$
2,510
 
 
The reclassification adjustments of $8,082 and $7,444 represent interest the Company paid in excess of the amount that would have been paid without the interest rate swap agreement during the quarters ended April 30, 2016 and 2015, respectively. These amounts were reclassified from accumulated other comprehensive loss and recorded in the consolidated statements of operations as interest expense.  No other material amounts were reclassified during the quarters ended April 30, 2016 and 2015.
 
10


The table below details the adjustments to other comprehensive income (loss), on a before tax and net-of tax basis, for the six months ended April 30, 2016 and 2015.
   
Before-Tax
   
Tax Benefit
   
Net-of-Tax
 
Six Months Ended April 30, 2015
                 
Loss on interest rate swap
 
$
(5,464
)
 
$
2,186
   
$
(3,278
)
Reclassification adjustment for loss in income
   
15,563
     
(6,226
)
   
9,337
 
Net unrealized gain
 
$
10,099
   
$
(4,040
)
 
$
6,059
 
Six Months Ended April 30, 2016
                       
Loss on interest rate swap
 
$
(54,942
)
 
$
21,977
   
$
(32,965
)
Reclassification adjustment for loss in income
   
12,915
     
(5,166
)
   
7,749
 
Net unrealized loss
 
$
(42,027
)
 
$
16,811
   
$
(25,216
)

The reclassification adjustments of $12,915 and $15,563 represent interest the Company paid in excess of the amount that would have been paid without the interest rate swap agreement during the six months ended April 30, 2016 and 2015, respectively. These amounts were reclassified from accumulated other comprehensive loss and recorded in the consolidated statements of operations as interest expense.  No other material amounts were reclassified during the quarters ended April 30, 2016 and 2015.
6.             FAIR VALUES OF ASSETS AND LIABILITIES

Fair Value Hierarchy
The Company's assets and liabilities measured at fair value on a recurring basis are as follows:

   
Level 1
   
Level 2
   
Level 3
 
Liabilities:
                 
April 30, 2016
                 
Unrealized loss on derivatives
 
$
-
   
$
50,939
   
$
-
 
       
October 31, 2015
     
Unrealized loss on derivatives
 
$
-
   
$
8,912
   
$
-
 
 
In determining the fair value, the Company uses a model that calculates a present value of the payments as they amortize through the life of the loan (float) based on the variable rate and compares them to the calculated value of the payment based on the fixed rate (fixed) defined in the swap.  In calculating the present value, in addition to the term, the model relies on other data – the "rate" and the "discount factor."

§ In the "float" model, the rate reflects where the market expects LIBOR to be for the respective period and is based on the Eurodollar futures market.
§ The discount factor is a function of the volatility of LIBOR.

Payments are calculated by applying the rate to the notional amount and adjusting for the term. Then the present value is calculated by using the discount factor.
 
11


There were no assets or liabilities measured at fair value on a nonrecurring basis.

7.             INCOME (LOSS) PER SHARE AND WEIGHTED AVERAGE SHARES

The Company considers outstanding in-the-money stock options as potential common stock in its calculation of diluted earnings per share, unless the effect would be anti-dilutive, and uses the treasury stock method to calculate the applicable number of shares.  The following calculation provides the reconciliation of the denominators used in the calculation of basic and fully diluted earnings per share:

   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2016
   
2015
   
2016
   
2015
 
Net Income (Loss)
 
$
239,251
   
$
(641,334
)
 
$
209,723
   
$
(1,067,944
)
Denominator:
                               
Basic Weighted Average Shares Outstanding
   
21,358,411
     
21,358,411
     
21,358,411
     
21,358,411
 
Dilutive effect of Stock Options
   
-
     
-
     
-
     
-
 
Diluted Weighted Average Shares Outstanding
   
21,358,411
     
21,358,411
     
21,358,411
     
21,358,411
 
Basic Income (Loss) Per Share
 
$
.01
   
$
(.03
)
 
$
.01
   
$
(.05
)
Diluted Income Per (Loss) Share
 
$
.01
   
$
(.03
)
 
$
.01
   
$
(.05
)

As of April 30, 2016 there were no options outstanding.  As of April 30, 2015 there were 46,250 options outstanding.   For the three and six month periods ended April 30, 2015 there were no options used to calculate the effect of dilution because the Company had a net loss.

