Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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☒
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended October 31, 2016
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☐
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
transition period from ____________ to
_______________.
Commission file
number: 001-32491
COFFEE
HOLDING CO., INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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11-2238111
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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3475 Victory Boulevard, Staten Island, New York
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10314
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (718) 832-0800
Securities
registered under Section 12(b) of the Act:
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Title
of each class:
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Name of
each exchange on which registered:
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Common Stock, Par Value $0.001 Per Share
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NASDAQ Capital Market
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Securities
registered under Section 12(g) of the Exchange Act: None
Indicate by check
mark if registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check
mark if registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ☐ No
☒
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
☒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 (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☒
No ☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (17 CFR 229.405) is not contained herein, and will
not be contained in, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☒
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, or 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. (Check one):
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Large
accelerated filer ☐
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Non-accelerated
filer ☐
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Accelerated
filer ☐
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Smaller
Reporting Company ☒
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ☐ No ☒
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant, computed by reference to
the closing price of the registrant’s common stock on the
NASDAQ Capital Market on April 30, 2016, was
$20,042,945.
As of
January 20, 2017, the registrant had 5,863,302 shares of common
stock, par value $0.001 per share, outstanding.
Documents
incorporated by reference
Portions of the
registrant’s proxy statement for the 2016 annual meeting of
stockholders to be filed pursuant to Regulation 14A within 120 days
after the registrant’s fiscal year ended October 31, 2016,
are incorporated by reference in Part III of this Form
10-K.
TABLE OF CONTENTS
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Page
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PART
I
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1
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ITEM
1.
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BUSINESS
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1
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ITEM
1A.
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RISK
FACTORS
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7
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ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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14
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ITEM
2.
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PROPERTIES
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14
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ITEM
3.
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LEGAL
PROCEEDINGS
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14
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ITEM
4.
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MINE
SAFETY DISCLOSURES
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14
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PART
II
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15
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ITEM
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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15
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ITEM
6.
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SELECTED
FINANCIAL DATA
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16
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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16
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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21
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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22
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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22
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ITEM
9A.
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CONTROLS
AND PROCEDURES
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22
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ITEM
9B.
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OTHER
INFORMATION
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23
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PART
III
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24
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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24
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ITEM
11.
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EXECUTIVE
COMPENSATION
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24
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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24
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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24
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ITEM
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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24
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PART
IV
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25
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ITEM
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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25
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SIGNATURES
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28
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INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
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F-1
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PART I
ITEM
1.
BUSINESS
General Overview
Products and
Operations. We are an integrated wholesale coffee
roaster and dealer in the United States. Our core
products can be divided into three categories:
●
Wholesale Green
Coffee: unroasted raw beans imported from around
the world and sold to large and small roasters and coffee shop
operators;
●
Private Label
Coffee: coffee roasted, blended, packaged and
sold under the specifications and names of others, including
supermarkets that want to have their own brand name on coffee to
compete with national brands; and
●
Branded Coffee:
coffee roasted and blended to our own specifications and packaged
and sold under our eight proprietary and licensed brand names in
different segments of the market.
Our
private label and branded coffee products are sold throughout the
United States, Canada and certain countries in Asia to
supermarkets, wholesalers, and individually owned and multi-unit
retail customers. Our unprocessed green coffee, which
includes over 90 specialty coffee offerings, is sold to specialty
gourmet roasters.
We
conduct our operations in accordance with strict freshness and
quality standards. All of our private label and branded
coffees are produced from high quality coffee beans that are deep
roasted for full flavor using a slow roasting process that has been
perfected utilizing our more than thirty years of experience in the
coffee industry. In order to ensure freshness, our
products are delivered to our customers within 72 hours of
roasting. We believe that our long history has enabled
us to develop a loyal customer base.
In June
of 2016, we acquired substantially all of the assets of Coffee
Kinetics LLC (doing business as Sonofresco) through our
wholly-owned subsidiary Sonofresco, LLC (“Sonofresco”),
including equipment, inventory, customer lists,
relationships and accounts payable. In addition to our
wholesale green coffee, private label coffee and branded coffee
product offerings, we currently sell tabletop coffee roasting
equipment to our customers through Sonofresco.
We were
incorporated on October 9, 1995 under the laws of the State of
Nevada under the name Transpacific International Group Corp
(“Transpacific”). On April 16, 1998, Transpacific
completed a merger with Coffee Holding Co., Inc., a New York
corporation. Upon the consummation of the merger, Coffee Holding
Co., Inc. was merged into Transpacific and Transpacific changed its
name to Coffee Holding Co., Inc.
Our
corporate offices are located at 3475 Victory Boulevard, Staten
Island, New York 10314. Our telephone number is (718)
832-0800 and our website address is
www.coffeeholding.com. The information on our website is
not incorporated by reference into this Annual Report on Form
10-K.
Our Competitive Strengths
To
achieve our growth objectives described below, we intend to
leverage the following competitive strengths:
Positioned
to Profitably Grow Through Varying Cycles of the Coffee
Market. We believe that we are one of the few coffee
companies to offer a broad array of branded and private label
roasted ground coffees and wholesale green coffee across the
spectrum of consumer tastes, preferences and price
points. While many of our competitors engage in distinct
segments of the coffee business, we sell products in each of the
following areas:
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Retail branded
coffee;
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Mainstream retail
private label coffee;
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Specialty retail
coffees both private label and branded including organic and fair
trade coffees;
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Wholesale specialty
green and gourmet whole bean coffees including organic and fair
trade coffees;
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Food
service;
1
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Instant
coffees;
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Tea;
and
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Tabletop
coffee roasting equipment.
Our
branded and private label roasted ground coffees are sold at
competitive and value price levels while some of our other branded
and specialty coffees are sold predominantly at premium price
levels. Premium price level coffee is high-quality
gourmet coffee, such as AA Arabica coffee, which sell at a
substantial premium over traditional retail canned coffee, while
competitive and value price level coffee is mainstream or
traditional canned coffee. Because of this
diversification, we believe that our profitability is not dependent
on any one area of the coffee industry and, therefore, is less
sensitive than our competition to potential coffee commodity price
and overall economic volatility.
Wholesale Green Coffee
Market Presence. As a large roaster-dealer of
green coffee, we believe that we are favorably positioned to
increase our specialty coffee sales. Since 1998, we have
increased the number of our wholesale green coffee customers,
including coffee houses, single store operators, mall coffee stores
and mail order sellers, by 425% from 150 to 787. We are
a charter member of the Specialty Coffee Association of America and
one of the largest distributors of Swiss Water Processed
Decaffeinated Coffees along the east coast. Our over 40
years of experience as a roaster and a dealer of green coffee
allows us to provide our roasting experience as a value added
service to our gourmet roaster customers. The assistance
we provide to our customers includes training, coffee blending and
market identification. We believe that our relationships
with wholesale green coffee customers and our focus on selling
green coffee as a wholesaler has enabled us to participate in the
growth of the specialty coffee market while mitigating the risks
associated with the competitive retail specialty coffee
environment.
Diverse Portfolio of
Differentiated Branded Coffees. We have amassed a
portfolio of six proprietary name brands sold to supermarkets,
wholesalers and individually owned stores in the United States,
including brands for specialty espresso, Latin espresso, Italian
espresso, 100% Colombian coffee and blended coffee. In
addition, we have entered into a licensing agreement with Del Monte
Corporation for the exclusive right to use the S&W and IL
CLASSICO trademarks in the United States and other countries
approved by Del Monte Corporation in connection with the
production, manufacture and sale of roasted whole bean and ground
coffee for distribution to retail customers. Our existing
portfolio of differentiated brands combined with our management
expertise serve as a platform to add additional name brands through
acquisition or licensing agreements which target product niches and
segments that do not compete with our existing brands.
Management Has Extensive
Experience in the Coffee Industry. We have been a
family-operated business for three
generations. Throughout this time, we have remained
strong through varying cycles in the coffee industry and the
economy. Andrew Gordon, our President, Chief Executive
Officer, Chief Financial Officer and Treasurer, and David Gordon,
our Executive Vice President – Operations, have worked with
Coffee Holding for 34 and 36 years, respectively. David
Gordon is an original member of the Specialty Coffee Association of
America. We believe that our employees and management
are dedicated to our vision and mission, which is to produce high
quality products, as well as to provide quality and responsive
service to our customers.
Our Growth Strategy
We
believe that significant growth opportunities exist by selectively
pursuing strategic acquisitions and alliances, targeting the
rapidly growing Hispanic market in the United States, increasing
penetration with existing customers by adding new products, and
developing our food service business. By capitalizing on
this strategy, we hope to continue to grow our business with our
commitment to quality and personalized service to our
customers. We do not intend to compete on price alone
nor do we intend to expand sales at the expense of
profitability.
Selectively Pursue
Strategic Acquisitions and Alliances. We have
expanded our operations by acquiring coffee companies, entering
into strategic alliances and acquiring or licensing brands, which
complement our business objectives and we intend to continue to
seek such opportunities.
Grow Our Cafe Caribe and
Cafe Supremo Products. We believe the Hispanic
population in the United States is the fastest growing and now
represents the largest minority demographic in the United
States. We believe there is significant opportunity for
our Café Caribe and Café Supremo brands to gain market
share among Hispanic consumers in the United
States. Café Caribe, which has historically been
our leading brand by poundage, is a specialty espresso coffee that
targets espresso coffee drinkers and, in particular, Hispanic
consumers. Café Supremo is a specialty espresso
coffee which is priced for the more price sensitive Hispanic
espresso coffee drinker.
2
Further Market Penetration
of Our Niche Products. We intend to capture
additional market share through our existing distribution channels
by selectively adding or introducing new brand names and products
across multiple price points, including:
●
Specialty
blends;
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Teton
tea;
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Private label
“value” blends;
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Specialty instant
coffees;
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Sales of our
tabletop coffee roasting equipment;
and
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Cold
brew.
Develop Our Food Service
Business. We plan to expand further into the food
service business by developing new distribution channels for our
products. Currently, we have a limited presence in the
food service market. Food service coffee products tend
to have a higher gross profit margin than our traditional
supermarket product retail offerings. We have expanded our food
service offerings to include instant cappuccinos, tea products and
an equipment program for our customers. We attend
various annual trade shows held by different buying groups, which
provide us a national audience to market our food service
products.
Expansion into China and
Other Countries in Asia. During 2013, we (i)
introduced our Don Manuel brand for sale in the Shanghai market
through an exclusive licensing arrangement with the DTS8 Coffee
Company, Ltd., (ii) commenced sales of green coffee into China and
(iii) continued to build upon prior sales of our S&W coffee in
certain countries in Asia. We intend to pursue
opportunities to increase sales of our green coffee, private label
coffee and branded coffee into certain countries in
Asia.
Our Core Products
Our
core products can be divided into three categories:
●
Wholesale Green
Coffee: unroasted raw beans imported from around the world
and sold to large, medium and small roasters and coffee shop
operators;
●
Private Label
Coffee: coffee roasted, blended, packaged and sold under the
specifications and names of others, including supermarkets
that want to have their own brand name on coffee to compete with
national brands; and
●
Branded
Coffee: coffee
roasted and blended to our own specifications and packaged and sold
under our eight proprietary and licensed brand names in different
segments of the market.
Wholesale Green
Coffee. The specialty coffee market represents
the fastest growing area of our industry. The number of
gourmet coffee houses have been increasing in all areas of the
United States. The growth in specialty coffee sales has
created a marketplace for higher quality and differentiated
products, which can be priced at a premium in the
marketplace. As a large roaster-dealer of green coffee,
we are favorably positioned to increase our specialty coffee
sales. We sell green coffee beans to small roasters and
coffee shop operators located throughout the United States and
carry over approximately 90 different
varieties. Specialty green coffee beans are sold
unroasted, direct from warehouses to small roasters and gourmet
coffee shop operators, which then roast the beans
themselves. We sell from as little as one bag (132
pounds) to a full truckload (44,000 pounds) of specialty green
coffee beans, depending on the size and need of the
customer. We believe that we can increase sales of
wholesale green coffee without an increase in infrastructure as
well as without venturing into the highly competitive retail
specialty coffee environment. We believe that by
utilizing our current strategy we can be as profitable or more
profitable than our competitors in this segment by selling
“one bag at a time” rather than “one cup at a
time.”
3
Private Label
Coffee. We roast, blend, package and sell coffee
under private labels for companies throughout the United States and
Canada. Our private label coffee is sold in cans, brick
packages and instants in a variety of sizes. As of
October 31, 2016, we supplied coffee under approximately 26
different labels to wholesalers and retailers. We produce private label coffee
for customers who desire to sell coffee under their own name but do
not want to engage in the manufacturing process. Our
private label customers seek a quality similar to the national
brands at a lower cost, which represents a better value for the
consumer.
Branded
Coffee. We
roast and blend our branded coffee according to our own recipes and
package the coffee at our facilities in La Junta, Colorado and
Brecksville, Ohio. We then sell the packaged coffee
under our brand labels to supermarkets, wholesalers and
individually-owned stores throughout the United
States.
We hold
trademarks for each of our proprietary name brands and have the
exclusive right to use the S&W, IL CLASSICO brand names in the
United States in connection with the production, manufacture and
sale of roasted whole bean and ground coffee for distribution at
the retail level. For further information regarding our
trademark rights, see
“Business—Trademarks.”
Each of
our name brands is directed at a particular segment of the coffee
market. Our branded coffees are:
Cafe Caribe, a
specialty espresso coffee that targets espresso coffee drinkers
and, in particular, the Hispanic consumer market;
Don Manuel, is
produced from the finest 100% Colombian coffee
beans. Don Manuel is an upscale quality product which
commands a substantial premium compared to the more traditional
brown coffee blends. We also use this known trademark in
our food service business because of the high brand
quality;
S&W, an upscale
canned coffee established in 1921 and includes Premium, Premium
Decaf, French Roast, Colombian, Colombian Decaf, Swiss Water Decaf,
Kona, Mellow’d Roast and IL CLASSICO lines;
Cafe Supremo, a
specialty espresso that targets espresso drinkers of all
backgrounds and tastes. It is designed to introduce
coffee drinkers to the tastes of dark roasted coffee;
Via Roma, an Italian
espresso targeted at the more traditional espresso
drinker;
Il CLASSICO, an
S&W brand espresso product; and
Premier Roasters,
retail high end premium whole-bean canisters and food service
packs.
Other Products
We also
offer several niche products, including:
●
specialty instant
coffees;
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tea;
and
●
trial-sized
mini-brick coffee packages.
Raw Materials
Coffee
is a commodity traded on the Commodities and Futures Exchange
subject to price fluctuations. Over the past five years,
the average price per pound of coffee beans ranged from
approximately $1.03 to $3.05. The price for coffee beans
on the commodities market as of October 31, 2016 and 2015 was
$1.64 and $1.21 per pound, respectively. Specialty green
coffee, unlike most coffee, is not tied directly to the commodities
cash markets. Instead, it tends to trade on a negotiated
basis at a substantial premium over commodity coffee pricing,
depending on the origin, supply and demand at the time of
purchase. We are a licensed Fair Trade dealer for Fair
Trade certified coffee. Fair Trade certified coffee
helps small coffee farmers to increase their incomes and improve
the prospects of their communities and families by guaranteeing
farmers a minimum price of ten cents above the current market
price. Our Ohio Facility operated by Generations Coffee
Company, LLC (“GCC”) is certified organic by the
Organic Crop Improvement Association
(“OCIA”). All of our specialty green
coffees, as well as all of the other coffees we import for
roasting, are subject to multiple levels of quality
control.
4
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. For the fiscal years ended 2016 and
2015, approximately 43% and 64%, respectively, of all of our green
coffee purchases were from five suppliers. One of these
suppliers, Rothfos Corporation, accounted for approximately $8.5
million, or 13%, in 2016, and $22.1 million, or 21%, in 2015, of
our total product purchases. An employee of Rothfos
Corporation is one of our directors. We do not have any
formalized, material agreements or long-term contracts with any of
these suppliers. Rather, our purchases are typically
made pursuant to individual purchase orders. We do not
believe that the loss of any one supplier, including Rothfos, would
have a material adverse effect on our operations due to the
availability of alternate suppliers.
The
supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond our
control. Supply and price can be affected by factors
such as weather, politics, currency fluctuations and economics
within the countries that export coffee. Increases in
the cost of coffee beans can, to a certain extent, be passed on to
our customers in the form of higher prices for coffee beans and
processed coffee. Drastic or prolonged increases in
coffee prices may also adversely impact our business as it could
lead to a decline in overall consumption of
coffee. Similarly, rapid decreases in the cost of coffee
beans may force us to lower our sale prices before realizing cost
reductions in our purchases.
We
subject all of our private unroasted green coffee to both a
pre-shipment sample approval and an additional sample approval upon
arrival into the United States. Once the arrival sample
is approved, we then bring the coffee to one of our facilities to
roast and blend according to our own strict
specifications. During the roasting and blending
process, samples are pulled off the production line and tested on
an hourly basis to ensure that each batch roasted is consistent
with the others and meets the strict quality standards demanded by
our customers and us.
Our Use of Derivatives
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 and to reduce
our costs of sales, as further explained in
Note 2 of the Notes to the Condensed 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, under
normal market conditions, our hedging policies are a necessary
component of 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 incurred
significant losses on options and futures contracts during past
reporting periods in 2015. In those cases, our cost of sales
increased, resulting in a decrease in our profitability or increase
in our losses. Such losses have, and similar losses 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 scaled 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 more
limited capacity than we did previously. See “Quantitative
and Qualitative Disclosures About Market Risk—Commodity Price
Risks.”
