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| GWDC.OB > SEC Filings for GWDC.OB > Form 10-Q on 9-Sep-2008 | All Recent SEC Filings |
9-Sep-2008
Quarterly Report
Our revenue for six months to June 30, 2008 was $1,048,999 compared to $644,189 for 2007. Our sales increased due to the late arrival of the "Penlyne Castle" "Jamaican Blue Mountain" coffees. The revenue generated from sales of the Jamaican coffees was included the second quarter of 2008. For the three month period to June 30, 2008 our revenue increased by $178,820 to $430,397 compared to $251,577 for three months to June 30, 2007. For the balance of 2008, we anticipate growth in revenue from the roasted coffees and increased revenue generated from our online sales via the website wwww.uncommongrounds.net of Uncommon Grounds Inc. Our gross profit on sales for six months in 2008 was approximately 29% compared to 50% in 2007. Our gross profits declined from 60% (three month to June 2007) to 34% for the three months to June 30 2008. For the balance of 2008, we anticipate generating higher gross margins as we increase our sale of wholesale roasted coffee through our "Tree to Cup" distribution strategy. Our operating expenses for six months to June 30, 2008 were $2,580,685 compared to $5,004,169 in 2007; a decline in expenses of $2,423,484. The general and administration expenses declined to $1,971,816 in 2008 compared to $3,030,254, marketing expenses decreased by $849,515 to $304,000 in 2008 compared to $1,153,515 in 2007. The net loss for the six months ended June 30, 2008 was $2,992,770 compared to $5,461,334 in 2007. For the three month to June 2008 our operating expenses were $1,654,276 compared to $3,858,703for three month to June 2007; a decline in expenses of $2,204,427. The general and administration expenses declined by $870,529 to $1,341,274 in 2008 compared to $2,211,803, marketing expenses decreased by $818,367 to $8,133 in 2008 compared to $826,500 in 2007. The net loss for the three months ended June 30, 2008 was $1,792,804 compared to $4,054,628 in 2007. At June 30, 2008, we had $651,319 in current assets and $1,098,096 in current liabilities. The current liabilities
As of the date of this Report, Growers Direct has not incurred any coffee related research and development expenses and does not plan to incur any research or development expenses in the future.
As of the date of this Report, Growers Direct did not have any off-balance sheet arrangements.
Critical Accounting Policies & Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and (2) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements.
Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. We have identified certain accounting policies that we believe are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Note 3 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-QSB.
Revenue Recognition
The Company derives its revenue from sale of green beans and roasted coffees and allied coffee products. Our revenue is recognized in the period when persuasive evidence of an arrangement exists, delivery occurs, the sales price is fixed or determinable and collectibility is reasonably assured. Coffee is considered delivered when title and risk have been transferred to the customer. Retail and wholesale sales are recorded when payment is tendered at point of sale for retail, and upon shipment of product for wholesale.
Stock Option
At June 30, 2008, the Company has one stock-based employee compensation plan. The stock option plan is for its directors, officers, employees and consultants. Under the terms of the plan, options become exercisable immediately upon grant. All stock options granted to date have been pursuant to separate agreements. The Company has adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment". Under the fair value method, compensation cost is measured at fair value using the Black-Scholes option-pricing
Convertible Note
On March 2007, the Company entered into convertible note agreements with certain institutional and accredited investors for amounts totalling $2,678,571 with an original discount of 16% ($428,571). The convertible notes are repayable on March 19, 2009. The notes are convertible into common stock of the Company, at the option of the holders, at a rate of $0.66 per share. The Company also issued to the holders 3,438,033 stock purchase warrants exercisable at $0.66 per share before March 18, 2010. The warrants may be exercised on either a cash or cashless basis, at the option of the warrant holders. In accordance with EITF Issue 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", the Company recognized the value of the embedded beneficial conversion feature of $368,000 as additional paid-in capital and an equivalent discount which will be expensed over the term of the convertible notes. In addition, in accordance with EITF Issue 00-27 "Application of Issue No.98-5 to Certain Convertible Instruments", the Company has allocated the proceeds of issuance between the convertible notes and the detachable warrants based on their relative fair value. Accordingly, the Company recognized the fair value of the detachable warrants of $1,087,979 as additional paid-in capital and an equivalent discount against the convertible notes. The difference between the face amount of the convertible notes and their carrying value is amortized over the life of the convertible notes. As long as any portion of the convertible notes remains outstanding, the Company shall not pay any cash dividends or distributions on any equity securities of the Company without prior written consent from the holders of the convertible note.
Fair Value of Financial Instruments
The Company's financial instruments, as defined by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," include cash and cash equivalents, marketable securities, receivables, advances to employees, accounts payable and accrued expenses. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at June 30, 2008 and December 31, 2007.
Receivables
Trade accounts receivable are recorded at the net realizable value and do not bear interest. No allowance for doubtful accounts was made during the six months ended June 30, 2008 and 2007 based on management's best estimate of the amount of probable credit losses in existing accounts receivable. Growers Direct evaluates its allowance for doubtful accounts based upon knowledge of its customers and their compliance with credit terms. The evaluation process includes a review of customers' accounts on a regular basis. The review process evaluates all account balances with amounts outstanding 60 days and other specific amounts for which information obtained indicates that the balance may be uncollectable. As at June 30, 2008, there was no allowance for doubtful accounts. Growers Direct does not have any off-balance-sheet credit exposure related to its customers.