8.             COMPENSATION PLANS

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide services in exchange for the award, the requisite service period (usually the vesting period).  The Company provides an estimate of forfeitures at the initial date of grant.

In April 2004, the Company's stockholders approved the 2004 Stock Incentive Plan.  The plan provided for issuances of awards of up to 250,000 restricted or unrestricted shares of the Company's common stock, or incentive or non-statutory stock options to purchase such common stock.  None of the total amount of options is outstanding.  As of February 18, 2014, no further options may be granted under the 2004 Plan.
In April 2014, the Company's stockholders approved the 2014 Stock Incentive Plan.  The plan provided for issuances of awards of up to 500,000 restricted or unrestricted shares of the Company's common stock, or incentive or non-statutory stock options to purchase such common stock. Of the total amount of shares authorized under this plan, no options have been granted and 500,000 shares are available for grant at April 30, 2016.
12

The options issued under the plans generally vest in periods up to five years based on the continuous service of the recipient and have 10 year contractual terms.  Share awards generally vest over one year.  Option and share awards provide for accelerated vesting if there is a change in control of the Company (as defined in the plans).
There was one option grant, for a total of 10,000 shares, that was forfeited in the first six months of 2016 and eight option grants, for a total of 201,500 shares that expired in the first six months of 2015.  Other than the forfeitures and expirations, there was no activity related to stock options and outstanding stock option balances during the three and six month periods ended April 30, 2016 and 2015.  The Company did not grant any equity based compensation during the six months ended April 30, 2016 and 2015.

Compensation is determined using the Black-Scholes model and the simplified method to derive the expected term of the options and historical volatility over the past five years.
All incentive and non-qualified stock option grants had an exercise price equal to the market value of the underlying common stock on the date of grant.
9. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following 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.  In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the ASU to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the transition methods and the impact of the standard on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". The ASU requires entities using the first-in, first-out (FIFO) inventory costing method to subsequently value inventory at the lower of cost and net realizable value. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU requires prospective application and is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.
13

In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes", which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The Company is currently in the process of evaluating the effect this guidance will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, "Leases", which is intended to improve financial reporting about leasing transactions.  The ASU requires that leased assts be recognized as assets on the balance sheet and the liabilities for the obligations under the lease also be recognized on the balance sheet.  This ASU requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.  The required disclosures include qualitative and quantitative requirements.  This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within the fiscal years beginning after December 15, 2020.

In March 2016, the FASB issued accounting guidance in order to simplify certain aspects of the accounting and presentation of share-based payments, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  This accounting guidance is effective for fiscal periods beginning after December 15, 2016, and interim periods within those years.  This guidance may be applied either on a prospective basis, retrospective basis or a modified retrospective basis depending on the specific accounting topic covered in the accounting guidance.  Early adoption is permitted. The Company is currently evaluating the impact of adopting this accounting guidance in the first quarter of 2018.

10. SIGNIFICANT ACCOUNTING POLICIES

Uncollectible Trade Accounts Receivable - Individual accounts receivable are written off when deemed uncollectible, with any future recoveries recorded as income when received.
For more details regarding the Company's accounts receivable policies refer to Note 2, Significant Accounting Policies, in the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2015.
 
14


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto as filed in our Annual Report on Form 10-K for the year ended October 31, 2015 as well as the consolidated financial statements and notes contained herein.