Trademarks
We hold
trademarks, registered with the United States Patent and Trademark
Office, for all six of our proprietary coffee brands and an
exclusive license for S&W, IL CLASSICO brands for sale in the
United States. Trademark registrations are subject to
periodic renewal and we anticipate maintaining our
registrations. We believe that our brands are
recognizable in the marketplace and that brand recognition is
important to the success of our branded coffee
business.
5
Customers
We sell
our private label and our branded coffee to some of the largest
retail and wholesale customers in the United States (according to
Supermarket
News). We sell
wholesale green coffee to GMCR. Sales to GMCR accounted
for approximately $22.6 million or 29% of our net sales for the
fiscal year ended October 31, 2016, and $63.8 million or 54% for
the fiscal year ended October 31, 2015.
Although our
agreements with wholesale customers generally contain only pricing
terms, our contracts with certain customers also contain minimum
and maximum purchase obligations at fixed
prices. Because our profits on a fixed-price contract
could decline if coffee prices increased, we acquire futures
contracts with longer terms (generally three to four months)
primarily for the purpose of guaranteeing an adequate supply of
green coffee at favorable prices. Although the use of
these derivative financial instruments has generally enabled us to
mitigate the effect of changing prices, no strategy can entirely
eliminate pricing risks or increased losses and we generally remain
exposed to losses on futures contacts 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 futures contracts. See “Our Use of
Derivatives.”
Marketing
We
market our private label and wholesale coffee through trade shows,
industry publications, face-to-face contact and through the use of
our internal sales force and non-exclusive independent food and
beverage sales brokers. We also use our web site
(www.coffeeholding.com) as a method of marketing our coffee
products and ourselves.
For our
private label and branded coffees, we will, from time to time in
conjunction with retailers and with wholesalers, conduct in-store
promotions, such as product demonstrations, coupons, price
reductions, two-for-one sales and new product launches to capture
changing consumer taste preferences for upscale canned
coffees.
We
evaluate opportunities for growth consistent with our business
objectives. In addition, we have established
relationships with independent sales brokers to market our products
across the United States, in areas of the country where we have not
had a high penetration of sales and Canada. We utilize
our in-house sales personnel to market our private label
brands. We intend to capture additional market share in
our existing distribution channels by selectively adding or
introducing new brand names and products across multiple price
points, including niche specialty blends, private label
“value” blends and tea and our own brands, filter
packages, and peripheral products.
Charitable Activities
We are
also a supporter of several coffee-oriented charitable
organizations and during fiscal 2016 and 2015, we donated
approximately $46,000 and $67,000, respectively, to
charities.
●
For over 20 years,
we have been members of Coffee Kids, an international non-profit
organization that helps to improve the quality of life of children
and their families in coffee-growing communities in Mexico,
Guatemala, Nicaragua and Costa Rica.
●
We are members of
Grounds for Health, an organization that educates, screens, and
arranges treatment for women who have cancer and live in the rural
coffee growing communities of Mexico.
●
We are a licensed
Fair Trade dealer of Fair Trade certified coffee. Fair
Trade certified coffee helps small coffee farmers to increase their
incomes and improve the prospects of their communities and
families. It guarantees farmers a minimum price of $1.90
per pound.
●
We are the
administrative benefactors to a non-profit organization called Cup
for Education. After discovering the lack of schools,
teachers, and basic fundamental learning supplies in the poor
coffee growing communities of Central and Latin America,
“Cup” was established by our employee, Karen Gordon, to
help build schools, sponsor teachers, and purchase basic supplies
such as books, chalk and other necessities for a proper
education.
Competition
The
coffee market is highly competitive. We compete in the
following areas:
6
Wholesale Green
Coffee. There are many green coffee dealers
throughout the United States. Many of these dealers have
greater financial resources than we do. However, we
believe that we have both the knowledge and the capability to
assist small specialty gourmet coffee roasters with developing and
growing their businesses. Our over 40 years of
experience as a roaster and a dealer of green coffee allows us to
provide our roasting experience as a value added service to our
gourmet roaster customers. While other coffee merchants
may be able to offer lower prices for coffee beans, we market
ourselves as a value-added supplier to small roasters, with the
ability to help them market their specialty coffee products and
develop a customer base. The assistance we provide our
customers includes training, coffee blending, market identification
as well as providing access to an extensive variety of coffee
products and inventory. Because specialty green coffee
beans are sold unroasted to small coffee shops and roasters that
market their products to local gourmet customers, we do not believe
that our specialty green coffee customers compete with our private
label or branded coffee lines of business. We believe
that the addition of Organic Products Trading Company, LLC
(“OPTCO”) and Sonofresco as well as our two green
coffee salespersons in South Carolina and Oregon allows us to
compete more effectively throughout the country.
Private Label
Competition. There are several major producers of
coffee for private label sales in the United
States. Many other companies produce coffee for sale on
a regional basis. Our main competitor is the former
retail coffee division of Sara Lee Corporation, which was purchased
by Segafredo Zanetti Group in 2006, now known as Massimo Zanetti
Beverage. Massimo Zanetti Beverage is larger and has
more financial and other resources than we do and, therefore, is
able to devote more resources to product development and
marketing. We believe that we remain competitive by
providing a higher level of quality and customer
service. This service includes ensuring that the coffee
produced for each label maintains a consistent taste and is
delivered on time and in the proper quantities. In
addition, we provide our private label customers with information
on the coffee market on a regular basis.
Branded
Competition. Our proprietary brand coffees
compete with many other brands that are sold in supermarkets and
specialty stores, primarily in the Northeastern United
States. The branded coffee market in both the Northeast
and elsewhere is dominated by three large
companies: Kraft General Foods, Inc. (owner of the
Maxwell House brand), Smuckers (owner of the Folgers Café
Bustelo brands) and Massimo Zanetti Beverage which also markets
specialty coffee in addition to non-specialty
coffee. Our large competitors have greater access to
capital and a greater ability to conduct marketing and
promotions. We believe that, while our
competitors’ brands may be more nationally recognizable, our
Café Caribe brand is competitive in the fast growing Hispanic
demographic and our S&W brand has been a popular and
recognizable brand on the west coast for over 80
years.
Government Regulation
Our
coffee roasting operations are subject to various governmental laws
and regulations, which require us to obtain licenses relating to
customs, health and safety, building and land use and environmental
protection. Our roasting facility is subject to state
and local air-quality and emissions regulation. If we
encounter difficulties in obtaining any necessary licenses or if we
have difficulty complying with these laws and regulations, then we
could be subject to fines and penalties, which could have a
material adverse effect on our profitability. In
addition, our product offerings could be limited, thereby reducing
our revenues.
We
believe that we are in compliance in all material respects with all
such laws and regulations and that we have obtained all material
licenses and permits that are required for the operation of our
business. We are not aware of any environmental
regulations that have or that we believe will have a material
adverse effect on our operations.
Employees
We have
70 full-time employees. None of our employees are
represented by unions or collective bargaining
agreements. Our management believes that we maintain
good working relationships with our employees. To
supplement our internal sales staff, we sometimes engage
independent national and regional sales brokers as independent
contractors who work on a commission basis.
ITEM
1A.
RISK
FACTORS
An
investment in our common stock is subject to risks inherent in our
business. Before making an investment decision, you
should carefully consider the risks and uncertainties described
below together with all of the other information included in this
report. In addition to the risks and uncertainties
described below, other risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may
materially and adversely affect our business, financial condition
and results of operations. The value or market price of
our common stock could decline due to any of these identified or
other risks, and you could lose all of your
investment.
7
Risks affecting our Company
Because our business is
highly dependent upon a single commodity, coffee, any decrease in
demand for coffee could materially adversely affect our revenues
and profitability. Our business is centered on
essentially one commodity: coffee. Our operations have
primarily focused on the following areas of the coffee
industry:
●
the roasting,
blending, packaging and distribution of private label
coffee;
●
the roasting,
blending, packaging and distribution of proprietary branded coffee;
and
●
the sale of
wholesale specialty green coffee.
Demand
for our products is affected by:
●
consumer tastes and
preferences;
●
global economic
conditions;
●
demographic trends;
and
●
the type, number
and location of competing products.
Because
we rely on a single commodity, any decrease in demand for coffee
would harm our business more than if we had more diversified
product offerings and could materially adversely affect our
revenues and operating results.
If we are unable to
geographically expand our branded and private label products, our
growth will be impeded which could result in reduced sales and
profitability. Our business strategy emphasizes,
among other things, geographic expansion of our branded and private
label products as opportunities arise. We may not be
able to implement successfully this portion of our business
strategy. Our ability to implement this portion of our
business strategy is dependent on our ability to:
●
market our products
on a national scale;
●
increase our brand
recognition on a national scale;
●
enter into
distribution and other strategic arrangements with third party
retailers; and
●
manage growth in
administrative overhead and distribution costs likely to result
from the planned expansion of our distribution
channels.
Our
sales and profitability may be adversely affected if we fail to
successfully expand the geographic distribution of our branded and
private label products. In addition, our expenses could
increase and our profits could decrease as we implement our growth
strategy.
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. The supply and
price of coffee beans are subject to volatility and are influenced
by numerous factors which are beyond our control. We
have used and expect to continue to use to a lesser extent than
used previously short-term coffee futures and options contracts for
the purpose of hedging the effects of changing green coffee
prices. In addition, we have acquired and expect to
continue to acquire to a lesser extent than done previously futures
contracts with longer terms, generally three to four months, 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.
8
The use
of these derivative financial instruments has generally enabled us
to mitigate the effect of changing 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 futures contracts. Historically, we generally
have been able to pass green coffee price increases through to
customers, thereby maintaining our gross profits, however, we may
not be able to pass price increases through to our customers in the
future. 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 hedging results in losses, our cost of sales may
increase, resulting in a decrease in profitability or an increase
in losses. Although we have had net gains on options and
futures contracts in the past, we incurred losses on options and
futures contracts during some reporting periods in
2015. In those cases, our cost of sales increased,
resulting in a decrease in our profitability or an increase in
losses. Such losses have, and similar losses could in
the future, could materially increase our cost of sales and
materially decrease our profitability or increase losses and
adversely affect our stock price.
Our revenues and
profitability could be adversely affected if our joint ventures or
acquisitions are not successful. We have
historically utilized acquisitions and joint ventures to grow our
business and we intend to continue to seek opportunities for new
joint ventures and acquisitions that will be complementary to our
business. While we believe that our joint ventures will be
successful, losses in our joint ventures or any future joint
ventures would hurt our profitability. In addition, we generally
will not be in a position to exercise sole decision-making
authority regarding our joint ventures. Investments in
joint ventures may under certain circumstances, involve risks not
present when a third party is not involved, including the
possibility that joint venture partners might become bankrupt or
fail to fund their share of the required capital
contributions. Joint venture partners may have business
interests, strategies or goals that are inconsistent with our
business interests, strategies or goals and may be, in cases where
we have a minority interest, in a position to take actions contrary
to our policies, strategies or objectives. Any disputes
that may arise between us and our joint venture partners may result
in litigation or arbitration that could increase our expenses and
could prevent our officers and/or directors from focusing their
time and effort exclusively on our business
strategies. In addition, we may in certain circumstances
be liable for the actions of our third-party joint venture
partners.
Acquisitions
including strategic investments or alliances entail numerous risks,
which may include:
●
difficulties in integrating acquired operations or products,
including the loss of key employees from, or customers of, acquired
businesses;
●
diversion of management’s attention from our existing
businesses;
●
adverse effects on existing business relationships with suppliers
and customers;
●
adverse impacts of margin and product cost structures different
from those of our current mix of business; and
●
risks of entering distribution channels, categories or
markets in which we have limited or no prior
experience.
Our
failure to successfully complete the integration of any acquired
business, and any adverse consequences associated with our
acquisition activities, could have a material adverse effect on our
business, financial condition and operating results.
Any inability to
successfully implement our strategy of growth through selective
acquisitions, licensing arrangements and other strategic alliances,
including joint ventures, could materially affect our revenues and
profitability. Part of our growth strategy
utilizes the selective acquisition of coffee companies, the
selective acquisition or licensing of additional coffee brands and
other strategic alliances including joint ventures, presents risks
that could result in increased expenditures and could materially
adversely affect our revenues and profitability,
including:
●
such acquisitions,
licensing arrangements or other strategic alliances may divert our
management’s attention from our existing
operations;
●
we may not be able
to successfully integrate any acquired coffee companies or new
coffee brands into our existing business;
●
we may not be able
to manage the contingent risks associated with the past operations
of, and other unanticipated problems arising in, any acquired
coffee company; and
●
we may not be able
to control unanticipated costs associated with such acquisitions,
licensing arrangements or strategic alliances.
In
addition, any such acquisitions, licensing arrangements or
strategic alliances may result in:
●
potentially
dilutive issuances of our equity securities;
●
the
incurrence of additional debt
9
●
restructuring
charges; and
●
the recognition of
significant charges for depreciation and amortization related to
intangible assets.
As has
been our practice in the past, we will continuously evaluate any
such acquisitions, licensing opportunities or strategic alliances
as they arise. However, we have not reached any new
agreements or arrangements with respect to any such acquisition,
licensing opportunity or strategic alliance (other than those
described herein) at this time and we may not be able to consummate
any acquisitions, licensing arrangements or strategic alliances on
terms favorable to us or at all. The failure to
consummate any such acquisitions, licensing arrangements or
strategic alliances may reduce our growth and
expansion. In addition, if these acquisitions, licensing
opportunities or strategic alliances are not successful, our
earnings could be materially adversely affected by increased
expenses and decreased revenues.
The loss of any of our key
customers, including Keurig Green Mountain, could negatively affect
our revenues and decrease our earnings. We are
dependent upon sales of our products to our key customers,
including GMCR, which accounted for approximately 29% and 54% of
our net sales for the fiscal years ended October 31, 2016 and 2015,
respectively. Going forward, we expect this decrease to
continue. No other customer accounted for greater than 10% of our
net sales during our 2015 and 2016 fiscal years. We generally
do not enter long-term contracts with our customers that are
material to our business. Accordingly, some of
our customers can stop purchasing our products at any time without
penalty and are free to purchase products from our
competitors. The loss of, or reduction in sales to our
key customers such as GMCR or any of our other customers to which
we sell a significant amount of our products or any material
adverse change in the financial condition of such customers would
negatively affect our revenues and decrease our
earnings.
If we lose our key
personnel, including Andrew Gordon and David Gordon, our revenues
and profitability could suffer. Our success
depends to a large degree upon the services of Andrew Gordon, our
President, Chief Executive Officer, Chief Financial Officer and
Treasurer, and David Gordon, our Executive Vice President –
Operations and Secretary. We also depend to a large
degree on the expertise of our coffee roasters. We do
not have employment contracts with our coffee
roasters. Our ability to source and purchase a
sufficient supply of high quality coffee beans and to roast coffee
beans consistent with our quality standards could suffer if we lose
the services of any of these individuals. As a result,
our business and operating results would be adversely
affected. We may not be successful in obtaining and
retaining a replacement for either Andrew Gordon or David Gordon if
they elect to stop working for us. In addition, we do
not have key-person insurance on the lives of Andrew Gordon or
David Gordon.
Our indebtedness may
adversely affect our ability to obtain additional funds and may
increase our vulnerability to economic or business
downturns. From time to time, we utilize
borrowings under our credit facility in connection with operations.
Outstanding debt could have important negative consequences to the
holders of our securities, including the following:
●
general domestic
and global economic conditions;
●
a portion of our
cash flow from operations will be needed to pay debt service and
will not be available to fund future operations;
●
we have increased
vulnerability to adverse general economic and coffee industry
conditions;
●
we may be
vulnerable to higher interest rates because interest expense on
borrowings under our revolving line of credit is based on variable
rates; and
●
we may be subject
to covenants that could restrict our operations.
Our
ability to make payments on our indebtedness and to fund our
operations depends on our ability to generate cash in the future.
Our future operating performance is subject to market conditions
and business factors that are beyond our control. If our cash flows
and capital resources are insufficient to allow us to make
scheduled payments on our debt, we may have to reduce or delay
capital expenditures, sell assets, seek additional capital or
restructure or refinance our debt.
Our credit facility contains covenants that place annual
restrictions on our operations, including covenants relating to
debt restrictions, capital expenditures, minimum deposit
restrictions, tangible net worth, net profit, leverage, employee
loan restrictions, distribution restrictions (common stock and
preferred stock), dividend restrictions, and restrictions on
intercompany transactions. The credit facility also requires that
we maintain a minimum working capital at all times. There can be no
assurance that we will be in compliance with all covenants in the
future or that we will be able to modify the terms of the credit
facility should that become necessary. Failure to comply with any
of these covenants and restrictions would result in an event of
default under the loan agreement.
10
If our planned increase in
marketing expenditures fails to promote and enhance our brands, the
value of our brands could decrease and our revenues and
profitability could be adversely affected. We
believe that promoting and enhancing our brands is critical to our
success. We intend to continue to increase our marketing
expenditures and slotting payments to increase retail shelf space,
to increase awareness of our brands, which we expect will create
and maintain brand loyalty. If our brand-building
strategy is unsuccessful, these expenses, including the slotting
expenses, may never be recovered, and we may be unable to increase
awareness of our brands or protect the value of our
brands. If we are unable to achieve these goals, our
revenues and ability to implement our business strategy could be
adversely affected.
Our
success in promoting and enhancing our brands will also depend on
our ability to provide customers with high quality products and
service. Although we take measures to ensure that we
sell only fresh roasted coffee, we have no control over our roasted
coffee products once they are purchased by our
customers. Accordingly, wholesale customers may store
our coffee for longer periods of time or resell our coffee without
our consent, in each case, potentially affecting the quality of the
coffee prepared from our products. Although we believe
we are less susceptible to quality control problems than many of
our competitors because our products are processed in-house under
strict quality control guidelines which have been in place for more
than 30 years, if consumers do not perceive our products and
service to be of high quality, then the value of our brands may be
diminished and, consequently, our operating results and ability to
implement our business strategy may be adversely
affected.