Seasonality and Other Factors That May Affect Our Future Results
(a)
Our business is seasonal in nature because coffee harvest season is from May to August in Papua New Guinea and August to November in Jamaica. The seasonal availability of green bean coffee in the second quarter of the year may result in increased sales in the last two quarters. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Furthermore, past seasonal patterns are not necessarily indicative of future results.
(b)
Our business strategy is centered on a single product; green bean coffee. If the demand for green bean coffee decreases, our business could suffer. Additionally, if we fail to continue developing and maintaining
We have only one coffee roasting facility. A significant interruption in the operation of this facility due to natural disaster or other causes could significantly impair our ability to operate our coffee roasting business on a day-to-day basis.
Our roasted coffees compete directly against gourmet specialty coffees sold at specialty retailers, discount stores, and a growing number of specialty coffee stores. Many specialty coffee companies, including Starbucks and Peets Coffee sell whole bean coffees through these channels. The gourmet specialty market contains competitors with substantially greater financial, marketing and operating resources than we have.
(e)
Our ability to continue with our business plan is subject to our ability to continue generating additional revenue. Our ability to continue as a going concern is an issue raised by our auditors in their audit report as a result of our limited revenue and accumulated losses of $26,137,911 as of June 30, 2008. There are no assurances that we may be successful in generating any additional revenue. To fund the ongoing operations, Growers Direct may be forced to find alternate sources of financing, which at this time cannot be assured. If we are unsuccessful in securing such financing on acceptable terms, our potential as a going concern could be affected and our ability to continue with our business would be harmed. In such event, we may curtail or cease our operations.
(f)
Our ability to implement the marketing and sales strategy is partially dependent on our ability to increase awareness and recognition of Papua New Guinea and Jamaican grown green bean coffee in United States, Canada and Europe. We may have difficulty selling the Papua New Guinea grown green bean coffee to roaster retailers, commercial roasters, gourmet roasters and retailers, and coffee brokers. Consequently, if we fail to implement our marketing and sales strategy, or if our resources on a marketing and sales strategy ultimately proves unsuccessful, our revenue and operating results may be adversely affected and we may have to curtail or cease our operations. As a result, investors could lose their entire investment.
(g)
We need to manage growth in our operations. Our ability to successfully offer
our products and services and implement our business plan in an evolving coffee
market requires an effective planning and management process. We will need to
continue to improve our financial and managerial controls and reporting systems
and procedures. We expect growth in our business; however, this growth will
continue to place a significant strain on our management systems and resources.
There are no assurances we will effectively achieve or manage future growth,
and the failure to do so could delay product development cycles or otherwise
have a materially adverse effect on the Company's financial condition and
results of operation.
(h)
Our business depends upon attracting and retaining highly capable management and operations personnel. In order to achieve its objectives, the Company must add key people to its management team. We also require highly skilled technical, sales, management and marketing employees who are in high demand and are often subject to competing offers. As we grow, we will continue to need an increased number of management and support personnel. It is possible that we will be unable to recruit the people we need in a timely fashion.
Intense competition may affect our profitability. The markets for our products
are highly competitive and rapidly changing. We face several large competitors
that have been in business longer than we have. These competitors have the
advantage of having entered the market earlier than us. Our competitors and
their products are more fully established and accepted in the market place.
There are a number of other companies offering green bean coffee currently
existing in the market place. These competing companies are already accepted in
the market place. We may therefore be unable to gain adequate market share that
will allow us to meet our financial projections. We cannot assure you that our
competitors will not develop services or products that are equal or superior to
ours or that achieve greater market acceptance.
(j)
We may need additional capital. We require substantial working capital to fund our business. If we do not generate enough cash from operations to finance our business in the future, we will need to raise additional funds through public or private financing. Selling additional stock could dilute the equity interests of our stockholders. If we borrow money, we will have to pay interest and may have to agree to restrictions on our operating flexibility. The borrowing of additional monies may put a strain on the Company's cash flow and ability to develop and or expand its products and business. There are no guarantees that we will be able to
Our Industry Related Factors That May Affect Our Future Results
(a)
Competition may adversely affect our ability to implement our business plan. There are other companies conducting similar activities, and the demand for green bean coffee is affected by consumer taste and preferences. With little operating capital in a rapidly evolving and highly competitive coffee industry, we will encounter financial difficulties. The whole green bean coffee market is highly fragmented and coffee brands are being established across multiple distribution markets. Several competitors are aggressive in obtaining distribution in specialty grocery and gourmet food stores. We have only begun to penetrate these markets, which gives some competitors advantages over us based on their earlier entry into these distribution markets. Competition in the green bean coffee market is intense as relatively low barriers to entry encourage new competitors to enter the green bean coffee market. The new market entrants may have substantially greater financial, marketing and operating resources than we may, which may adversely affect our ability to implement our business plan. We may have to curtail or cease our business and our investors may lose their entire investment.