                                                                                     Forward-Looking Statements
 
The "Management's Discussion and Analysis" (MD&A) portion of this Form 10-Q contains forward-looking statements, including statements about these topics:

(1) the lower gross profits of products that we are offering in connection with our brand expansion and response to competition in our marketplace,
(2) the outstanding debt levels may adversely impact the business profitability and ability to finance future expansion,
(3) the cost pressures related to commodities affecting our business, and
(4) the potential adverse effect of weather on our sales and costs.
 
The following factors could cause actual results to differ materially from statements in MD&A about topic (1):  The volume of and revenues from products that we sell may be greater or less than we anticipate.  If greater, the effect will likely reduce our gross margin percentage overall as a result of lower prices in response to competition; if less, the effect on our gross margin percentage should be less significant, although in that case our results of operations could be adversely affected due to lower revenues.  We also incorporate by reference into this paragraph the full Risk Factors on pages 12 through 15 of our Annual Report on Form 10-K for the Fiscal Year Ended October 31, 2015 (our 2015 Form 10-K) beginning "We operate in a competitive business environment that is influenced by conditions some of which are controllable and others are beyond our control."; "The office products business is highly competitive"; "Acquisitions may disrupt our operations or adversely affect our results"; and "We also face significant competition in the water and office refreshment business".
 
The following factors could strain liquidity and working capital availability in MD&A about topic (2):  We incorporate by reference into this paragraph the full Risk Factor on page 17 of our 2015 Form 10-K beginning "Our Company is significantly leveraged".

The following factors could cause actual results to differ materially from statements in MD&A about topic (3):  We incorporate by reference into this paragraph the full Risk Factor on page 18 of our 2015 Form 10-K beginning "Fluctuations in the cost of essential raw materials and commodities".

The following factors could cause actual results to differ materially from statements in MD&A about topic (4):  We incorporate by reference into this paragraph the full Risk Factor on page 19 of our 2015 Form 10-K beginning "Our business has been and may continue to be affected from time to time by extremes of weather".
 
 
15

Results of Operations

Overview and Trends

Our strategy of improving both operating income and profit margin percentages by avoiding "commodity pricing," providing value-added service, and working to operate a leaner, more efficient business continues to show encouraging results with meaningful improvement.
The first six months of 2016 were marked by a significant increase in gross margin percentage, which improved to 48.2% from 44.3% in the corresponding period of 2015.  Results were also positively affected by sharp decreases in selling, general and administrative expenses (lower by $2,286,000, or 14%) and total operating expenses (lower by $2,425,000, or 14%) when the corresponding six-month periods are compared.
The effect of these changes was a $2,096,000 improvement in operating income, despite a 10% reduction in sales in the first half of 2016 compared to the corresponding half of 2015.  We also improved net income by $1,278,000, to $210,000 in the first six months of 2016.
The decline in sales and the improvement in margin percentages reflected a decision to emphasize the service aspect of our business to a greater extent, with less emphasis on meeting the lowest prices offered by our competitors.  The sales decrease was in all major product lines except water.  Notably, despite a decrease in revenues of $3,584,000 in the first half of 2016 compared to the first half of 2015, our dollar gross profit declined by just $328,000.  The 2016 sales mix attributable to the decrease in all product sales, except water, resulted in a much improved gross profit as a percentage of sales.
Operating a leaner, more efficient business with lower operating costs more than offset the effects of slightly lower margin dollars, resulting in positive operating income and net income for the first half of 2016 compared to an operating loss and a net loss for the same period of 2015.
Results of Operations for the Three Months Ended April 30, 2016 (Second Quarter) Compared to the Three Months Ended April 30, 2015

Sales
 
Sales for the three months ended April 30, 2016 were $16,711,000 compared to $18,729,000 for the corresponding period in 2015, a decrease of $2,018,000 or 11%.  Other than water and other revenues, all sales categories declined.  The most notable decline was that of office products.
 
16

 
The comparative breakdown of sales of the product lines for the respective three-month periods ended April 30, 2016 and 2015 is as follows:

Product Line (000's $)
 
2016
   
2015
   
Difference
   
% Diff.
 