Our roasting methods are
not proprietary, so competitors may be able to duplicate them,
which could harm our competitive position. If our
competitive position is weakened, our revenues and profitability
could be materially adversely affected. We
consider our roasting methods essential to the flavor and richness
of our roasted coffee and, therefore, essential to our brands of
coffee. Because we do not hold any patents for our
roasting methods, it may be difficult for us to prevent competitors
from copying our roasting methods if such methods become
known. If our competitors copy our roasting methods, the
value of our coffee brands may be diminished, and we may lose
customers to our competitors. In addition, competitors
may be able to develop roasting methods that are more advanced than
our roasting methods, which may also harm our competitive
position.
The
success of our brand also depends in part on our intellectual
property. We rely on a combination of trademarks, copyrights,
service marks, trade secrets and similar rights to protect our
intellectual property. The success of our growth strategy depends
on our continued ability to use our existing trademarks and service
marks in order to increase brand awareness and further develop our
brand in both domestic and international markets. If our efforts to
protect our intellectual property are not adequate, or if any third
party misappropriates or infringes on our intellectual property,
the value of our brand may be harmed, which could have a material
adverse effect on our business. We may become engaged in litigation
to protect our intellectual property, which could result in
substantial costs to us as well as diversion of management
attention.
Since we rely heavily on
common carriers to ship our coffee on a daily basis, any disruption
in their services or increase in shipping costs could adversely
affect our relationship with our customers, which could result in
reduced revenues, increased operating expenses, a loss of customers
or reduced profitability. We rely on a number of
common carriers to deliver coffee to our customers and to deliver
coffee beans to us. We have no control over these common
carriers and the services provided by them may be interrupted as a
result of labor shortages, contract disputes and other
factors. If we experience an interruption in these
services, we may be unable to ship our coffee in a timely manner,
which could reduce our revenues and adversely affect our
relationship with our customers. In addition, a delay in
shipping could require us to contract with alternative, and
possibly more expensive, common carriers and could cause orders to
be cancelled or receipt of goods to be refused. Any
significant increase in shipping costs could lower our profit
margins or force us to raise prices, which could cause our revenue
and profits to suffer.
If there was a significant
interruption in the operation of our Colorado facility, we may not
have the capacity to service all of our customers and we may not be
able to service our customers in a timely manner, thereby reducing
our revenues and earnings. We are dependent on
the continued operations of our Colorado coffee roasting and
distribution facility. Our ability to maintain our
computer and telecommunications equipment in effective working
order and to protect against damage from fire, natural disaster,
power loss, telecommunications failure or similar events. In
addition, growth of our customer base may strain or exceed the
capacity of our systems and lead to degradations in performance or
systems failure. Although we continually review and consider
upgrades to our order fulfillment infrastructure and provide for
system redundancies to limit the likelihood of systems overload or
failure, substantial damage to our systems or a systems failure
that causes interruptions for a number of days could adversely
affect our business. Additionally, if we are unsuccessful in
updating and expanding our order fulfillment infrastructure, our
ability to grow may be constrained. As a result, our
revenues and earnings could be materially adversely
affected.
11
Prolonged negative economic
conditions could adversely affect us, our customers and suppliers,
which could harm our financial condition. We are
subject to the risks arising from adverse changes in general
economic and market conditions. Uncertainty remains in
the United States economy as it continues to recover from a severe
economic recession. The United States economy continues
to experience market volatility, difficulties in the financial
services sector, diminished liquidity and availability of credit,
concerns regarding inflation, increases in the costs of
commodities, continuing high unemployment rates, reduced consumer
spending and consumer confidence and continuing economic
uncertainties. If the United States economy were to
deteriorate significantly, our business could be negatively
impacted.
If we fail to continue to
develop and maintain our brand, our business could
suffer. We believe that maintaining and
developing our brand is critical to our success and that the
importance of brand recognition may increase as a result of
competitors offering products similar to ours. If our brand
building initiative is unsuccessful, we may never recover the
expenses incurred in connection with these efforts and we may be
unable to increase our future revenue or implement our business
strategy. Our success in promoting and enhancing our
brand will also depend on our ability to provide customers with
high-quality products and customer service. Although we take
measures to ensure that we sell only fresh roasted coffee, we have
no control over our coffee products once purchased by
customers. Accordingly, customers may prepare coffee from our
brands inconsistent with our standards, store our coffee for long
periods of time or resell our coffee without our consent, which in
each case, potentially affects the quality of the coffee prepared
from our products. If customers do not perceive our products
and service to be of high-quality, then the value of our brand may
be diminished and, consequently, our ability to implement our
business strategy may be adversely affected.
Risks related to the coffee industry
Increases in the cost of
high quality Arabica or Robusta coffee beans could reduce our gross
margin and profit. Green coffee is our largest
single cost of sales. Coffee is a traded commodity and,
in general, its price can fluctuate depending on:
●
weather patterns in
coffee-producing countries;
●
economic and
political conditions affecting coffee-producing countries,
including acts of terrorism in such countries;
●
foreign currency
fluctuations; and
●
trade regulations
and restrictions between coffee-producing countries and the United
States.
If the
cost of wholesale green coffee increases due to any of these
factors, our margins could decrease and our profitability could
suffer accordingly. It is expected that coffee prices
will remain volatile in the coming years. Although we
have historically attempted to raise the selling prices of our
products in response to increases in the price of wholesale green
coffee, when wholesale green coffee prices increase rapidly or to
significantly higher than normal levels, we are not always able to
pass the price increases through to our customers on a timely
basis, if at all, which adversely affects our operating margins and
cash flow. We may not be able to recover any future
increases in the cost of wholesale green coffee. Even if
we are able to recover future increases, our operating margins and
results of operations may still be materially and adversely
affected by time delays in the implementation of price
increases.
Disruptions in the supply
of green coffee could result in a deterioration of our relationship
with our customers, decreased revenues or could impair our ability
to grow our business. Green coffee is a commodity
and its supply is subject to volatility beyond our
control. Supply is affected by many factors in the
coffee growing countries including weather, pest damage, economic
conditions, acts of terrorism, as well as efforts by coffee growers
to expand or form cartels or associations. In addition,
the political situation in many of the Arabica coffee growing
regions, including Africa, Indonesia, and Central and South
America, can be unstable, and such instability could affect our
ability to purchase coffee from those regions. If Arabica coffee
beans from a region become unavailable or prohibitively expensive,
we could be forced to discontinue particular coffee types and
blends or substitute coffee beans from other regions in our blends.
Frequent substitutions and changes in our coffee product lines
could lead to cost increases, customer alienation and fluctuations
in our gross margins.
Some of
the Arabica coffee beans of the quality we purchase do not trade
directly on the commodity markets. Rather, we purchase
the high-end Arabica coffee beans that we use on a negotiated
basis. We depend on our relationships with coffee
brokers, exporters and growers for the supply of our primary raw
material, high quality Arabica coffee beans. If any of
our relationships with coffee brokers, exporters or growers
deteriorate, we may be unable to procure a sufficient quantity of
high quality coffee beans at prices acceptable to us or at
all. In such case, we may not be able to fulfill the
demand of our existing customers, supply new retail stores or
expand other channels of distribution. A raw material
shortage could result in a deterioration of our relationship with
our customers, decreased revenues or could impair our ability to
expand our business.
12
The coffee industry is
highly competitive and if we cannot compete successfully, we may
lose our customers or experience reduced sales and
profitability. The coffee markets in which we do
business are highly competitive and competition in these markets
could become increasingly more intense due to the relatively low
barriers of entry. The industry in which we compete is
particularly sensitive to price pressure, as well as quality,
reputation and viability for wholesale and brand loyalty for
retail. To the extent that one or more of our
competitors becomes more successful with respect to any key
competitive factor, our ability to attract and retain customers
could be materially adversely affected. Our private
label and branded coffee products compete with other manufacturers
of private label coffee and branded coffees. These
competitors, such as Kraft General Foods, Inc. (owner of the
Maxwell House brand), Smuckers (owner of the Folgers
Café Bustelo brands), and Massimo Zanetti Beverage, have much
greater financial, marketing, distribution, management and other
resources than we do for marketing, promotions and geographic and
market expansion. In addition, there are a growing
number of specialty coffee companies who provide specialty green
coffee and roasted coffee for retail sale. If we are
unable to compete successfully against existing and new
competitors, we may lose our customers or experience reduced sales
and profitability.
Besides coffee, we face
exposure to other commodity cost fluctuations, which could impair
our profitability. In addition to the increase in coffee
costs discussed in the risk factor above, we are exposed to cost
fluctuation in other commodities, including, in particular, steel,
natural gas and gasoline. In addition, an increase in the
cost of fuel could indirectly lead to higher electricity costs,
transportation costs and other commodity costs. Much like coffee
costs, the costs of these commodities depend on various factors
beyond our control, including economic and political conditions,
foreign currency fluctuations, and global weather patterns. To the
extent we are unable to pass along such costs to our customers
through price increases, our margins and profitability will
decrease.
Adverse public or medical
opinion about caffeine may harm our
business. Coffee contains caffeine and other
active compounds, the health effects of some of which are not fully
understood. A number of research studies conclude or suggest
that excessive consumption of caffeine may lead to increased heart
rate, nausea and vomiting, restlessness and anxiety, depression,
headaches, tremors, sleeplessness and other adverse health
effects. An unfavorable report on the health effects of
caffeine or other compounds present in coffee could significantly
reduce the demand for coffee, which could harm our business and
reduce our sales and profits. In addition, we could become subject
to litigation relating to the existence of such compounds in our
coffee; litigation that could be costly and could divert management
attention.
Risks related to our common stock
Our operating results may
fluctuate significantly, which makes our results of operations
difficult to predict and could cause our results of operations to
fall short of expectations. Our operating results
may fluctuate from quarter to quarter and year to year as a result
of a number of factors, many of which are outside of our
control. These fluctuations could be caused by a number
of factors including:
●
fluctuations in
purchase prices and supply of green coffee;
●
fluctuations in the
selling prices of our products;
●
the level of
marketing and pricing competition from existing or new competitors
in the coffee industry;
●
the success of our
hedging strategy;
●
our ability to
retain existing customers and attract new customers;
and
●
our ability to
manage inventory and fulfillment operations and maintain gross
margins.
As a
result of the foregoing, period-to-period comparisons of our
operating results may not necessarily be meaningful and those
comparisons should not be relied upon as indicators of future
performance. Accordingly, our operating results in
future quarters may be below market expectations. In
this event, the price of our common stock may decline.
13
The Gordon family has the
ability to influence action requiring stockholder approval.
Members of the Gordon family, including Andrew Gordon, our
President, Chief Executive Officer, Chief Financial Officer and
Treasurer, and David Gordon, our Executive Vice President and
Secretary, own, in the aggregate, approximately 11.5% of our
outstanding shares of common stock. As a result, the Gordon family
is able to influence the actions that require stockholder approval,
including:
●
the election of a
majority of our directors;
●
the amendment of
our charter documents; and
●
the approval of
mergers, sales of assets or other corporate transactions or matters
submitted for stockholder approval.
As a
result, our other stockholders may have reduced influence over
matters submitted for stockholder approval. In addition, the Gordon
family’s influence could preclude any unsolicited acquisition
of us and consequently materially adversely affect the price of our
common stock.
The market price of our
common stock has been volatile over the year and may continue to be
volatile. The market price and trading volume of
our common stock has been volatile over the past year and it may
continue to be volatile. Over the past year, our common stock has
traded as low as $3.00 and as high as $6.15 per
share. We cannot predict the price at which our common
stock will trade in the future and it may decline. The price at
which our common stock trades may fluctuate significantly and may
be influenced by many factors, including our financial results,
developments generally affecting the coffee industry, general
economic, industry and market conditions, the depth and liquidity
of the market for our common stock, fluctuations in coffee prices,
investor perceptions of our business, reports by industry analysts,
negative announcements by our customers, competitors or suppliers
regarding their own performances, and the impact of other
“Risk Factors” discussed in this Annual
Report.
Provisions in our articles
of incorporation, bylaws and of Nevada law have anti-takeover
effects that could prevent a change in control that could be
beneficial to our stockholders, which could depress the market
price of shares of our common stock. Our articles of
incorporation, bylaws and Nevada corporate law contain provisions
that could delay, defer or prevent a change in control of us or our
management that could be beneficial to our
stockholders. These provisions could also discourage
proxy contests and make it more difficult for our stockholders to
elect directors and take other corporate actions. These
provisions might also discourage a potential acquisition proposal
or tender offer, even if the acquisition proposal or tender offer
is at a price above the then current market price for shares of our
common stock. These provisions:
●
provide that
directors may only be removed upon a vote of at least eighty
percent of the shares outstanding;
●
establish advance
notice requirements for nominating directors and proposing matters
to be voted on by shareholders at shareholder
meetings;
●
limit the right of
our stockholders to call a special meeting of
stockholders;
●
authorize our board
of directors to issue preferred stock and to determine the rights
and preferences of those shares, which would be senior to our
common stock, without prior stockholder approval;
●
require amendments
to our articles of incorporation to be approved by the holders of
at least eighty percent of our outstanding shares of common
stock;
●
a classified board
of directors with three-year staggered terms, which may delay the
ability of stockholders to change the membership of a majority of
our board of directors; and
●
provide a
prohibition on stockholder action by written consent, thereby only
permitting stockholder action to be taken at an annual or special
meeting of our stockholders.
We are
also subject to certain anti-takeover provisions under Nevada
law. Under Nevada law, a corporation may not, in
general, engage in a business combination with any
“interested stockholder” for two (2) years after the date that the
person first became an interested stockholder, unless the
combination meets all of the requirements of our articles of
incorporation and (i) the purchase of shares by the interested
stockholder is approved by our board of directors before that date
or (ii) the combination is approved by our board of directors and,
at or after that time, the combination is approved at an annual or
special meeting of our stockholders, and not by written consent, by
the affirmative vote of the holders of stock representing at least
sixty percent (60%) of our outstanding voting power not
beneficially owned by the interested stockholder or the affiliates
or associates of the interested stockholder.
14
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
Not
applicable.
ITEM
2.
PROPERTIES
We are
headquartered at 3475 Victory Boulevard, Staten Island, New York,
where we lease office and warehouse space. We pay annual
rent of $129,420 under the terms of the lease, which expires on
October 31, 2023.
We
lease a 50,000 square foot facility located at 27700 Frontage Road
in La Junta, Colorado from the City of La Junta. We pay
annual rent of $100,093 under the terms of the lease, which expires
in January 2024.
We
lease office space in Vancouver, Washington. We pay
annual rent of $36,889 under the terms of a lease, which expires in
May 2017.
We
lease office space in Burlington, Washington. We pay
annual rent of $36,000 under the terms of a lease, which expires in
December 2017.
We also
use a variety of independent, bonded commercial warehouses to store
our green coffee beans. Our management believes that our
facilities are adequate for our current operations and for our
contemplated operations in the foreseeable future.
ITEM
3.
LEGAL
PROCEEDINGS
We are
not a party to, and none of our property is the subject of, any
pending legal proceedings other than routine litigation that is
incidental to our business. To our knowledge, no
governmental authority is contemplating initiating any such
proceedings.
ITEM
4.
MINE
SAFETY DISCLOSURES
Not
applicable.
15
PART II
ITEM
5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock trades on the NASDAQ Capital Market under the symbol
“JVA.” We do not currently pay cash dividends on
our common stock. We do not intend to declare or pay cash dividends
on our common stock for the foreseeable future, but currently
intend to retain any future earnings for use in the operation and
expansion of our business. The payment of cash dividends if any, on
the common stock will rest solely within the discretion of our
board of directors and will depend, among other things, upon our
earnings, capital requirements, financial condition, and other
relevant factors.
As of
January 20, 2017, we had 174 holders of record.
We
repurchased 53,687 shares of our common stock during the year ended
October 31, 2015.
We
repurchased 337,269 shares of our common stock during the year
ended October 31, 2016.
ISSUER
PURCHASES OF EQUITY SECURITIES (1)
|
Period
|
(a)
Total Number of
Shares (or Unites) Purchased
|
(b)
Average Price
Paid per Share (or Unit)
|
(c)
Total Number of
Shares (or Units) Purchased as Part of Publicly Announced Plans or
Programs
|
(d)
Maximum Number
(or Approximate Dollar Value) of Shares (or Units) that May Yet Be
Purchased Under the Plans or Programs
|
|
|
|
|
|
|
|
August 1, 2016 to
August 31, 2016
|
-
|
-
|
-
|
-
|
|
September 1, 2016
to September 30, 2016
|
66,750
|
$5.53
|
66,750
|
$564,033
|
|
October 1, 2016 to
October 31, 2016
|
96,231
|
$5.67
|
96,231
|
$18,272
|
|
Total
|
|
|
|
|
(1)
On September 29,
2015, we announced that the Board of Directors had approved a share
repurchase program (the “Share Repurchase Program”)
pursuant to which we may repurchase up to $2 million of our
outstanding common stock from time to time on the open market and
in privately negotiated transactions subject to market conditions,
share price and other factors. The Share Repurchase Program may be
discontinued or suspended at any time.