Water
 
$
6,905
   
$
6,647
   
$
258
     
4
%
Coffee
   
2,993
     
3,558
     
(565
)
   
(16
%)
Refreshment
   
2,507
     
2,794
     
(287
)
   
(10
%)
Equipment Rental 
     1,744        1,870        (126      (7 %) 
Office Products 
     2,053        3,370        (1,317      (39 %) 
Other
   
509
     
490
     
19
     
4
%
Total
 
$
16,711
   
$
18,729
   
$
(2,018
)
   
(11
%)

Water – Sales of water increased 4% for the second quarter 2016 as compared to the same period of 2015.  The increase is attributable to an average price increase of just under 2% and a volume increase of 2%.

Coffee – The decrease in sales was attributable to a decline in our traditional higher volume lines, bulk and K-cup, while Cool Beans® pods increased 6%.  Bulk products sales continued to be negatively influenced by the single serve lines and K-cup sales declined as a result of ongoing commoditization. The increase in pod sales is a result of conversion of the other lines as well as new sales but the volume of the product, to date, has not approached that of the other coffee products.

Refreshment – Complementary coffee products, single serve drinks, cups, and vending sales all declined while small packaged water sales, such as ½ liter cases of water, increased 9%.

Equipment Rental – The decrease in sales was a result of a 3% decrease in price and 4% decrease in number of rental units in the field.  During the past twelve months the Company has lost units mostly due to the loss of competitive bids.

Office Products – The decrease in sales was a result of implemented price increases on items previously sold at cost or near cost.

Other – The increase is attributable to an increase in late payment finance charges partially offset by a decrease in the fees that are charged to offset energy costs for delivery and freight, raw materials, and bottling operations.

Gross Profit/Cost of Goods Sold – Despite a decrease in sales for the three months ended April 30, 2016, gross profit increased to $8,229,000 from $8,112,000 for the comparable period in 2015.  As a percentage of sales, gross margin was 49% compared to 43% for the same period a year ago. The increase in gross profit of $117,000 was primarily due to lower sales of lower margin items combined with an increase in water sales.  The increase in water volume combined with lower fuel costs for the transportation of water also led to greater cost efficiencies in production.  For the comparable three month periods, water accounted for 41% and 36% of total sales in 2016 and 2015, respectively.
 
17


Cost of goods sold includes all costs to bottle water, costs of purchasing and receiving products for resale, including freight, as well as costs associated with product quality, warehousing and handling costs, internal transfers, and the repair and service of rental equipment, but does not include the costs of distributing our product to our customers.  We include distribution costs in selling, general, and administrative expense, and the amount is reported below.  The reader should be aware that other companies may include distribution costs in their cost of goods sold, in which case, on a comparative basis, such other companies may have a lower gross margin as a result.

Operating Expenses and Income from Operations

Total operating expenses decreased to $7,436,000 in the second quarter of 2016 from $8,763,000 in the comparable period in 2015, a decrease of $1,327,000, or 15%.

Selling, general and administrative (SG&A) expenses of $7,150,000 in the second quarter of 2016 decreased $1,285,000, or 15%, from $8,435,000 in the comparable period in 2015.  Of total SG&A expenses, route distribution costs decreased $421,000, or 11%, as a result of lower labor, truck operating and fuel costs; combined selling and marketing costs decreased $505,000, or 36%, as a result of reduced staffing; and administration costs decreased $359,000, or 11%, as a result of lower labor and insurance costs and reduced professional fees.

Advertising expenses were $115,000 in the second quarter of 2016 compared to $143,000 in the second quarter of 2015, a decrease of $28,000, or 19%. The decrease in advertising costs is primarily related to a decrease in outsourced services and more reliance on social media.