The
following table sets forth the high and low sales prices of our
common stock for each quarter of the last two fiscal
years.
|
|
High
|
Low
|
|
|
2016
|
|
|
1st
Quarter
|
$4.90
|
$3.00
|
|
2nd
Quarter
|
$4.49
|
$3.05
|
|
3rd
Quarter
|
$6.15
|
$3.50
|
|
4th
Quarter
|
$6.00
|
$5.01
|
|
|
2015
|
|
|
1st
Quarter
|
$6.20
|
$4.50
|
|
2nd
Quarter
|
$5.38
|
$4.39
|
|
3rd
Quarter
|
$5.50
|
$4.70
|
|
4th
Quarter
|
$5.07
|
$3.74
|
16
ITEM
6.
SELECTED
FINANCIAL DATA
The
following table sets forth selected financial data for the last
five years from the consolidated financial statements of Coffee
Holding Co., Inc. The following information is only a
summary, and you should read it in conjunction with our
consolidated financial statements and notes beginning on page
F-1.
|
|
For the Years
Ended October 31,
|
||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
|
(Dollars in
thousands, except per share data)
|
||||
|
Income
Statement Data:
|
|
|
|
|
|
|
Net
sales
|
$78,948
|
$118,154
|
$108,863
|
$133,981
|
$173,656
|
|
Cost of
sales
|
67,066
|
112,437
|
93,334
|
128,012
|
161,649
|
|
Gross
profit
|
11,882
|
5,717
|
15,529
|
5,969
|
12,007
|
|
Operating
expenses
|
8,019
|
7,654
|
7,527
|
7,522
|
7,607
|
|
Income (loss) from
operations
|
3,863
|
(1,937)
|
8,002
|
(1,553)
|
4,400
|
|
Other income
(expense)
|
(147)
|
(156)
|
(37)
|
(169)
|
(345)
|
|
Income (loss)
before income taxes
|
3,716
|
(2,093)
|
7,965
|
(1,722)
|
4,055
|
|
Provision (benefit)
for income taxes
|
1,366
|
(764)
|
2,947
|
(393)
|
1,471
|
|
Minority
interest
|
(138)
|
(84)
|
(51)
|
(152)
|
(98)
|
|
Net income
(loss)
|
$2,212
|
$(1,413)
|
$4,967
|
$(1,481)
|
$2,486
|
|
Net income (loss)
per share – Basic
|
$0.36
|
$(0.23)
|
$0.78
|
$(0.23)
|
$0.39
|
|
Net income (loss)
per share – Diluted
|
$0.36
|
$(0.23)
|
$0.78
|
$(0.23)
|
$0.37
|
|
|
At October
31,
|
||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
|
(Dollars in
thousands, except per shares data)
|
||||
|
Balance
Sheet Data:
|
|
|
|
|
|
|
Total
assets
|
$37,023
|
$35,274
|
$38,952
|
$32,399
|
$38,248
|
|
Short-term
debt
|
6,958
|
5,554
|
2,498
|
1,229
|
563
|
|
Long-term
debt
|
–
|
–
|
–
|
–
|
–
|
|
Total
liabilities
|
11,910
|
10,856
|
12,898
|
10,315
|
14,448
|
|
Stockholders’
equity
|
24,913
|
24,418
|
26,055
|
22,084
|
23,800
|
|
Book value per
share
|
$4.28
|
$3.96
|
$4.19
|
$3.47
|
$3.73
|
|
|
At October
31,
|
||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
Per
Common Share Data:
|
|
|
|
|
|
|
Basic
EPS
|
$.36
|
$(.23)
|
$.78
|
$(.23)
|
$.39
|
|
Diluted
EPS
|
$.36
|
$(.23)
|
$.78
|
$(.23)
|
$.37
|
|
Cash dividends
declared
|
$0
|
$0
|
$0
|
$387,379
|
$774,756
|
17
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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.
18
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, our joint
venture with Caruso’s Coffee, Inc. of Brecksville, Ohio, the
transaction with OPTCO, the transaction with Sonofresco and our
licensing arrangement with DTS8 Coffee Company, Ltd. We believe
these efforts will allow us to expand or business.
Our net
sales are affected by the price of green coffee. We
purchase our green coffee from dealers located primarily within the
United States. The dealers supply us with coffee beans
from many countries, including Colombia, Mexico, Kenya, Indonesia,
Brazil and Uganda. The supply and price of coffee beans
are subject to volatility and are influenced by numerous factors
which are beyond our control. For example, in Brazil,
which produces approximately 35% 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.
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 Condensed 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.
19
Critical Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Estimates are used for, but not limited to, the
accounting for the allowance for doubtful accounts, inventories,
assets held for sale, income taxes, commodities held and loss
contingencies. Management bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the
circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
We
believe the following critical accounting policies, among others,
may be impacted significantly by judgment, assumptions and
estimates used in the preparation of the financial
statements:
●
We recognize
revenue in accordance with the relevant authoritative
guidance. Revenue is recognized at the point title and
risk of ownership transfers to its customers which is upon the
shippers taking possession of the goods because i) title passes in
accordance with the terms of the purchase orders and with our
agreements with our customers, ii) any risk of loss is covered by
the customers’ insurance, iii) there is persuasive evidence
of a sales arrangement, iv) the sales price is determinable and v)
collection of the resulting receivable is reasonably
assured. Thus, revenue is recognized at the point of
shipment.
●
Our allowance for
doubtful accounts is maintained to provide for losses arising from
customers’ inability to make required payments. If
there is deterioration of our customers’ credit worthiness
and/or there is an increase in the length of time that the
receivables are past due greater than the historical assumptions
used, additional allowances may be required. For
example, every additional one percent of our accounts receivable
that becomes uncollectible, would decrease our operating income by
approximately $135,000 for the year ended October 31,
2016. The reserve for sales discounts represents the
estimated discount that customers will take upon
payment. The reserve for other allowances represents the
estimated amount of returns, slotting fees and volume based
discounts estimated to be incurred by us from our
customers.
●
Inventories are
stated at lower of cost (determined on a first-in, first-out basis)
or market. Based on our assumptions about future demand
and market conditions, inventories are subject to be written-down
to market value. If our assumptions about future demand
change and/or actual market conditions are less favorable than
those projected, additional write-downs of inventories may be
required. Each additional one percent of potential
inventory writedown would have decreased operating income by
approximately $142,000 for the year ended October 31,
2016.
●
The commodities
held at broker represent the market value of the Company’s
trading account, which consists of option and futures contracts for
coffee held with a brokerage firm. We use options and futures
contracts, which are not designated or qualifying as hedging
instruments, to partially hedge the effects of fluctuations in the
price of green coffee beans. Options and futures contracts are
recognized at fair value in the consolidated financial statements
with current recognition of gains and losses on such positions. We
classify options and futures contracts as trading securities and
accordingly, unrealized holding gains and losses are included in
earnings. We record realized and unrealized gains and losses in our
cost of sales in the statement of operations/income.
●
We account for
income taxes in accordance with the relevant authoritative
guidance. Deferred tax assets and liabilities are
computed for temporary differences between the financial statement
and tax basis of assets and liabilities that will result in taxable
or deductible amounts in the future based on enacted tax rates in
effect for the year in which the differences are expected to
reverse. Deferred tax assets are reflected on the
balance sheet when it is determined that it is more likely than not
that the asset will be realized.
20
●
Our goodwill
consists of the cost in excess of the fair market value of the
acquired net assets of OPTCO and Sonofresco, 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 Sonofesco. At
October 31, 2016 our balance sheet reflected goodwill and
intangible assets as set forth below:
|
|
October 31,
2016
|
|
Customer list and
relationships, net
|
$219,750
|
|
Trademarks
|
180,000
|
|
Goodwill
|
1,017,905
|
|
|
$1,417,655
|
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 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.
Because
the Company is a single reporting unit, the closing NASDAQ Capital
Market price of our common stock as of the acquisition date was
used as a basis to measure the fair value of goodwill. Goodwill and
the intangible assets will be 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.
Year Ended October 31, 2016 (Fiscal Year 2016) Compared to the Year
Ended October 31, 2015 (Fiscal Year 2015)
Net
Sales. Net sales totaled $78,948,228 for the
fiscal year ended October 31, 2016, a decrease of $39,205,313, or
approximately
33%, from $118,153,541 for the fiscal year ended October 31,
2015. The decrease in net sales reflects reduced
wholesale transactions with our largest wholesale green coffee
customer during fiscal 2016 of approximately
$41,044,000.
Cost of
Sales. Cost of sales for the fiscal year ended
October 31, 2016 was $67,066,050, or approximately 85%
of net sales, as compared to $112,436,831, or
approximately 95% of net sales, for the fiscal year
ended October 31, 2015. Cost of sales consists primarily
of the cost of green coffee and packaging materials and realized
and unrealized gains or losses on hedging activity. The
decrease in cost of sales reflects a more favorable inventory
position during fiscal 2016 and our reduced wholesale transactions
with our largest wholesale green coffee
customer.
Gross
Profit. Gross profit for the fiscal year ended
October 31, 2016 was $11,882,178, an increase of $6,165,468 from
$5,716,710 for the fiscal year ended October 31,
2015. Gross profit as a percentage of net sales
increased to approximately
15% for the fiscal year ended October 31, 2016 from
approximately
5% for the fiscal year ended October 31,
2015. The increase in our margins was due to improved
margins on our wholesale and roasted business as well as a decrease
in our losses period to period on our hedging operations.
Operating
Expenses. Total operating expenses increased by
$365,081 to $8,019,110 for the fiscal year ended October 31, 2016
from $7,654,029 for the fiscal year ended October 31,
2015. Selling and administrative expenses increased
$362,966, or approximately
5%, to $7,363,710 for the fiscal year ended October 31, 2016 from
$7,000,744 for the fiscal year ended October 31,
2015.
Other Income
(Expense). Other expense for the fiscal year
ended October 31, 2016 was $147,106, a decrease of $8,752 from
$155,858 for the fiscal year ended October 31, 2015. The
decrease in other expense was attributable to a decrease in
interest expense of $12,764 partially offset by an increase in our
loss from our equity investments of $139 and a
decrease in interest income of $3,873, during the
fiscal year ended October 31, 2016.
21
Income (Loss) Before Taxes
and Non-controlling Interest in Subsidiary. We
had income of $3,715,962 before income taxes and non-controlling
interest in subsidiary for the fiscal year ended October 31, 2016
compared to a net loss of $(2,093,177) for the fiscal year ended
October 31, 2015, resulting in a net change of $5,809,139 for the
year ended October 31, 2016. The increase was primarily
attributable to our decreased realized trading loss.
Income
Taxes. Our
provision (benefit) for income taxes for the fiscal year ended
October 31, 2016 totaled $1,365,920 compared to a benefit of
$(763,647) for the fiscal year ended October 31,
2015. The change was attributable to the difference in
the gain for the year ended October 31, 2016 versus the loss in the
fiscal year ended October 31, 2015. The Company’s effective
tax rate for the year ended October 31, 2016 was 37% compared to
(37%) for the year ended October 31, 2015.
Net Income
(Loss). We
had net income of $2,212,288 or $0.36 per share basic and diluted,
for the fiscal year ended October 31, 2016 compared to a net loss
of $(1,413,228), or $(0.23) per share basic and diluted for the
fiscal year ended October 31, 2015. The increase in net income was
due primarily to the reasons described above.
Liquidity and Capital Resources
As of
October 31, 2016, we had working capital of $21,669,442, which
represented a $265,035 decrease from our working capital of
$21,934,477 as of October 31, 2015, and total stockholders’
equity of $24,539,203 which increased by $657,414 from
our total stockholders’ equity of $24,081,793 as of October
31, 2015. Our working capital decreased primarily due
to decreases of $625,835 in cash, $184,875 in prepaid green
coffee, $952,600 in prepaid and refundable income taxes, $916,175
in deferred income tax asset and increases of $41,184 in accounts
payable and accrued expenses, $1,404,254 in our line of credit and
$1,050 in income taxes payable partially offset by increases of
$2,549,655 in accounts receivable, $413,472 in inventory, $279,254
in prepaid expenses and other current assets and $618,557 in due
to/from broker. As of October 31, 2016, the outstanding balance on
our line of credit was $6,958,375 compared to $5,554,121 as of
October 31, 2015. Total stockholders’ equity
increased due to our net income, partially offset by our Share
Repurchase Program.
On
March 10, 2015, we entered into a loan modification agreement (the
“Modification Agreement”) with our lender Sterling
National Bank (“Sterling”) which modified the terms of
the financing agreement with Sterling previously entered into on
February 17, 2009 (the “Financing Agreement”). Prior to
the Modification Agreement, the Financing Agreement, as amended,
provided for a credit facility in which we had a revolving line of
credit for a maximum of $7,000,000 (the “Loan
Facility”). On February 3, 2011, we amended the Financing
Agreement to create a sublimit within the revolving line of credit
in the form of a $300,000 term loan for the benefit of GCC. The
Financing Agreement was set to expire on March 31, 2015. Pursuant
to the Modification Agreement, the Financing Agreement was modified
to, among other things, (i) extend the term of the Financing
Agreement until February 28, 2017; (ii) increase the maximum amount
of the Loan Facility from $7,000,000 to $9,000,000; (iii) reduce
the interest rate on the average unpaid balance of the line of
credit from an interest rate equal to a per annum reference rate of
3.75% to an interest rate per annum equal to the Wall Street
Journal Prime Rate; and (iv) require us to pay, upon the occurrence
of certain termination events, a prepayment premium of 0.50% of the
maximum amount of the credit facility in effect as of the date of
the termination event.
Other
than as described above, the Financing Agreement remains in full
force and effect. Pursuant to the Modification Agreement, we are
able to draw on the loan Facility up to an amount of 85% of
eligible accounts receivable and 25% of eligible inventory
consisting of green coffee beans and finished coffee not to exceed
$1,000,000. The Loan Facility is secured by all tangible and
intangible assets of the Company.
The
Loan Facility contains covenants that place annual restrictions on
our operations, including covenants related to debt restrictions,
capital expenditures, minimum deposit restrictions, tangible net
worth, net profit, leverage, employee loan restrictions,
distribution restrictions (common stock and preferred stock),
dividend restrictions, and restrictive transactions. The Loan
Facility also requires that we maintain a minimum working capital
at all times. The Company was in compliance with all required
financial covenants at October 31, 2016 and October 31,
2015.
As of
October 31, 2016 and 2015, the outstanding balance under the bank
line of credit was $5,121,375 and $4,317,121,
respectively.
22
Also on March 10, 2015, we, as guarantor, and OPTCO (the
“Borrower”), as borrower, entered into a new loan
facility agreement with Sterling. The new loan facility is a
revolving line of credit for a maximum of $3,000,000 (the
“New Loan Facility”), including a letter of credit in
the amount of $286,855. The New Loan Facility terminates on
February 28, 2017. The Borrower is able to draw on the New
Loan Facility at an amount up to 85% of eligible accounts
receivable, not to exceed 25% of all accounts of the
Borrower. The New Loan Facility is payable monthly in
arrears on the average unpaid balance of the line of credit at an
interest rate per annum equal to the Wall Street Journal Prime
Rate (currently 3.5%). The New Loan Facility is
secured by all tangible and intangible assets of the Company. In
connection with the New Loan Facility, the Company entered into a
security agreement with Sterling and provided Sterling with a
guarantee of the Borrower’s obligations.
As of
October 31, 2016 and 2015, the outstanding balance under the New
Loan Facility was $1,837,000 and $1,237,000,
respectively.
For the
fiscal year ended October 31, 2016, our operating activities
provided net cash of $1,607,788 as compared to the fiscal year
ended October 31, 2015 when operating activities used net cash of
$2,285,840. The increased cash flow from operations for
the fiscal year ended October 31, 2016 was primarily due to our net
income of $2,350,042, $991,275 of deferred income taxes, $184,875
of prepaid green coffee, $952,600 of prepaid and refundable income
taxes partially offset by, $618,557 of Unrealized commodities
gains, $2,465,513 in accounts receivable, $143,907 in inventory,
$279,254 in prepaid expenses and other current assets and $30,860
in accounts payable and accrued expenses.
For the
fiscal year ended October 31, 2016, our investing activities used
net cash of $1,782,999 as compared to the fiscal year October 31,
2015 when net cash used by investing activities was
$391,796. The increase in our uses of cash in investing
activities was due to our increased outlays for equipment and our
acquisition of Sonofresco during fiscal year 2016.
For the
fiscal year ended October 31, 2016, our financing activities used
net cash of $450,624 compared to net cash provided by financing
activities of $2,748,813 for the fiscal year ended October 31,
2015. The change in cash flow from financing activities
for the fiscal year ended October 31, 2016 was due to our decreased
net borrowing of $1,651,409 and an increase of $1,528,028 in our
treasury stock purchases and an increase in our dividend payment of
$20,000.
We
expect to fund our operations, including paying our liabilities,
funding capital expenditures and making required payments on our
indebtedness, through October 31, 2017 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.
Off-Balance Sheet Arrangements
We do
not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
risks relating to our operations result primarily from changes in
interest rates and commodity prices as further described
below.
Interest Rate Risks. We are subject to market risk
from exposure to fluctuations in interest rates. As of
October 31, 2016, our debt consisted of $6,958,375 of variable rate
debt under our revolving line of credit. Our line of
credit provides for a maximum of $12,000,000 and is payable monthly
in arrears on the average unpaid balance of the line of credit at
an interest rate equal to a per annum reference rate (currently
3.5%). This loan is secured by all tangible and intangible assets
of the Company.
Commodity Price Risks. 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 Condensed 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, under
normal market conditions, our hedging policies are a necessary
component of 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
past reporting periods in 2015. In those cases, our cost of sales
increased, resulting in a decrease in our profitability or increase
in our losses. Such losses have, and similar losses 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 more limited capacity than we did
previously. See “Quantitative and Qualitative Disclosures
About Market Risk—Commodity Price Risks.”
23
As of
October 31, 2016, we held 22 futures contracts for the purchase of
825,000 pounds of green coffee at a weighted average price of $1.45
per pound compared to 38 futures contracts for the purchase of
1,425,000 pounds of coffee at a weighted average price of $1.23 per
pound for the fiscal year ended October 31, 2015. The fair market
value of coffee applicable to such contracts was $1.64 and $1.21
per pound, respectively. At October 31, 2016, we did not hold any
options. At October 31, 2015, we also held 20 options covering an
aggregate of 750,000 pounds of green coffee beans at $1.25 per
pound. The fair market value of these options, was $42,750 at
October 31, 2015.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
See
pages F-1 through F-21 following the Exhibit Index of this Annual
Report on Form 10-K.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A.
CONTROLS
AND PROCEDURES
Evaluation of Disclosure
Controls and Procedures. Management, which includes our
President, Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the period covered by this
report. Based upon that evaluation, our President, Chief
Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that we file
and submit under the Exchange Act is (i) recorded, processed,
summarized and reported as and when required and
(ii) accumulated and communicated, as is appropriate, to our
management, including its principal executive officer and financial
officer to allow timely decisions regarding
disclosure.
Management Report on
Internal Control Over Financial Reporting. Management is responsible
for establishing and maintaining adequate internal control over
financial reporting. Our internal control system is a process
designed to provide reasonable assurance to our management and
Board of Directors regarding the preparation and fair presentation
of published financial statements.
24
Our
internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and
dispositions of assets, provide reasonable assurances that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. GAAP, and that
receipts and expenditures are being made only in accordance with
authorizations of our management and the directors, and provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial
statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management assessed the effectiveness of its internal control over
financial reporting as of October 31, 2016. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway
Commission (2013). Based on our assessment our
management believes that, as of October 31, 2016, our internal
control over financial reporting was effective based on those
criteria.
There
have been no changes in our internal control over financial
reporting identified in connection with the evaluation that
occurred during our last fiscal quarter that has materially
affected, or that is reasonably likely to materially affect, our
internal control over financial reporting.
Attestation Report of the
Registered Public Accounting Firm.
This
annual report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to
section 989G of the Dodd-Frank Wall Street Reform and Consumer
Protection Act that permits us to provide only management’s
report in this annual report.
ITEM
9B.
OTHER
INFORMATION
None.
25
PART III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information
required by this item is incorporated by reference to our Proxy
Statement for the 2017 Annual Meeting of Stockholders.
ITEM
11.
EXECUTIVE
COMPENSATION
Information
required by this item is incorporated by reference to our Proxy
Statement for the 2017 Annual Meeting of Stockholders.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information
required by this item is incorporated by reference to our Proxy
Statement for the 2017 Annual Meeting of Stockholders.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information
required by this item is incorporated by reference to our Proxy
Statement for the 2017 Annual Meeting of Stockholders.
ITEM
14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES
Information
required by this item is incorporated by reference to our Proxy
Statement for the 2017 Annual Meeting of Stockholders.
26
PART IV
ITEM
15.
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
(a) List
of Documents filed as part of this Report
(1) Financial
Statements
The
financial statements and related notes, together with the report of
Marcum LLP appear at pages F-1 through F-21 following the Exhibit
List as required by Part II, Item 8 “Financial Statements and
Supplementary Data” of this Form 10-K.
(2) Financial
Statement Schedules
None.
(3) List
of Exhibits
(a) Exhibits
The
Company has filed with this report or incorporated by reference
herein certain exhibits as specified below pursuant to Rule 12b-32
under the Exchange Act. See Exhibit Index following the signature
page to this report for a complete list of documents filed with
this report.
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Exhibit No.
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Description
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2.1
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Agreement
and Plan of Merger, dated October 31, 1997, by and among
Transpacific International Group Corp. and Coffee Holding Co., Inc.
(incorporated herein by reference to Exhibit 2 to Post-Effective
Amendment No. 1 to the Company’s Registration Statement on
Form SB-2 filed on November 10, 1997 (File No.
333-00588-NY)).
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2.2
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Asset
Purchase Agreement, dated February 4, 2004, by and between Coffee
Holding Co., Inc. and Premier Roasters LLC (incorporated herein by
reference to Exhibit 2.1 to the Company’s Current Report on
Form 8-K filed on February 20, 2004 (File No.
333-00588-NY)).
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3.1
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Amended
and Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company’s
Registration Statement on Form 8-A the “2005 Registration
Statement” filed on May 2, 2005 (File No.
001-32491)).
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3.2
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ByLaws
of the Company (incorporated herein by reference to Exhibit 3.2 to
the 2005 Registration Statement (File No. 001-32491)).
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4.1
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Form of
Stock Certificate of the Company (incorporated herein by reference
to the Company’s Registration Statement on Form SB-2 filed on
June 24, 2004 (Registration No. 333-116838)).
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10.1
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Loan
and Security Agreement, dated February 17, 2009, by and between
Sterling National Bank and Coffee Holding Co., Inc. (incorporated
herein by reference to Exhibit 10.21 to the Company’s Current
Report on Form 8-K filed on February 23, 2009 (File No.
001-32491)).
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10.2
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Lease,
dated February 4, 2004, by and between Coffee Holding Co., Inc. and
the City of La Junta, Colorado (incorporated herein by reference to
Exhibit 10.12 to Amendment No. 1 to the Company’s
Registration Statement on Form SB-2/A filed on August 12, 2004
(Registration No. 333-116838)).
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10.3
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Trademark
License Agreement, dated February 4, 2004, between Del Monte
Corporation and Coffee Holding Co., Inc. (incorporated herein by
reference to Exhibit 10.13 to the Company’s Quarterly Report
on Form 10-QSB/A for the quarter ended April 30, 2004 filed on
August 26, 2004 (File No. 333-00588-NY)) as amended by that First
Amendment to Trademark License Agreement, dated January 4,
2013.
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27
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10.4
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First
Amendment to Trademark License Agreement, dated January 4, 2013, by
and between Del Monte Corporation and Coffee Holding Co., Inc.
Certain portions of Exhibit 10.4 are omitted based upon approval of
the Company’s request for confidential treatment through
January 28, 2023. The omitted portions were filed
separately with the SEC on a confidential basis (incorporated
herein by reference to Exhibit 10.4 to the Company’s Annual
Report on Form 10-K for the year ended October 31, 2012 filed on
January 28, 2013 (File No. 001-32491)).
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10.5
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Amended
and Restated Employment Agreement, dated April 11, 2008, by and
between Coffee Holding Co., Inc. and Andrew Gordon (incorporated
herein by reference to Exhibit 10.14 of the Company’s Current
Report on Form 8-K filed on April 16, 2008 (File No.
001-32491)).
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10.6
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Amended
and Restated Employment Agreement, dated April 11, 2008, by and
between Coffee Holding Co., Inc. and David Gordon (incorporated
herein by reference to Exhibit 10.15 of the Company’s Current
Report on Form 8-K filed on April 16, 2008 (File No.
001-32491)).
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10.7
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Coffee
Holding Co., Inc. Non-Qualified Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.19 of the
Company’s Quarterly Report on Form 10-QSB filed on June 14,
2005 (File No. 001-32491)).
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10.8
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Contract
of Sale, dated April 14, 2009, by and between Coffee Holding Co.,
Inc. and 4401 1st Ave LLC (incorporated herein by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on
January 28, 2010 (File No. 001-32491)).
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10.9
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First
Amendment to Loan and Security Agreement between Coffee Holding
Co., Inc. and Sterling National Bank, dated July 23, 2010
(incorporated herein by reference to Exhibit 103 to the
Company’s Annual Report on Form 10-K filed on January 31,
2011 (File No. 001-32491)).
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10.10
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Placement
Agency Agreement, dated as of September 27, 2011, by and among the
Company, the selling stockholders named therein, Roth Capital
Partners, LLC and Maxim Group, LLC (incorporated herein by
reference to Exhibit 10.1 to the Company’s Report on Form 8-K
filed on September 27, 2011 (File No. 001-32491)).
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10.11
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Subscription
Agreement, dated as of September 27, 2011, by and between the
Company, the selling stockholders named therein and each of the
purchasers identified on the signature pages thereto (incorporated
herein by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed on September 27, 2011 (File No.
001-32491)).
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10.12
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2013
Equity Compensation Plan (incorporated by reference to Annex A of
the Company’s Definitive Proxy Statement filed on February
28, 2013 (File No. 13653320)).
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10.13
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Loan
Modification Agreement, dated as of May 10, 2013, by and between
Sterling National Bank and Coffee Holding Co., Inc. (incorporated
herein by reference to Exhibit 10.11 to the Company’s Annual
Report on Form 10-K filed on January 24, 2014 (File No.
001-32491)).
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10.14
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Loan
Modification Agreement, dated March 10, 2015, by and between
Sterling National Bank and Coffee Holding Co., Inc. (incorporated
herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on March 31, 2015).
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10.15
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Loan
Agreement, dated March 10, 2015, by and between Sterling National
Bank and Organic Products Trading Company LLC (incorporated herein
by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed on March 31, 2015).
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10.16
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Security
Agreement, dated March 10, 2015, by and between Sterling National
Bank and Coffee Holding Co., Inc. (incorporated herein by reference
to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on March 31, 2015).
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28
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10.17
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Guarantee,
dated March 10, 2015, by Coffee Holding Co., Inc. (incorporated
herein by reference to Exhibit 10.4 to the Company’s Current
Report on Form 8-K filed on March 31, 2015).
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21.1
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List of
Significant Subsidiaries.*
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31.1
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Principal
Executive Officer and Principal Financial Officer’s
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
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32.1
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Principal
Executive Officer and Principal Financial Officer’s
Certification furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
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101.INS
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XBRL
Instance Document.
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101.SCH
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XBRL
Taxonomy Extension Schema Document.
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase Document.
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101.LAB
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XBRL
Taxonomy Extension Label Linkbase Document.
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase Document.
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase Document.
|
____________
* Filed herewith
29
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on January 27,
2017.
|
|
COFFEE
HOLDING CO., INC.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Andrew
Gordon
|
|
|
|
|
Andrew
Gordon
|
|
|
|
|
President, Chief
Executive Officer
|
|
In
accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/Andrew
Gordon
|
|
President,
Chief Executive Officer, Chief Financial Officer, Treasurer
and
|
|
January
27, 2017
|
|
Andrew
Gordon
|
|
Director
|
|
|
|
|
|
(principal
executive officer and principal financial and accounting
officer)
|
|
|
|
|
|
|
|
|
|
/s/
David Gordon
|
|
Executive
Vice President – Operations, Secretary and
Director
|
|
January
27, 2017
|
|
David
Gordon
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Gerard DeCapua
|
|
Director
|
|
January
27, 2017
|
|
Gerard
DeCapua
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Daniel Dwyer
|
|
Director
|
|
January
27, 2017
|
|
Daniel
Dwyer
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Barry Knepper
|
|
Director
|
|
January
27, 2017
|
|
Barry
Knepper
|
|
|
|
|
|
|
|
|
|
|
|
/s/
John Rotelli
|
|
Director
|
|
January
27, 2017
|
|
John
Rotelli
|
|
|
|
|
|
|
|
|
|
|
|
/s/
George F. Thomas
|
|
Director
|
|
January
27, 2017
|
|
George
F. Thomas
|
|
|
|
|
30
EXHIBIT INDEX
|
Exhibit No.
|
|
Description
|
|
2.1
|
|
Agreement
and Plan of Merger, dated October 31, 1997, by and among
Transpacific International Group Corp. and Coffee Holding Co., Inc.
(incorporated herein by reference to Exhibit 2 to Post-Effective
Amendment No. 1 to the Company’s Registration Statement on
Form SB-2 filed on November 10, 1997 (File No.
333-00588-NY)).
|
|
|
|
|
|
2.2
|
|
Asset
Purchase Agreement, dated February 4, 2004, by and between Coffee
Holding Co., Inc. and Premier Roasters LLC (incorporated herein by
reference to Exhibit 2.1 to the Company’s Current Report on
Form 8-K filed on February 20, 2004 (File No.
333-00588-NY)).
|
|
|
|
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company’s
Registration Statement on Form 8-A the “2005 Registration
Statement” filed on May 2, 2005 (File No.
001-32491)).
|
|
|
|
|
|
3.2
|
|
ByLaws
of the Company (incorporated herein by reference to Exhibit 3.2 to
the 2005 Registration Statement (File No. 001-32491)).
|
|
|
|
|
|
4.1
|
|
Form of
Stock Certificate of the Company (incorporated herein by reference
to the Company’s Registration Statement on Form SB-2 filed on
June 24, 2004 (Registration No. 333-116838)).
|
|
|
|
|
|
10.1
|
|
Loan
and Security Agreement, dated February 17, 2009, by and between
Sterling National Bank and Coffee Holding Co., Inc. (incorporated
herein by reference to Exhibit 10.21 to the Company’s Current
Report on Form 8-K filed on February 23, 2009 (File No.
001-32491)).
|
|
|
|
|
|
10.2
|
|
Lease,
dated February 4, 2004, by and between Coffee Holding Co., Inc. and
the City of La Junta, Colorado (incorporated herein by reference to
Exhibit 10.12 to Amendment No. 1 to the Company’s
Registration Statement on Form SB-2/A filed on August 12, 2004
(Registration No. 333-116838)).
|
|
|
|
|
|
10.3
|
|
Trademark
License Agreement, dated February 4, 2004, between Del Monte
Corporation and Coffee Holding Co., Inc. (incorporated herein by
reference to Exhibit 10.13 to the Company’s Quarterly Report
on Form 10-QSB/A for the quarter ended April 30, 2004 filed on
August 26, 2004 (File No. 333-00588-NY)) as amended by that First
Amendment to Trademark License Agreement, dated January 4,
2013.
|
|
|
|
|
|
10.4
|
|
First
Amendment to Trademark License Agreement, dated January 4, 2013, by
and between Del Monte Corporation and Coffee Holding Co., Inc.
Certain portions of Exhibit 10.4 are omitted based upon a approval
of the Company’s request for confidential treatment through
January 28, 2023. The omitted portions were filed
separately with the SEC on a confidential basis (incorporated
herein by reference to Exhibit 10.4 to the Company’s Annual
Report on Form 10-K for the year ended October 31, 2012 filed on
January 28, 2013 (File No. 001-32491)).
|
|
|
|
|
|
10.5
|
|
Amended
and Restated Employment Agreement, dated April 11, 2008, by and
between Coffee Holding Co., Inc. and Andrew Gordon (incorporated
herein by reference to Exhibit 10.14 of the Company’s Current
Report on Form 8-K filed on April 16, 2008 (File No.
001-32491)).
|
|
|
|
|
|
10.6
|
|
Amended
and Restated Employment Agreement, dated April 11, 2008, by and
between Coffee Holding Co., Inc. and David Gordon (incorporated
herein by reference to Exhibit 10.15 of the Company’s Current
Report on Form 8-K filed on April 16, 2008 (File No.
001-32491)).
|
31
|
10.7
|
|
Coffee
Holding Co., Inc. Non-Qualified Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.19 of the
Company’s Quarterly Report on Form 10-QSB filed on June 14,
2005 (File No. 001-32491)).
|
|
|
|
|
|
10.8
|
|
Contract
of Sale, dated April 14, 2009, by and between Coffee Holding Co.,
Inc. and 4401 1st Ave LLC (incorporated herein by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on
January 28, 2010 (File No. 001-32491)).
|
|
|
|
|
|
10.9
|
|
First
Amendment to Loan and Security Agreement between Coffee Holding
Co., Inc. and Sterling National Bank, dated July 23, 2010
(incorporated herein by reference to Exhibit 10.9 to the
Company’s Annual Report on Form 10-K filed on January 31,
2011 (File No. 001-32491).
|
|
|
|
|
|
10.10
|
|
Placement
Agency Agreement, dated as of September 27, 2011, by and among the
Company, the selling stockholders named therein, Roth Capital
Partners, LLC and Maxim Group, LLC (incorporated herein by
reference to Exhibit 10.1 to the Company’s Report on Form 8-K
filed on September 27, 2011 (File No. 001-32491)).
|
|
|
|
|
|
10.11
|
|
Subscription
Agreement, dated as of September 27, 2011, by and between the
Company, the selling stockholders named therein and each of the
purchasers identified on the signature pages thereto (incorporated
herein by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed on September 27, 2011 (File No.
001-32491)).
|
|
|
|
|
|
10.12
|
|
2013
Equity Compensation Plan (incorporated by reference to Annex A of
the Company’s Definitive Proxy Statement filed on February
28, 2013 (File No. 13653320)).
|
|
|
|
|
|
10.13
|
|
Loan
Modification Agreement, dated as of May 10, 2013, by and between
Sterling National Bank and Coffee Holding Co., Inc. (incorporated
herein by reference to Exhibit 10.11 to the Company’s Annual
Report on Form 10-K filed on January 24, 2014 (File No.