Amortization decreased to $171,000 in the second quarter of 2016 from $184,000 in the comparable quarter in 2015, a decline of $13,000, or 7%.  Amortization is attributable to intangible assets that were acquired as part of acquisitions. The lower amortization in 2016 is attributable to some intangible assets becoming fully amortized during 2015.  In addition, we had a gain of $1,000, from the sale of assets in the second quarter of 2016, we recognized no gains on similar sales in the second quarter of 2015. We routinely sell assets used in the normal course of business as they are replaced with newer assets.

The income from operations for the three months ended April 30, 2016 was $793,000 compared to a loss from operations of $651,000 in the comparable period in 2015, an improvement of $1,444,000.  The improvement was the result of a higher gross profit due to a change in product mix and lower operating expenses.

Interest, Taxes, and Other Expenses
 
Interest expense was $406,000 for the three months ended April 30, 2016 compared to $384,000 in the three months ended April 30, 2015, an increase of $22,000.  The increase is attributable to higher debt and a higher weighted average of interest rates.
The income before income taxes was $387,000 for the three months ended April 30, 2016 compared to a loss before income taxes of $1,034,000 in the corresponding period in 2015, an improvement of $1,421,000. The tax expense for the second quarter of 2016 was $148,000 compared to a tax benefit of $393,000 in 2015.  The expected effective tax rates used was the same in both 2016 and 2015.
 
18


Net Income (Loss)
The net income for the three months ended April 30, 2016 was $239,000 compared to a net loss of $641,000 in the corresponding period in 2015.  The improvement is attributable to a higher gross profit and reduced operating expenses despite lower sales the second quarter of 2016 as compared to the same period in fiscal year 2015.

Results of Operations for the Six Months Ended April 30, 2016 (First Half) Compared to the Six Months Ended April 30, 2015

Sales
 
Sales for the six months ended April 30, 2016 were $32,842,000 compared to $36,427,000 for the corresponding period in 2015, a decrease of $3,585,000 or 10%.  Other than water revenues, all sales categories declined.  The most notable decline was that of office products.

The comparative breakdown of sales of the product lines for the respective six-month periods ended April 30, 2016 and 2015 is as follows:

Product Line (000's $)
 
2016
   
2015
   
Difference
   
% Diff.
 
Water
 
$
13,053
   
$
12,783
   
$
270
     
2
%
Coffee
   
5,913
     
6,982
     
(1,069
)
   
(15
%)
Refreshment
   
4,876
     
5,447
     
(571
)
   
(10
%)
Equipment Rental 
     3,535        3,809        (274      (7 %) 
Office Products 
     4,533        6,336        (1,803      (28 %) 
Other
   
932
     
1,070
     
(138
)
   
(13
%)
Total
 
$
32,842
   
$
36,427
   
$
(3,585
)
   
(10
%)

Water – Sales of water increased 2% for the first half 2016 as compared to the same period of 2015.  The increase is attributable to an average price increase of 1% and a volume increase of 1%.

Coffee – The decrease in sales was attributable to a decline in our traditional higher volume lines, bulk and K-cup, while Cool Beans® pods increased 8%.  Bulk products sales continued to be negatively influenced by the single serve lines and K-cup sales declined as a result of ongoing commoditization. The increase in pod sales is a result of conversion of the other lines as well as new sales but the volume of the product, to date, has not approached that of the other coffee products.

Refreshment – Complementary coffee products, single serve drinks, cups, and vending sales all declined while sales of small packaged water, such as ½ liter cases of water, increased 5%.

Equipment Rental – The decrease in sales was a result of a 3% decrease in price and 4% decrease in number of rental units in the field.  During the past twelve months the Company has lost units mostly due to the loss of incumbent competitive bids.
 
19


Office Products – The decrease in sales was a result of implemented price increases on items previously sold at cost or near cost.

Other – The decrease is the result of a decrease in the fees that are charged to offset energy costs for delivery and freight, raw materials, and bottling operation as well as other miscellaneous revenue streams partially offset by an increase in late payment finance charges.

Gross Profit/Cost of Goods Sold – The decrease in sales for the six months ended April 30, 2016 resulted in a gross profit decrease of $329,000 to $15,818,000 from $16,147,000 for the comparable period in 2015.  As a percentage of sales, gross margin was 48% compared to 44% for the same period a year ago. Due to a changing sales mix with a reduction of lower margin sales items, the gross margin percentage increased in 2016 as compared to 2015.

Cost of goods sold includes all costs to bottle water, costs of purchasing and receiving products for resale, including freight, as well as costs associated with product quality, warehousing and handling costs, internal transfers, and the repair and service of rental equipment, but does not include the costs of distributing our product to our customers.  We include distribution costs in selling, general, and administrative expense, and the amount is reported below.  The reader should be aware that other companies may include distribution costs in their cost of goods sold, in which case, on a comparative basis, such other companies may have a lower gross margin as a result.

Operating Expenses and Income from Operations

Total operating expenses decreased to $14,676,000 in the first half of 2016 from $17,101,000 in the comparable period in 2015, a decrease of $2,425,000, or 14%.

Selling, general and administrative (SG&A) expenses of $14,099,000 in the first half of 2016 decreased $2,286,000, or 14%, from $16,385,000 in the comparable period in 2015.  Of total SG&A expenses, route distribution costs decreased $574,000, or 8%, as a result of lower labor, truck operating and fuel costs; combined selling and marketing costs decreased $1,023,000, or 37%, as a result of reduced staffing; and administration costs decreased $689,000, or 11%, as a result of lower labor and insurance costs and reduced professional fees.

Advertising expenses were $251,000 in the first half of 2016 compared to $397,000 in the first half of 2015, a decrease of $146,000, or 37%. The decrease in advertising costs is primarily related to a decrease in outsourced services and more reliance on social media.

Amortization decreased to $330,000 in the first half of 2016 from $369,000 in the comparable quarter in 2015, a decline of $39,000, or 11%.  Amortization is attributable to intangible assets that were acquired as part of acquisitions. The lower amortization in 2016 is attributable to some intangible assets becoming fully amortized during 2015.  In addition, we had a gain of $4,000, from the sale of assets in the first half of 2016 compared to a gain of $50,000 on asset sales in the first half of 2015. We routinely sell assets used in the normal course of business as they are replaced with newer assets.
 
20


The income from operations for the six months ended April 30, 2016 was $1,142,000 compared to a loss from operations of $954,000 in the comparable period in 2015, an improvement of $2,096,000.  The improvement was the result of lower operating expenses partially offset by a lower gross profit attributable to lower sales.

Interest, Taxes, and Other Expenses
 
Interest expense was $804,000 for the six months ended April 30, 2016 compared to $768,000 in the six months ended April 30, 2015, an increase of $36,000.  The increase is attributable to higher debt and a higher weighted average of interest rates.
The income before income taxes was $338,000 for the six months ended April 30, 2016 compared to a loss before income taxes of $1,722,000 in the corresponding period in 2015, an improvement of $2,060,000. The tax expense for the first six months of 2016 was $129,000 compared to a tax benefit of $655,000 in 2015.  The expected effective tax rates used was the same in both 2016 and 2015.

Net Income (Loss)
 
The net income for the six months ended April 30, 2016 was $210,000 compared to a net loss of $1,068,000 in the corresponding period in 2015.  The improvement is attributable to reduced operating expenses partially offset by slightly lower gross profit on significantly lower sales the first half of 2016 as compared to the same period in fiscal year 2015.

Liquidity and Capital Resources

As of April 30, 2016, we had working capital of $9,152,000 compared to $8,351,000 as of October 31, 2015, an increase of $801,000.  The most significant change in working capital was due to the increase in cash of $1,043,000 during the six month period ending April 30, 2016.  The more profitable operations and the deferral of cash subordinated interest payments were significant contributors to the increase in cash.   Also during the six month period, we used $854,000 for capital expenditures and $800,000 for repayment of senior debt.