001-32491)).
|
|
|
|
|
|
21.1
|
|
List of
Significant Subsidiaries.*
|
|
|
|
|
|
31.1
|
|
Principal
Executive Officer and Principal Financial Officer’s
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
|
|
|
|
32.1
|
|
Principal
Executive Officer and Principal Financial Officer’s
Certification furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance Document.
|
|
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document.
|
|
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document.
|
|
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document.
|
|
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document.
|
|
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document.
|
____________
* Filed herewith
32
COFFEE HOLDING CO., INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
PAGE
|
|
FINANCIAL
STATEMENTS:
|
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
F-2
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS AS OF OCTOBER 31, 2016 AND 2015
|
|
F-3
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS - YEARS ENDED OCTOBER 31, 2016 AND
2015
|
|
F-4
|
|
|
|
|
|
CONSOLIDATED
STATEMENT OF CHANGES IN REDEEMABLE COMMON STOCK AND
STOCKHOLDERS’ EQUITY - YEARS ENDED OCTOBER 31, 2016 AND
2015
|
|
F-5
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS - YEARS ENDED OCTOBER 31, 2016 AND
2015
|
|
F-6
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
F-7
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Audit Committee of the
Board
of Directors and Shareholders
Coffee
Holding Co., Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Coffee
Holding Co., Inc. and Subsidiaries (the “Company”) as
of October 31, 2016 and 2015 and the related consolidated
statements of operations, changes in redeemable common stock
and stockholders’ equity and cash flows for each of
the years then ended. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion
on these consolidated financial statements based on our
audit.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United
States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial
reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Coffee Holding Co., Inc. and Subsidiaries as of October 31, 2016
and 2015, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Marcum LLP
New
York, NY
January
27, 2017
F-2
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2016 AND 2015
|
|
2016
|
2015
|
|
|
|
|
|
-
ASSETS -
|
||
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
$3,227,981
|
$3,853,816
|
|
Accounts
receivable, net of allowances of $144,000 for 2016 and
2015
|
13,517,892
|
10,968,237
|
|
Inventories
|
14,276,290
|
13,862,818
|
|
Prepaid green
coffee
|
435,577
|
620,452
|
|
Prepaid expenses
and other current assets
|
535,456
|
256,202
|
|
Prepaid and
refundable income taxes
|
481,977
|
1,434,577
|
|
Due from
broker
|
134,722
|
|
|
Deferred income tax
asset
|
81,545
|
997,720
|
|
TOTAL
CURRENT ASSETS
|
32,691,440
|
31,993,822
|
|
|
|
|
|
Machinery and
equipment, at cost, net of accumulated depreciation of $4,819,828
and $4,241,256 for 2016 and 2015, respectively
|
2,269,863
|
1,845,000
|
|
Customer list and
relationships, net of accumulated amortization of $50,250 and
$41,250 for 2016 and 2015, respectively
|
219,750
|
108,750
|
|
Trademarks
|
180,000
|
180,000
|
|
Goodwill
|
1,017,905
|
440,000
|
|
Equity method
investments
|
95,598
|
96,571
|
|
Deposits and other
assets
|
549,337
|
610,499
|
|
TOTAL
ASSETS
|
$37,023,893
|
$35,274,642
|
|
|
|
|
|
-
LIABILITIES, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS’ EQUITY -
|
||
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts payable
and accrued expenses
|
$4,062,573
|
$4,021,389
|
|
Line of
credit
|
6,958,375
|
5,554,121
|
|
Due to
broker
|
-
|
483,835
|
|
Income taxes
payable
|
1,050
|
-
|
|
TOTAL
CURRENT LIABILITIES
|
11,021,998
|
10,059,345
|
|
|
|
|
|
Deferred income tax
liabilities
|
167,470
|
92,370
|
|
Deferred rent
payable
|
231,216
|
222,055
|
|
Deferred
compensation payable
|
489,668
|
482,499
|
|
TOTAL
LIABILITIES
|
11,910,352
|
10,856,269
|
|
|
|
|
|
Redeemable common
stock:
|
|
|
|
Common stock
subject to possible redemption, at $200,004; 38,364 shares issued
and outstanding at redemption value as of October 31, 2016, none as
of October 31, 2015
|
200,004
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
Coffee Holding Co.,
Inc. stockholders’ equity:
|
|
|
|
Preferred
stock, par value $.001 per share; 10,000,000 shares authorized;
none issued
|
-
|
-
|
|
Common
stock, par value $.001 per share; 30,000,000 shares authorized,
6,494,680 and 6,456,316 shares issued; 5,824,938 and
6,162,207 shares outstanding for 2016 and 2015
|
6,456
|
6,456
|
|
Additional
paid-in capital
|
15,904,109
|
15,904,109
|
|
Retained
earnings
|
11,878,228
|
9,665,940
|
|
Less:
Treasury stock, 631,378 and 294,109 common shares, at cost for 2016
and 2015
|
(3,249,590)
|
(1,494,712)
|
|
Total
Coffee Holding Co., Inc. Stockholders’ Equity
|
24,539,203
|
24,081,793
|
|
Noncontrolling
interest
|
374,334
|
336,580
|
|
TOTAL
EQUITY
|
24,913,537
|
24,418,373
|
|
TOTAL
LIABILITIES, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS’ EQUITY
|
$37,023,893
|
$35,274,642
|
See Notes to Consolidated Financial Statements
F-3
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2016 AND 2015
|
|
2016
|
2015
|
|
NET
SALES
|
$78,948,228
|
$118,153,541
|
|
|
|
|
|
COST OF SALES (which include purchases
of approximately $8.5 million and $22.1 million in fiscal years
2016 and 2015, respectively, from a related party)
|
67,066,050
|
112,436,831
|
|
|
|
|
|
GROSS
PROFIT
|
11,882,178
|
5,716,710
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
Selling and
administrative
|
7,363,710
|
7,000,744
|
|
Officers’
salaries
|
655,400
|
653,285
|
|
TOTAL
|
8,019,110
|
7,654,029
|
|
INCOME
(LOSS) FROM OPERATIONS
|
3,863,068
|
(1,937,319)
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
Interest
income
|
41,176
|
45,049
|
|
Loss from equity
method investments
|
(972)
|
(833)
|
|
Interest
expense
|
(187,310)
|
(200,074)
|
|
TOTAL
|
(147,106)
|
(155,858)
|
|
|
|
|
|
INCOME
(LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
|
|
|
|
AND
NON-CONTROLLING INTEREST IN SUBSIDIARY
|
3,715,962
|
(2,093,177)
|
|
|
|
|
|
Provision (benefit)
for income taxes
|
1,365,920
|
(763,647)
|
|
|
|
|
|
NET
INCOME (LOSS) BEFORE NON-CONTROLLING INTEREST IN
SUBSIDIARY
|
2,350,042
|
(1,329,530)
|
|
Less: Net income
attributable to the non-controlling interest in
subsidiary
|
(137,754)
|
(83,698)
|
|
|
|
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO COFFEE HOLDING CO., INC.
|
$2,212,288
|
$(1,413,228)
|
|
|
|
|
|
Basic and diluted
earnings (loss) per share
|
$.36
|
$(.23)
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
Basic and
diluted
|
6,082,777
|
6,212,929
|
See Notes to Consolidated Financial Statements
F-4
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE COMMON STOCK
AND STOCKHOLDERS’ EQUITY
YEARS
ENDED OCTOBER 31, 2016 AND 2015
|
|
|
Common
Stock
|
Treasury
Stock
|
|
|
|
|
|||
|
|
Redeemable
Common Stock
|
$.001
Par Value
|
Additional
|
|
Non-
|
|
||||
|
|
Number
of
|
|
Number
of
|
|
Number
of
|
|
Paid-in
|
Retained
|
Controlling
|
|
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Earnings
|
Interest
|
Total
|
|
Balance,10/31/14
|
|
|
6,215,894
|
$ 6,456
|
240,422
|
$ (1,267,862)
|
$ 15,904,109
|
$ 11,079,168
|
$ 332,882
|
$ 26,054,753
|
|
Treasury
Stock
|
|
|
(53,687)
|
|
53,687
|
(226,850)
|
|
|
|
(226,850)
|
|
Dividend
|
|
|
|
|
|
|
|
|
(80,000)
|
(80,000)
|
|
Net
loss
|
|
|
|
|
|
|
|
(1,413,228)
|
|
(1,413,228)
|
|
Non-Controlling
Interest
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
83,698
|
83,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
10/31/15
|
-
|
$ -
|
6,162,207
|
$ 6,456
|
294,109
|
$ (1,494,712)
|
$ 15,904,109
|
$ 9,665,940
|
$ 336,580
|
$ 24,418,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
Stock
|
|
|
(337,269)
|
|
337,269
|
(1,754,878)
|
|
|
|
(1,754,878)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued in connection with Acquisition
|
38,364
|
200,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
|
|
|
|
|
|
|
|
|
(100,000)
|
(100,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
2,212,288
|
|
2,212,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Controlling
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
-
|
-
|
-
|
-
|
-
|
-
|
137,754
|
137,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
10/31/16
|
38,364
|
$ 200,004
|
5,824,938
|
$ 6,456
|
631,378
|
$ (3,249,590)
|
$ 15,904,109
|
$ 11,878,228
|
$ 374,334
|
$ 24,913,537
|
See Notes to Consolidated Financial Statements
F-5
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2016 AND 2015
|
|
2016
|
2015
|
|
OPERATING
ACTIVITIES:
|
|
|
|
Net income
(loss)
|
$2,350,042
|
$(1,329,530)
|
|
Adjustments to
reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
|
|
|
Depreciation and
amortization
|
587,572
|
545,390
|
|
Unrealized (gain)
on commodities
|
(618,557)
|
(1,089)
|
|
Loss on equity
method investments
|
972
|
833
|
|
Deferred
rent
|
9,161
|
12,415
|
|
Deferred income
taxes
|
991,275
|
(726,850)
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(2,465,512)
|
4,451,623
|
|
Inventories
|
(143,907)
|
1,347,335
|
|
Prepaid expenses
and other current assets
|
(279,254)
|
3,910
|
|
Prepaid green
coffee
|
184,875
|
(153,297)
|
|
Prepaid and
refundable income taxes
|
952,600
|
(1,433,818)
|
|
Accounts payable
and accrued expenses
|
(30,860)
|
(4,671,711)
|
|
Deposits and other
assets
|
68,331
|
-
|
|
Income taxes
payable
|
1,050
|
(331,051)
|
|
Net
cash provided by (used in) operating activities
|
1,607,788
|
(2,285,840)
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
Cash paid for
acquisition of business
|
(819,564)
|
-
|
|
Purchases of
machinery and equipment
|
(963,435)
|
(391,796)
|
|
Net
cash used in investing activities
|
(1,782,999)
|
(391,796)
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
Line of
credit
|
1,404,254
|
3,055,663
|
|
Purchase
of treasury stock
|
(1,754,878)
|
(226,850)
|
|
Payment
of dividend
|
(100,000)
|
(80,000)
|
|
Net
cash (used in) provided by financing activities
|
(450,624)
|
2,748,813
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH
|
(625,835)
|
71,177
|
|
|
|
|
|
CASH,
BEGINNING OF PERIOD
|
3,853,816
|
3,782,639
|
|
|
|
|
|
CASH,
END OF PERIOD
|
$3,227,981
|
$3,853,816
|
See Notes to Consolidated Financial Statements
F-6
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2016 AND 2015
|
|
2016
|
2015
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW DATA:
|
|
|
|
Interest
paid
|
$181,007
|
$196,556
|
|
Income taxes
paid
|
$34,183
|
$1,651,156
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
On June 29, 2016
Coffee Holding Co., Inc. acquired certain assets of Coffee
Kinetics, LLC:
|
|
|
|
|
|
|
|
Accounts
receivable
|
$84,142
|
|
|
Inventory
|
269,565
|
|
|
Equipment
|
40,000
|
|
|
Customer
list
|
120,000
|
|
|
Goodwill
|
577,905
|
|
|
Less: liabilities
assumed
|
(72,044)
|
|
|
Net assets
acquired:
|
1,019,568
|
|
|
|
|
|
|
Redeemable
Common Stock
|
200,004
|
|
|
|
|
|
|
Net cash
paid
|
$819,564
|
|
See Notes to Consolidated Financial Statements
F-7
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 1 - BUSINESS ACTIVITIES:
Coffee
Holding Co., Inc. (the “Company”) conducts wholesale
coffee operations, including manufacturing, roasting, packaging,
marketing and distributing roasted and blended coffees for private
labeled accounts and its own brands, and it sells green
coffee. The Company also manufactures and sells coffee
roasters. The Company’s core product, coffee, can be
summarized and divided into three product categories
(“product lines”) as follows:
Wholesale Green
Coffee: unroasted raw beans imported from around
the world and sold to large and small roasters and coffee shop
operators;
Private Label
Coffee: coffee roasted, blended, packaged and sold under the
specifications and names of others, including supermarkets that
want to have their own brand name on coffee to compete with
national brands; and
Branded Coffee:
coffee roasted and blended to the Company’s own
specifications and packaged and sold under the Company’s
eight proprietary and licensed brand names in different segments of
the market.
The
Company’s private label and branded coffee sales are
primarily to customers that are located throughout the United
States with limited sales in Canada and certain countries in
Asia. Such customers include supermarkets, wholesalers,
and individually-owned and multi-unit retailers. The
Company’s unprocessed green coffee, which includes over 90
specialty coffee offerings, is sold primarily to specialty gourmet
roasters and to coffee shop operators in the United States with
limited sales in Australia, Canada, England and China.
The
Company’s wholesale green, private label, and branded coffee
product categories generate revenues and cost of sales individually
but incur selling, general and administrative expenses in the
aggregate. There are no individual product managers and discrete
financial information is not available for any of the product
lines. The Company’s product portfolio is used in one
business and it operates and competes in one business activity and
economic environment. In addition, the three product lines share
customers, manufacturing resources, sales channels, and marketing
support.
Thus,
the Company considers the three product lines to be one single
reporting segment.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS
OF PRESENTATION:
The
consolidated financial statements include the accounts of the
Company, Organic Products Trading Company, LLC
(“OPTCO”), Sonofresco LLC (“Sono”) and
Generations Coffee Company, LLC (“GCC”). All
significant inter-company balances and transactions have been
eliminated in consolidation.
USE
OF ESTIMATES:
The
preparation of the Company’s financial statements in
conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Significant estimates include
allowance for uncollectible accounts receivable and reserves,
inventory obsolescence, depreciation, intangible asset valuations
and useful lives, taxes, contingencies, and valuation of financial
instruments. These estimates may be adjusted as more current
information becomes available, and any adjustment could have a
significant impact on recorded amounts.
CASH:
Cash
consists primarily of unrestricted cash on deposit at financial
institutions and brokerage firms.
F-8
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
PREPAID
GREEN COFFEE:
Prepaid
coffee is an item that emanates from OPTCO. The balance represents
advance payments made by OPTCO to several coffee growing
cooperatives for the purchase of green coffee. Interest is charged
to the cooperatives for these advances. Interest earned was $41,176
and $45,049 as of October 31, 2016 and 2015, respectively. The
prepaid coffee balance was $435,577 and $620,452 as of October 31,
2016 and 2015, respectively.
ACCOUNTS
RECEIVABLE:
Trade
accounts receivable are stated at the amount the Company expects to
collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to
make required payments. Management considers the following factors
when determining the collectability of specific customer accounts:
customer credit-worthiness, past transaction history with the
customer, current economic industry trends, and changes in customer
payment terms. Past due balances over 60 days and other higher risk
amounts are reviewed individually for collectability. If the
financial condition of the Company’s customers were to
deteriorate, adversely affecting their ability to make payments,
additional allowances would be required. Based on
management’s assessment, the Company provides for estimated
uncollectible amounts through a charge to earnings and a credit to
a valuation allowance. Balances that remain outstanding after the
Company has used reasonable collection efforts are written off
through a charge to the valuation allowance and a credit to
accounts receivable.
The
reserve for sales discounts represents the estimated discount that
customers will take upon payment. The reserve for other allowances
represents the estimated amount of returns, slotting fees and
volume based discounts estimated to be incurred by the Company from
its customers. The allowances are summarized as
follows:
|
|
2016
|
2015
|
|
Allowance for
doubtful accounts
|
$65,000
|
$65,000
|
|
Reserve for other
allowances
|
35,000
|
35,000
|
|
Reserve for sales
discounts
|
44,000
|
44,000
|
|
Totals
|
$144,000
|
$144,000
|
INVENTORIES:
Inventories are
stated at the lower of cost (First in, first out basis) or market,
including provisions for obsolescence commensurate with known or
estimated exposures. There are no reserves for obsolescence as of
October 31, 2016 and 2015.
MACHINERY
AND EQUIPMENT:
Machinery and
equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Purchases of machinery and equipment and additions and betterments
which substantially extend the useful life of an asset are
capitalized at cost. Expenditures which do not materially prolong
the normal useful life of an asset are charged to operations as
incurred. The Company also provides for amortization of leasehold
improvements.
F-9
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
COMMODITIES
HELD BY BROKER:
The
commodities held at broker represent the market value of the
Company’s trading account, which consists of option and
future contracts for coffee held with a brokerage firm. The Company
uses options and futures contracts, which are not designated or
qualifying as hedging instruments, to partially hedge the effects
of fluctuations in the price of green coffee beans. Options and
futures contracts are recognized at fair value in the consolidated
financial statements with current recognition of gains and losses
on such positions. The Company's accounting for options and futures
contracts may increase earnings volatility in any particular
period.
The
Company has open position contracts held by the broker, which are
summarized as follows:
|
|
2016
|
2015
|
|
|
|
|
|
Option
contracts
|
$(83,753)
|
$(134,613)
|
|
Future
contracts
|
218,475
|
(349,222)
|
|
Commodities due to
broker
|
$134,722
|
$(483,835)
|
The
Company classifies its options and future contracts as trading
securities and accordingly, unrealized holding gains and losses are
included in earnings.
At
October 31, 2016, the Company held 22 futures contracts (generally
with terms of three to four months) for the purchase of 825,000
pounds of green coffee at a weighted average price of $1.45 per
pound. The fair market value of coffee applicable to such contracts
was $1.64 per pound at that date. At October 31, 2016, the Company
did not have any options.