Our Credit Agreement with Bank of America (the "Bank") provides a senior financing facility consisting of term debt and a revolving line of credit.  As of April 30, 2016 we had $10,533,000 outstanding on our term loan.  We have no funds borrowed from our line of credit with the Bank.  We have a letter of credit of $1,415,000 secured by our line of credit resulting in $3,585,000 available to borrow on the line of credit as of April 30, 2016.

Our term debt amortizes over a five year period with 59 equal monthly installments of $133,333 and a final payment of $4,133,333 due in May 2020. The revolving line of credit matures in May 2018.  There are various restrictive covenants under the Agreement, and the Company is prohibited from entering into other debt agreements without the Bank's consent.  The Agreement also prohibits the Company from paying dividends without the prior consent of the Bank.
 
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On September 16, 2015, the Company amended its Credit Agreement with Bank of America (as so amended, the "Amendment"), effective as of July 31, 2015.  Under the Amendment, interest is paid at a rate of one-month LIBOR plus a margin based on the achievement of a specified leverage ratio.  As of April 30, 2016, the margin was 3.50% for the term note and 3.25% for the revolving line of credit.  The Company fixed the interest rate on a portion of its term debt by purchasing an interest rate swap as of the date of the Agreement. As of April 30, 2016, the Company had $5,266,669 of the term debt subject to variable interest rates.  The one-month LIBOR was .4352% on the last business day of April 2016 resulting in total variable interest rates of 3.9352% and 3.6852%, for the term note and the revolving line of credit, respectively, as of April 30, 2016.

The following information pertains to the Company's outstanding interest rate swap at April 30, 2016.  The pay rate is fixed and the receive rate is one month LIBOR.
 
Instrument Rate
Notional Amount
Pay Rate
Receive Rate
Interest rate swap
$5,266,668
1.25%
.4352%
 
The Amendment requires the Company to be in compliance with certain financial covenants at the end of each quarter.  The covenants include rolling four quarter EBITDA of $4,000,000 as of April 30, 2016 and minimum liquidity (as defined) of at least $1,000,000.  The Amendment also requires specific EBITDA goals each quarter through the quarter ending October 31, 2016 and minimum liquidity (as defined) of no less than $1,000,000 through January 30, 2017.  As of April 30, 2016, the Company was in compliance with these covenants and the terms of the Amendment.
Effective for the quarter ending January 31, 2017, the quarterly covenants will include senior debt service coverage as defined of greater than 1.25 to 1, total debt service coverage, as defined, of greater than 1.05 to 1, and senior debt to EBITDA of less than 2.50 to 1.

The Amendment also restricts payments of interest on Subordinated Notes and Company acquisitions until certain conditions are met.

In addition to the senior debt, as of April 30, 2016, the Company has subordinated debt owed to Henry, Peter and John Baker in the aggregate principal amount of $9,832,000 that is due November 20, 2020.  The interest rate on each of these notes is 12% per annum.  On September 16, 2015, the Company amended its Subordinated Notes held by related parties.  Future interest payments on the notes will not be paid but will be added to the principal balance of the Subordinated Notes as of the date the payment is due until the following conditions are met: (1) the ratio of consolidated operating cash flow to consolidated total debt service of not less than 1.2 to 1 and (2) historical consolidated EBITDA of greater than $6,000,000 for two consecutive reference periods.  As of April 30, 2016, $833,000 of accrued interest had been added to the principal balance of the Subordinated Notes.
 
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In addition to our senior and subordinated debt commitments, we have significant future cash commitments, primarily in the form of operating leases that are not reported on the consolidated balance sheet. The following table sets forth our contractual commitments in the remainder of the current year and future fiscal years as of April 30, 2016:

 
Payment due by Period
 
 
Contractual Obligations (2)
 
 
Total
   
Remainder
of 2016
     
2017-2018
     
2019-2020
   
 
After 2020
 
Debt
 
$
20,365,000
   
$
800,000
   
$
3,200,000
   
$
6,533,000
   
$
9,832,000
 
Interest on Debt (1)
   
6,590,000
     
810,000
     
3,065,000
     
2,715,000
     
-
 
Operating Leases
   
6,998,000
     
1,484,000
     
3,516,000
     
1,766,000
     
232,000
 
Total
 
$
33,953,000
   
$
3,094,000
   
$
9,781,000
   
$
11,014,000
   
$
10,064,000
 

(1) Interest based on 50% of outstanding senior debt at the hedged interest rate discussed above, 50% of outstanding senior debt at a variable rate of 3.93%, line of credit at a rate of 3.68%, and subordinated debt at a rate of 12%.
(2) Customer deposits have been excluded from the table.  Deposit balances vary from period to period with water sales but future increases and decreases in the balances are not accurately predictable.  Deposits are excluded because, net of periodic additions and reductions, it is probable that a customer deposit balance will always be outstanding as long as the business operates.
We have no other material contractual obligations or commitments.

Item 3.  Quantitative and Qualitative Disclosures about Market Risks.

Pursuant to Regulation S-K, Item 305(e), smaller reporting companies are not required to provide this information.

Item 4.  Controls and Procedures.

Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by us, including our consolidated subsidiary, in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive and Chief Financial officers, as appropriate to allow timely decisions regarding required disclosure.

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.
 
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Changes in Internal Control over Financial Reporting.
No change in our internal control over financial reporting occurred during the six month period ended April 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II – OTHER INFORMATION
Item 1.                                                 Legal Proceedings.

None.

Item 1A.                                              Risk Factors.
There was no change in the six months ended April 30, 2016 from the Risk Factors reported in our Annual Report on Form 10-K for the year ended October 31, 2015.

Item 2.                                                 Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.

Item 6. Exhibits.

Exhibit
Number Description

3.1 Certificate of Incorporation (Incorporated by reference to Exhibit B to Appendix A to our registration statement on Form S-4, File No. 333-45226, filed with the SEC on September 6, 2000)

3.2 Certificate of Amendment of Certificate of Incorporation (Incorporated by reference to Exhibit 4.2 of our current report on Form 8-K, filed with the SEC on October 19, 2000)

3.3 Certificate of Ownership and Merger of Crystal Rock Holdings, Inc. with and into Vermont Pure Holdings, Ltd. (Incorporated by reference to Exhibit 3.1 to our current report on Form 8-K, filed with the SEC on May 6, 2010)
 
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3.4 By-laws, as amended (Incorporated by reference to Exhibit 3.2 to our report on Form 8-K, filed with the SEC on April 2, 2010)

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 Interactive Data Files regarding (a) our Consolidated Balance Sheets as of April 30, 2016 and October 31, 2015, (b) our Consolidated Statements of Operations for the Three and Six Months Ended April 30, 2016 and 2015, (c) our Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended April 30, 2016 and 2015, (d) our Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2016 and 2015, and (e) the Notes to such Consolidated Financial Statements.

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SIGNATURE

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated: June 13, 2016

 
CRYSTAL ROCK HOLDINGS, INC.
 

 
By: /s/ David Jurasek                              
       David Jurasek
       Chief Financial Officer/Treasurer
       (Principal Accounting Officer and Principal Financial Officer)
 
 

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Exhibits Filed Herewith

Exhibit
Number                  Description

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley act of 2002.

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 Interactive Data Files regarding (a) our Consolidated Balance Sheets as of April 30, 2016 and October 31, 2015, (b) our Consolidated Statements of Operations for the Three and Six Months Ended April 30, 2016 and 2015, (c) our Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended April 30, 2016 and 2015, (d) our Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2016 and 2015, and (e) the Notes to such Consolidated Financial Statements.




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