At
October 31, 2015, the Company held 38 futures contracts (generally
with terms of three to four months) for the purchase of 1,425,000
pounds of green coffee at a weighted average price of $1.23 per
pound. The fair market value of coffee applicable to such contracts
was $1.21 per pound at that date. At October 31, 2015, the Company
held 20 options covering an aggregate of 750,000 pounds of green
coffee beans at $1.25 per pound. The fair market value of these
options, which was obtained from observable market data of similar
instruments was $42,750.
Included in cost of
sales for the years ended October 31, 2016 and 2015, the Company
recorded realized and unrealized gains and losses respectively, on
these contracts as follows:
|
|
Year Ended October
31,
|
|
|
|
2016
|
2015
|
|
Gross realized
gains
|
$1,443,046
|
$1,292,471
|
|
Gross realized
(losses)
|
(1,000,976)
|
(6,778,407)
|
|
Unrealized
gains
|
618,558
|
1,089
|
|
Total
|
$1,060,628
|
$(5,484,847)
|
F-10
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
GOODWILL
AND TRADEMARKS:
The
Company has determined that its goodwill and trademarks, which
consist of product lines, trade names and packaging designs have an
indefinite useful life. The value of the goodwill and trademarks
was allocated based on an independent valuation. Goodwill and
trademarks are not amortized but are assigned to a specific
reporting unit or asset class and tested for impairment at least
annually or upon the occurrence of an event or when circumstances
indicate that the reporting unit’s carrying amount of
goodwill and trademarks is greater than its fair value. As of
October 31, 2016 and 2015, the Company has determined by using a
qualitative assessment that an impairment did not exist. In 2011,
the Company adopted Financial Accounting Standard ASB ASU 2011-08
Intangibles – Goodwill and Other – Testing Goodwill for
Impairment, which allows an entity to first assess qualitative
factors to determine whether it is necessary to perform the
two-step quantitative goodwill impairment test. Under this
amendment, an entity would not be required to calculate the fair
value of a reporting unit unless the entity determines, based on a
qualitative assessment, that it is more likely than not that its
fair value is less than its carrying amount. The amendment includes
a number of events and circumstances for an entity to consider in
conducting the qualitative assessment.
CUSTOMER
LIST AND RELATIONSHIPS:
Customer list and
relationships consist of a specific customer lists and customer
contracts obtained by the Company in the acquisition of OPTCO and
Sono which are being amortized on the straight-line method over
their estimated useful life of twenty years.
ADVERTISING:
The
Company expenses the cost of advertising and promotion as incurred.
Advertising costs charged to operations totaled $170,774 and
$157,922 for the years ended October 31, 2016 and 2015,
respectively.
INCOME
TAXES:
The
Company accounts for income taxes pursuant to the asset
and liability method which requires deferred income tax assets and
liabilities to be computed for temporary differences between the
financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred tax
assets and liabilities are individually classified as current or
non-current based on their characteristics. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The income tax provision or benefit
is the tax incurred for the period plus or minus the change during
the period in deferred tax assets and liabilities.
EARNINGS
PER SHARE:
Basic
earnings per common share were computed by dividing net income by
the sum of the weighted-average number of common shares
outstanding. Diluted earnings per common share is computed by
dividing the net income by the weighted-average number of common
shares outstanding plus the dilutive effect of common shares
issuable upon exercise of potential sources of
dilution.
The
weighted average common shares outstanding used in the computation
of basic and diluted earnings per share were 6,082,777 and
6,212,929 for the years ended October 31, 2016 and 2015,
respectively.
F-11
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
FAIR
VALUE OF FINANCIAL INSTRUMENTS:
The
carrying amounts of cash, accounts receivable, notes receivable,
accounts payable and accrued expenses approximate fair value
because of the short-term nature of these instruments. The carrying
amount of the bank line of credit borrowings approximates fair
value because the debt is based on current rates at which the
Company could borrow funds with similar remaining maturities. Fair
value estimates are made at a specific point in time, based on
relevant market information about the financial instruments when
available. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
REVENUE
RECOGNITION:
The
Company recognizes revenue in accordance with the authoritative
guidance. Revenue is recognized at the point title and risk of
ownership transfers to its customers upon the Company’s
shippers taking possession of the goods at the time of shipment
because i) title passes in accordance with the terms of the
Company’s purchase orders and with its agreements with its
customers, ii) any risk of loss is covered by the Company’s
customers’ insurance, iii) there is persuasive evidence of a
sales arrangement, iv) the sales price is determinable and v)
collection of the resulting receivable is reasonably assured. Thus,
revenue is recognized at the point of shipment to its
customers.
Returns: The
Company does not accept returns for damaged goods on packaged
coffee and usable green coffee, as the customer takes possession of
our product at the point of shipment. In the event a customer
claims receipt of damaged goods, the Company, acting as an agent on
behalf of the customer, may file a claim for reimbursement with the
shipper. The Company is not obligated or required to act as an
agent on behalf of its customers, but may make the business
decision to do so as a convenience to its customers. The shipper
keeps the damaged product. The Company will then ship a completely
new order to the customer once a claim has been filed and the
Company receives reimbursement or credit from the shipper for the
initial shipment. The Company does evaluate the need, if any, of an
accrual for returns for damaged goods. To date, returns for damaged
goods have been immaterial. The Company estimates that, based on
historical trends, that future returns for damaged goods should
also be immaterial.
In the
event that the Company ships an incorrect order or has returns for
short dated product, the Company will accept those two types of
items back as returns. The amount for these two types of returns
are estimated, accrued and recognized at the date of sale. These
amounts are included in the determination of net
sales.
Slotting fees:
Certain retailers require the payment of slotting fees in order to
obtain space for the Company’s products on the
retailer’s store shelves. The cost of these fees are
estimated, accrued and
recognized at the earlier of the date cash is paid or a liability
to the retailer is created. The amounts are included in the
determination of net sales.
Sales
discounts: The amount of sales discounts are estimated, accrued and
recognized at the date of the sale. These amounts are included in
the determination of net sales.
F-12
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
REVENUE
RECOGNITION (cont’d):
Volume-based
incentives: These incentives typically involve rebates or refunds
of a specific amount of cash consideration that are redeemable only
if the reseller completes a specified cumulative level of sales
transactions. Under incentive programs of this nature, the Company
estimates and accrues the cost of the rebate when it is taken by
the reseller. These amounts are included in the determination of
net sales.
Cooperative
advertising: Under these arrangements, the Company will agree to
reimburse the reseller for a portion of the costs incurred by the
reseller to advertise and promote certain of the Company’s
products. The Company estimates, accrues and recognizes the cost of
cooperative advertising programs in the period in which the
advertising and promotional activity first takes place. The costs
of these incentives are included in advertising
expense.
SHIPPING
AND HANDLING FEES AND COSTS:
Revenue
earned from shipping and handling fees is reflected in net sales.
Costs associated with shipping product to customers aggregating
approximately $1,506,000 and $1,352,000 for the years ended October
31, 2016 and 2015, respectively, is included in selling and
administrative expenses.
CONCENTRATION
OF RISK:
Financial
instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash deposits at financial
institutions and brokerage firms.
Accounts at each
institution are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to certain limits. At October
31, 2016 and 2015, the Company had approximately $1,539,429 and
$220,422 in excess of FDIC insured limits,
respectively.
The
accounts at the brokerage firm contain cash and securities.
Balances are insured up to $500,000, with a limit of $100,000 for
cash, by the Securities Investor Protection Corporation
(“SIPC”). At October 31, 2016 and 2015, the Company had
approximately $348,041 and $2,818,431 in excess of SIPC insured
limits, respectively.
See
Note 10 for concentration of risks with respect to trade
receivables and purchases from accounts payable
vendors.
OPERATING
LEASES:
The
Company has operating lease agreements for its corporate office and
warehouses, some of which contain provisions for future rent
increases or periods in which rent payments are abated. Operating
leases which provide for lease payments that vary materially from
the straight-line basis are adjusted for financial accounting
purposes to reflect rental income or expense on the straight-line
basis in accordance with the authoritative guidance issued by the
FASB. The excess of straight-line rent over actual payments by the
Company of $231,216 and $222,055 is included as deferred rent
payable as of October 31, 2016 and 2015, respectively.
F-13
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
EQUITY
METHOD OF ACCOUNTING:
Investee companies
that are not consolidated, but over which the Company exercises
significant influence, are accounted for under the equity method of
accounting. Whether or not the Company exercises significant
influence with respect to an Investee depends on an evaluation of
several factors including, among others, representation on the
Investee company’s board of directors and ownership level,
which is generally a 20% to 50% interest in the voting securities
of the Investee company. Under the equity method of accounting, an
Investee company’s accounts are not reflected within the
Company’s Consolidated Balance Sheets and Consolidated
Statements of Income; however, the Company’s share of the
earnings or losses of the Investee company is reflected in the
caption “Loss from equity method investments” in the
Consolidated Statements of Income. The Company’s carrying
value in an equity method Investee company is reflected in the
caption “Equity method investments” in the
Company’s Consolidated Balance Sheets.
The
Company’s investment in a company that is accounted for on
the equity method of accounting consist of the following: (1) 20%
interest in Healthwise Gourmet Coffees, LLC, a distributor of low
acidity coffees. The investments in this company amounted to
$100,000. The loss recognized amounted to $972 and $833 for the
years ended October 31, 2016 and 2015, respectively. The net value
of this investment as presented on our consolidated balance sheet
at October 31, 2016 and 2015 was $95,598 and $96,571,
respectively.
NOTE
3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AFFECTING THE
COMPANY:
The
FASB has issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes, which changes how deferred
taxes are classified on organizations' balance
sheets.
The ASU eliminates
the current requirement for organizations to present deferred tax
liabilities and assets as current and noncurrent in a classified
balance sheet. Instead, organizations will be required to classify
all deferred tax assets and liabilities as noncurrent. The
amendments apply to all organizations that present a classified
balance sheet. For public companies, the amendments are effective
for financial statements issued for annual periods beginning after
December 15, 2016, and interim periods within those annual periods.
For private companies, not-for-profit organizations, and employee
benefit plans, the amendments are effective for financial
statements issued for annual periods beginning after December 15,
2017, and interim periods within annual periods beginning after
December 15, 2018. The adoption of this standard is not expected to
have a material impact on the Company's consolidated financial
position and results of operations.
In July
2015, the FASB issued ASU 2015-11, “Inventory (Topic 330):
Simplifying the Measurement of Inventory,” which applies to
inventory that is measured using first-in, first-out
(“FIFO”) or average cost. Under the updated guidance,
an entity should measure inventory that is within scope at the
lower of cost and net realizable value, which is the estimated
selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation.
Subsequent measurement is unchanged for inventory that is measured
using last-in, last-out (“LIFO”). This ASU is effective
for annual and interim periods beginning after December 15, 2016,
and should be applied prospectively with early adoption permitted
at the beginning of an interim or annual reporting period. The
Company is currently evaluating the impact of adopting this
guidance.
The
FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-01 requires
that a lessee recognize the assets and liabilities that arise from
operating leases. A lessee should recognize in the statement of
financial position a liability to make lease payments (the lease
liability) and a right-of-use asset representing its right to use
the underlying asset for the lease term. For leases with a term of
12 months or less, a lessee is permitted to make an accounting
policy election by class of underlying asset not to recognize lease
assets and lease liabilities. In transition, lessees and lessors
are required to recognize and measure leases at the beginning of
the earliest period presented using a modified retrospective
approach.
F-14
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AFFECTING THE COMPANY
(cont’d):
Public
business entities should apply the amendments in ASU 2016-02 for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years (i.e., January 1, 2019, for a
calendar year entity). Nonpublic business entities should apply the
amendments for fiscal years beginning after December 15, 2019
(i.e., January 1, 2020, for a calendar year entity), and interim
periods within fiscal years beginning after December 15, 2020.
Early application is permitted for all public business entities and
all nonpublic business entities upon issuance. The Company is
currently evaluating the impact of adopting this
guidance.
On
March 17, 2016 the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-08 that amends the guidance for
Principle versus Agent
Considerations (Reporting Revenue Gross versus Net) in ASC
2014-09, Revenue from Contracts
with Customers (Topic 606), issued in May 2014. The ASU
clarifies that the principal or agent determination is based on
whether the entity controls the goods or services before they are
transferred to its customer. Public entities must apply ASU 2016-08
to annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period.
Nonpublic entities will be required to adopt the amendments for
annual reporting periods beginning after December 15, 2018, and
interim periods within annual reporting periods beginning after
December 15, 2019. Earlier application is permitted for both types
of entities only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that
reporting period. Early adoption prior to that date is not
permitted. The Company is evaluating the effect that ASU 2016-08
will have on its results of operations, financial position or cash
flows.
In May
2014 the FASB issued ASU 2014-09, Revenue from Contracts with Customers,
which is a new standard related to revenue recognition. Under the
new standard, recognition of revenue occurs when a customer obtains
control of promised services or goods in an amount that reflects
the consideration to which the entity expects to receive in
exchange for those goods or services. In addition, the standard
requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from customer contracts. The
standard must be adopted using either a full retrospective approach
for all periods presented in the period of adoption or a modified
retrospective approach. In July 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with
Customers - Deferral of the Effective Date, which defers the
implementation of this new standard to be effective for fiscal
years beginning after December 15, 2017. Early adoption is
permitted effective January 1, 2017. In March 2016, the FASB issued
ASU 2016-08, Principal versus
Agent Considerations, which clarifies the implementation
guidance on principal versus agent considerations in the new
revenue recognition standard pursuant to ASU 2014-09. In April
2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and
Licensing, and in May 2016, the FASB issued ASU 2016-12,
Narrow-Scope Improvements and
Practical Expedients, which amend certain aspects of the new
revenue recognition standard pursuant to ASU 2014-09. We are
currently evaluating which transition approach we will utilize and
the impact of adopting this accounting standard on our financial
statements.
NOTE
4 - INVENTORIES:
Inventories at
October 31, 2016 and 2015 consisted of the following:
|
|
2016
|
2015
|
|
Packed
coffee
|
$1,804,633
|
$1,441,451
|
|
Green
coffee
|
11,434,024
|
11,730,006
|
|
Roasters and
parts
|
210,007
|
-
|
|
Packaging
supplies
|
827,626
|
691,361
|
|
Totals
|
$14,276,290
|
$13,862,818
|
F-15
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
5 - FORMATION OF SUBSIDIARY:
On June
23, 2016, the Company formed a wholly-owned subsidiary named
Sonofresco, LLC a Delaware limited liability company.
Pursuant to the
terms of an Agreement for Purchase and Sale of Assets dated June
23, 2016 (the “Sono Agreement”), by and among the
Company, Coffee Kinetics LLC, a Washington limited liability
company (the “Seller”), the members of the Seller and
Sono (the “Buyer”), the Company, through its
wholly-owned subsidiary Sono, purchased substantially all the
assets, including equipment, inventory, customer list and
relationships (the “Assets”) of the Seller. The
acquisition was accounted for using the purchase method in
accordance with ASC 805, “Business Combinations.” The
Buyer purchased the Assets for a purchase price consisting of
$819,564 in cash and 38,364 shares of the Company's
redeemable common stock (the "Sono Shares")
with a value of $200,004 (the "Common Stock Payment
Amount") issued on June 29, 2016.
As part
of the transaction, all of the employees of the Seller became
employees of the Buyer. In addition, on June 29, 2016, the Company
entered into a one-year advisory agreement (the “Advisory
Agreement”), with one of the Seller’s executives (the
“Executive”), on an independent contractor basis, to
ensure continuity of the business and to continue to operate the
business located in Washington. The Advisory Agreement will
automatically renew for an additional one year term upon the
expiration of the first year term unless terminated by the Company.
After completion of the first year term, the Advisory Agreement is
subject to renewal by mutual agreement of the parties. Pursuant to
the terms of the Advisory Agreement, the Executive is entitled to
cash compensation of $50,000 per annum. If the Advisory Agreement
is terminated prior to the end of the first year term, the
Executive is entitled to receive an additional $50,000 termination
fee. If the term of the Advisory Agreement is extended past the
first year term, subject to certain exceptions, the Executive will
be entitled to the $50,000 termination fee upon termination of the
Advisory Agreement.
|
The following table
summarizes the estimated fair value of the assets and liabilities
assumed at the acquisition:
|
|
|
Assets
acquired:
|
|
|
Accounts
receivable
|
$84,142
|
|
Inventory
|
269,565
|
|
Equipment
|
40,000
|
|
Customer
list
|
120,000
|
|
Goodwill
|
577,905
|
|
Less: liabilities
assumed
|
(72,044)
|
|
Net assets
acquired:
|
$1,019,568
|
|
Purchase of assets
funded by:
|
|
|
Cash
Paid
|
819,564
|
|
Redeemable
Common Stock
|
200,004
|
|
|
$1,019,568
|
Pursuant to
the terms of Sono Agreement, the value of the Sono Shares was based
on the three day average of the closing price of the Company's
common stock for the three trading days immediately prior to June
23, 2016. In addition, pursuant to the terms of the Sono Agreement,
during the twelve month period commencing on June 29, 2016 (the
"Closing Date"), if Seller informs Buyer of its desire to sell all,
but not less than all of the Sono Shares to the Company, Buyer
agrees to repurchase all but not less than all of the Sono Shares
at the Common Stock Payment amount.
F-16
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
5 - FORMATION OF SUBSIDIARY (cont’d):
Pro Forma Results
of Operations (unaudited) The following pro
forma results of operations for the years ended October 31, 2016
and 2015 have been prepared as though the acquisition of Sono had
occurred as of the beginning of the earliest period presented. This
pro forma financial information is not indicative of the results of
operations that the Company would have attained had the acquisition
of Sono occurred at the beginning of the periods presented, nor is
the pro forma financial information indicative of the results of
operations that may occur in the future:
|
|
Year ended October
31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Pro forma
sales
|
$80,132,616
|
$119,711,018
|
|
Pro forma net
income (loss)
|
$2,290,084
|
$(1,433,493)
|
|
Pro forma basic and
diluted earnings per share
|
$.38
|
$(.23)
|
|
Basic and diluted
weighted average common shares outstanding
|
6,082,777
|
6,212,929
|
The
operations of Sono have been included in the Company’s
consolidated statement of operations since the date of the
acquisition on June 29, 2016. The total revenue included for the
period is $560,736.
NOTE
6 - MACHINERY AND EQUIPMENT:
Machinery and
equipment at October 31, 2016 and 2015 consisted of the
following:
|
|
Estimated
Useful
Life
|
2016
|
2015
|
|
Improvements
|
15-30
years
|
$202,285
|
$199,035
|
|
Machinery and
equipment
|
7
years
|
6,004,156
|
5,274,277
|
|
Furniture and
fixtures
|
7
years
|
883,250
|
612,944
|
|
|
7,089,691
|
6,086,256
|
|
|
Less, accumulated
depreciation
|
|
4,819,828
|
4,241,256
|
|
|
$2,269,863
|
$1,845,000
|
|
Depreciation
expense totaled $578,572 and $537,890 for the years ended October
31, 2016 and 2015, respectively.
F-17
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
7 - LINE OF CREDIT:
On
March 10, 2015, the Company entered into a loan modification
agreement (the “Modification Agreement”) with its
lender Sterling National Bank (“Sterling”) which
modified the terms of the financing agreement with Sterling
previously entered into on February 17, 2009 (the “Financing
Agreement”). Prior to the Modification Agreement, the
Financing Agreement, as amended, provided for a credit facility in
which the Company had a revolving line of credit for a maximum of
$7,000,000 (the “Loan Facility”). On February 3, 2011,
the Company amended the Financing Agreement to create a sublimit
within the revolving line of credit in the form of a $300,000 term
loan for the benefit of GCC. The Financing Agreement was set to
expire on March 31, 2015. Pursuant to the Modification Agreement,
the Financing Agreement was modified to, among other things, (i)
extend the term of the Financing Agreement until February 28, 2017;
(ii) increase the maximum amount of the Loan Facility from
$7,000,000 to $9,000,000; (iii) reduce the interest rate on the
average unpaid balance of the line of credit from an interest rate
equal to a per annum reference rate of 3.75% to an interest rate
per annum equal to the Wall Street Journal Prime Rate; and (iv)
require the Company to pay, upon the occurrence of certain
termination events, a prepayment premium of 0.50% of the maximum
amount of the credit facility in effect as of the date of the
termination event.
Other
than as described above, the Financing Agreement remains in full
force and effect. Pursuant to the Modification Agreement, the
Company is able to draw on the loan Facility up to an amount of 85%
of eligible accounts receivable and 25% of eligible inventory
consisting of green coffee beans and finished coffee not to exceed
$1,000,000. The Loan Facility is secured by all tangible and
intangible assets of the Company.
The
Loan Facility contains covenants that place annual restrictions on
our operations, including covenants related to debt restrictions,
capital expenditures, minimum deposit restrictions, tangible net
worth, net profit, leverage, employee loan restrictions,
distribution restrictions (common stock and preferred stock),
dividend restrictions, and restrictive transactions. The Loan
Facility also requires that the Company maintain a minimum working
capital at all times. The Company was in compliance with all
required financial covenants at October 31, 2016 and
2015.
As of
October 31, 2016 and 2015, the outstanding balance under the bank
line of credit was $5,121,375 and $4,317,121,
respectively.
Also on March 10, 2015, the Company, as
guarantor, and OPTCO (the “Borrower”), as borrower,
entered into a new loan facility agreement with Sterling. The new
loan facility is a revolving line of credit for a maximum of
$3,000,000 (the “New Loan Facility”). The New Loan
Facility terminates on February 28, 2017. The Borrower is
able to draw on the New Loan Facility at an amount up to 85% of
eligible accounts receivable, not to exceed 25% of all accounts of
the Borrower. The New Loan Facility is payable monthly
in arrears on the average unpaid balance of the line of credit at
an interest rate per annum equal to the Wall Street Journal Prime
Rate (currently 3.5%). The New Loan Facility is
secured by all tangible and intangible assets of the Company. In
connection with the New Loan Facility, the Company entered into a
security agreement with Sterling and provided Sterling with a
guarantee of the Borrower’s obligations. As of October
31, 2016 and 2015, the outstanding balance under the New Loan
Facility was $1,837,000.
F-18
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
8 - INCOME TAXES:
The Company’s provision
(benefit) for income taxes in 2016 and 2015 consisted of the
following:
|
|
2016
|
2015
|
|
|
|
|
|
Current
|
|
|
|
Federal
|
$219,562
|
$(73,407)
|
|
State
and local
|
155,083
|
36,610
|
|
|
374,645
|
(36,797)
|
|
|
|
|
|
Deferred
|
|
|
|
Federal
|
941,150
|
(657,500)
|
|
State
and local
|
50,125
|
(69,350)
|
|
|
991,275
|
(726,850)
|
|
Income
tax (benefit) expense
|
$1,365,920
|
$(763,647)
|
|
|
|
|
A
reconciliation of the difference between the expected income tax
rate using the statutory U.S. federal tax rate and the
Company’s effective tax rate is as follows:
|
|
2016
|
2015
|
|
Tax at the federal
statutory rate of 34%
|
$1,263,427
|
$(711,680)
|
|
Other permanent
differences
|
(32,944)
|
(30,359)
|
|
State and local
tax, net of federal benefit
|
135,437
|
(21,608)
|
|
|
|
|
|
Provision for
income taxes
|
$1,365,920
|
$(763,647)
|
|
|
|
|
|
Effective income
tax rate
|
37%
|
(37%)
|
F-19
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
8 - INCOME TAXES (cont’d):
The tax effects of the temporary
differences that give rise to the deferred tax assets and
liabilities as of October 31, 2016 and 2015 are as
follows:
|
|
2016
|
2015
|
|
Current deferred
tax assets:
|
|
|
|
Accounts
receivable
|
$67,034
|
$53,605
|
|
Net
operating loss
|
|
714,150
|
|
Unrealized
loss
|
|
180,112
|
|
Inventory
|
64,384
|
49,853
|
|
|
|
|
|
Total current
deferred tax asset
|
$131,418
|
$997,720
|
|
|
|
|
|
Non-current
deferred tax assets:
|
|
|
|
Deferred
rent
|
107,635
|
82,666
|
|
Deferred
compensation
|
227,947
|
179,614
|
|
|
|
|
|
Total non-current
deferred tax asset
|
$335,582
|
$262,280
|
|
|
|
|
|
Total deferred tax
asset
|
$467,000
|
$1,260,000
|
|
|
|
|
|
Current deferred
tax liability:
|
|
|
|
Unrealized
gain
|
$49,873
|
$
|
|
|
|
|
|
Non-current
deferred tax liability:
|
|
|
|
Fixed
assets
|
$503,052
|
354,650
|
|
|
|
|
|
Total deferred tax
liabilities
|
$552,925
|
$354,650
|
A
valuation allowance was not provided at October 31, 2016 or 2015.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are expected to be deductible, management
believes it is more likely than not the Company will realize the
benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced
in the near term if estimates of future taxable income are
reduced.
As of
October 31, 2016 and 2015, the Company did not have any
unrecognized tax benefits or open tax positions. The
Company’s practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. As of October
31, 2016 and 2015, the Company had no accrued interest or penalties
related to income taxes. The Company currently has no federal or
state tax examinations in progress.
F-20
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 8 - INCOME TAXES (cont’d):
The
Company files a U.S. federal income tax return and California,
Colorado, Connecticut, Idaho, Kansas, Michigan, New Jersey, New
York, Texas, Rhode Island, South Carolina, Virginia
and Oregon state tax returns. The Company’s federal income
tax return is no longer subject to examination by the federal
taxing authority for years before fiscal 2013. The Company’s
California, Colorado and New Jersey income tax returns are no
longer subject to examination by their respective taxing
authorities for the years before fiscal 2010. The Company’s
Oregon, New York, Kansas, South Carolina, Rhode Island, Connecticut
and Michigan and Texas income tax returns are no longer subject to
examination by their respective taxing authorities for the years
before fiscal 2011.
NOTE
9 - COMMITMENTS AND CONTINGENCIES:
OPERATING
LEASES:
In
February 2004, the Company entered into a lease for office and
warehouse space in La Junta City, Colorado. This lease, which is at
a monthly rental of $8,341 beginning January 2005, expires on
January 31, 2024. Rent charged to operations amounted to $95,504
for the years ended October 31, 2016 and 2015.
In
October 2008, the Company entered into a lease for office and
warehouse space in Staten Island, NY. This lease, which is at a
monthly rental beginning November 2008, expires on October 31, 2023
and includes annual rent increases. Rent charged to operations
amounted to $143,171 and $146,423 for the years ended October 31,
2016 and 2015. The Company also uses a variety of independent,
bonded commercial warehouses to store its green coffee
beans.
In
March 2015, the Company entered into a lease for office space in
Vancouver, WA. This lease, which is at a monthly rental
beginning April 1, 2015, expires on March 31, 2017. Rent
charged to operations amounted to $37,745 and $36,721 for the years
ended October 31, 2016 and 2015, respectively.
In
December 2016, the Company entered into a lease for office and
warehouse space in Burlington WA. This lease which is at a monthly
rental beginning December 1, 2016, expires on December 31,
2017.
The
aggregate minimum future lease payments as of October 31, 2016 for
each of the next five years and thereafter are as
follows:
|
October 31,
|
|
|
|
|
|
2017
|
$300,123
|
|
2018
|
260,683
|
|
2019
|
262,413
|
|
2020
|
271,051
|
|
2021
|
279,051
|
|
Thereafter
|
610,416
|
|
|
|
|
|
$1,983,737
|
F-21
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 9 - COMMITMENTS AND CONTINGENCIES
(cont’d):
401
(K) RETIREMENT PLAN:
The Company has a 401(k) Retirement Plan, which
covers all the full time employees who have completed one year of
service and have reached their 21st birthday. The Company matches 100% of the
aggregate salary reduction contribution up to the first 3% of
compensation and 50% of aggregate contribution of the next 2% of
compensation. Contributions to the plan aggregated $67,083 and
$67,166 for the years ended October 31, 2016 and 2015,
respectively.
NOTE 10 - ECONOMIC DEPENDENCY:
Approximately 29%
of the Company’s sales were derived from one customer during
the year ended October 31, 2016. This customer also accounted for
approximately $3,661,000 or 27% of the Company’s accounts
receivable balance at October 31, 2015. Approximately 54% of the
Company’s sales were derived from one customer during the
year ended October 31, 2015. This customer also accounted for
approximately $4,113,000 or 38% of the Company’s accounts
receivable balance at October 31, 2015. Concentration of credit
risk with respect to other trade receivables is limited due to the
short payment terms generally extended by the Company, by ongoing
credit evaluations of customers, and by maintaining an allowance
for doubtful accounts and other allowances that management believes
will adequately provide for credit losses.
For the year ended October 31, 2016,
approximately 43% of the Company’s purchases were from four
vendors. These vendors accounted for approximately $609,000 of the
Company’s accounts payable at October 31, 2016. For the year
ended October 31, 2015, approximately 64% of the Company’s
purchases were from five vendors. These vendors accounted for
approximately $2,664,000 of the Company’s accounts payable at
October 31, 2015. Management does not believe the loss of any one
vendor would have a material adverse effect of the Company’s
operations due to the availability of many alternate
suppliers.
NOTE
11 - RELATED PARTY TRANSACTIONS:
The
Company has engaged its 40% partner in Generation Coffee Company,
LLC as an outside contractor (the “Partner”). Included
in contract labor expense, which is a component of cost of sales,
are expenses incurred from the Partner during the years ended
October 31, 2016 and 2015 of $459,345 and $422,039,
respectively.
An
employee of one of the top two vendors is a director of the
Company. Purchases from that vendor totaled approximately
$8,475,000 and $22,143,000 for the years ended October 31, 2016 and
2015, respectively. The corresponding accounts payable balance to
this vendor was approximately $237,000 and $586,000 at October 31,
2016 and 2015, respectively.
In
January 2005, the Company established the “Coffee Holding
Co., Inc. Non-Qualified Deferred Compensation Plan.”
Currently, there is only one participant in the plan: Andrew
Gordon, the CEO. Within the plan guidelines, this employee is
deferring a portion of his current salary and bonus. The deferred
compensation payable represents the liability due to an officer of
the Company. The deferred compensation liability at October 31,
2016 and 2015 was $489,668 and $482,499, respectively. Deferred
compensation expenses included in officers’ salaries were $0
during the years ended October 31, 2016 and 2015,
respectively.
F-22
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 12 - STOCKHOLDERS’ EQUITY:
a.
Treasury Stock. The Company utilizes
the cost method of accounting for treasury stock. The cost of
reissued shares is determined under the last-in, first-out method.
The Company purchased 337,269 shares for $1,754,878 during the year
ended October 31, 2016 and 53,687 shares for $226,850 during the
year ended October 31, 2015.
b.
Share Repurchase Program. On January
24, 2014, the Company announced that the Board of Directors had
approved a share repurchase program (the “2014 Share
Repurchase Program”) pursuant to which the Company may
repurchase up to $1 million of its outstanding shares of common
stock from time to time on the open market and in privately
negotiated transactions subject to market conditions, share price
and other factors. The 2014 Share Repurchase Program may be
discontinued or suspended at any time. The Company does not intend
to make any further repurchases under the 2014 Share Repurchase
Program and the 2014 Share Repurchase Program is terminated. As of
October 31, 2016, pursuant to the terms of the 2014 Share
Repurchase Program, the Company had repurchased 156,415 shares of
outstanding common stock in an amount equal in value to $995,729.
On September 29, 2015, the Company announced that the Board of
Directors had approved a share repurchase program (the “2015
Share Repurchase Program”) pursuant to which the Company may
repurchase up to $2 million of the outstanding common stock from
time to time on the open market and in privately negotiated
transactions subject to market conditions, share price and other
factors. The timing and amount of any shares repurchased will be
determined based on the Company’s evaluation of market
conditions and other factors. The 2015 Share Repurchase Program may
be discontinued or suspended at any time. Pursuant to the terms of
the 2015 Share Repurchase Program, the Company purchased 337,269
shares during the year ended October 31, 2016 for $1,754,878. Also
pursuant to the terms of the 2015 Share Repurchase Program, the
Company had repurchased 53,687 shares of outstanding common stock
in an amount equal in value to $226,850 during the year ended
October 31, 2015.
NOTE 13 - FAIR VALUE
MEASUREMENTS:
Fair
value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date, not adjusted for transaction
costs. The guidance also establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels giving the highest priority to quoted
prices in active markets for identical assets or liabilities (Level
1) and the lowest priority to unobservable inputs (Level 3) as
described below:
Level 1
Inputs – Unadjusted quoted prices in active markets for
identical assets or liabilities that are accessible by the
Company;
Level 2
Inputs – Quoted prices in markets that are not active or
financial instruments for which all significant inputs are
observable, either directly or indirectly; and
Level 3
Inputs – Unobservable inputs for the asset or liability
including significant assumptions of the Company and other market
participants.
The
Company determines fair values for its investment assets as
follows:
F-23
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 13 - FAIR VALUE MEASUREMENTS
(cont’d):
Investments at fair
value consist of commodity securities and deferred compensation
plan assets.
The
Company maintains a deferred compensation plan. The fair value of
the plan assets are classified within Level 1 as the assets are
valued using quoted prices in active markets. The assets are
included with Deposits and other assets in the accompanying balance
sheets. Additional information related to the Company’s
deferred compensation plan is disclosed in Note 10.
The
Company’s commodity securities are classified within Level 2
and include coffee futures and options contracts. To determine fair
value, the Company utilizes the market approach valuation technique
for the coffee futures and options contracts. The Company uses
Level 2 inputs that are based on market data of similar instruments
that are in observable markets. All commodities on the balance
sheet are recorded at fair value with changes in fair value
included in earnings.
The
following tables present the Company’s assets and liabilities
that are measured at fair value on a recurring basis and are
categorized using the fair value hierarchy.
|
|
|
Fair Value
Measurements as of October 31, 2016
|
||
|
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Assets:
|
|
|
|
|
|
Money
market
|
489,826
|
489,826
|
–
|
–
|
|
Commodities-Futures
|
218,475
|
|
218,475
|
|
|
Total
Assets
|
$708,301
|
$489,826
|
218,475
|
–
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Commodities –
Options
|
(83,753)
|
|
(83,753)
|
|
|
Total
Liabilities
|
$(83,753)
|
–
|
$(83,753)
|
–
|
|
|
|
Fair Value
Measurements as of October 31, 2015
|
||
|
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Assets:
|
|
|
|
|
|
Money
market
|
482,499
|
482,499
|
–
|
–
|
|
Total
Assets
|
$482,499
|
$482,499
|
–
|
–
|
|
Liabilities:
|
|
|
|
|
|
Commodities –
Options
|
(134,613)
|
|
(134,613)
|
|
|
Commodities –
Futures
|
(349,222)
|
–
|
(349,222)
|
–
|
|
Total
Liabilities
|
$(483,835)
|
–
|
$(483,835)
|
–
|
NOTE
14 - SUBSEQUENT EVENT:
The
Company evaluates events that have occurred after the balance sheet
date but before the financial statements are issued. Based upon the
evaluation, the Company did not identify any recognized or
non-recognized subsequent events that would have required further
adjustment or disclosure in the condensed consolidated financial
statements.
F-24