(b)
Adverse weather conditions and diseases may negatively affect the cost of and our supply of green coffee beans. Decreased availability of quality green bean coffee would have an adverse affect on our purchasing costs, revenue and profitability and would jeopardize our ability to grow our business. A significant portion of our anticipated revenue will be realized during the Papua New Guinea coffee harvest season, which is from May to August. Any coffee tree and/or coffee bean diseases and/or severe adverse weather conditions such as a prolonged period of drought, would have an adverse effect upon the supply of quality green bean coffee at a reasonable price, which, in turn, would directly affect our ability to market and distribute green bean coffee in the United States, Europe and Canada. As a result, our business would be impaired, we may have to curtail or cease our operations, and the investors could lose their entire investment.
Political and social instability in Papua New Guinea, Jamaica and Ethiopia may also negatively affect our supply of green coffee beans and our purchasing costs. We purchase unprocessed green bean coffee from Papua New Guinea, Jamaica and Ethiopia. Consequently, any political, economic and social unrest and/or instability in Papua New Guinea, Jamaica and Ethiopia may adversely affect our business operations. In particular, instability in coffee growing regions of Papua New Guinea, Jamaica and Ethiopia could result in a decrease in the availability of quality green coffee beans needed for the continued operation and growth of our business. It could also lead to an increase in our purchasing costs and increased operating costs. This may impair our business, we may have to cease or curtail our operations, and investors could lose their entire investment.
Fluctuations in the price of green bean coffee may impede our marketing ability Green bean coffee is traded on the commodities market. The supply and price of green bean coffee is affected by multiple factors in the various producing countries including; weather, political, and economic conditions. We plan to sell our green bean coffee on a negotiated basis based upon the supply and demand at the time of purchase/sale. The benchmark (beginning) price will be directly tied to the then current prevailing price of New York "C" futures coffee contracts trading on the New York Coffee, Sugar & Cocoa Exchange. If the cost of green bean coffee increases, we may not be able to pass along those costs to our customers because of the competitive nature of the coffee industry. If we are unable to pass along increased coffee costs, our margins will decrease and profitability will suffer accordingly. As a result, our business will be adversely affected and we may have to curtail or cease our operations and the investors could lose their entire investment.
(a) There are a large number of shares underlying the Notes. As of June 30, 2008, we had 35,513,992 shares of common stock issued and outstanding. There are currently Notes outstanding that may be converted into an estimated 6,350,584 shares of common stock at current market prices and outstanding warrants to purchase 3,678,695 shares of common stock. All of the shares, including all of the shares issuable upon conversion of the notes and upon exercise of our warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock.
(b) The issuance of shares upon conversion of the Convertible Notes and exercise of outstanding Warrants may cause immediate and substantial dilution to our existing stockholders. The issuance of shares upon
(c) Repayment of the Notes could negatively affect our supply of working capital. On March 19, 2007, we entered into agreements to issue the Notes. The Notes are due and payable March 18, 2009, unless sooner converted into shares of our common stock. The Company could not have voluntarily pre-paid the Notes until March 18, 2008. In addition, any event of default such as our failure to repay the principal or interest when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Subscription Agreement or related convertible note, the assignment or appointment of a receiver to control a substantial part of our property or business, the filing of a money judgment, writ or similar process against our company in excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against our company and the delisting of our common stock could require the early repayment of the Notes, including a default interest rate of 15% on the outstanding principal balance of the Notes if the default is not cured within the specified grace period. The intent of the Company is to make all payments that may become due under the Notes. Furthermore, we have a reasonable basis to believe that the Company has the financial ability to make all such payments as they may become due. We anticipate that the full amount of the Notes will be converted into shares of our common stock, in accordance with the terms of the Notes. If we were required to repay the Notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the Notes when required, the notes and stockholders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations.
(d) Management owns a substantial majority of our common stock and that may reduce your ability to influence our activities. Our officers, directors collectively owned approximately 14% of our outstanding shares of common stock as of June 30, 2008 and if all of the underlying shares being registered hereby are acquired by the Note holders, our officers and directors will collectively own approximately 11% allowing these security holders to control matters requiring approval of our shareholders. Such concentrated control of the company may adversely affect the price of our common stock in that it may be more difficult for Growers Direct to attract investors because such investors will know that our officers and directors will likely decide matters requiring shareholder consent. Our officers and directors can control matters requiring approval by our security holders, including the election of directors. Moreover, if our officers and directors decide to sell a substantial number of their shares, investors will likely lose confidence in our ability to earn revenue and will see such a sale as a sign that our business is failing. Each of these factors, independently or collectively, will likely harm the market price of our stock.
(e) There is currently a limited trading market for our shares of common stock, there can be no assurance that a more substantial market will ever develop or be maintained. Any market price for shares of common stock of Growers Direct is likely to be very volatile, and numerous factors beyond our control may have a significant adverse effect. In addition, the stock markets generally have experienced, and continue to experience, extreme price and volume fluctuations which have affected the market price of many companies, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions, may also adversely affect the market price of our common stock. Further, there is no correlation between the present limited market price of our common stock and our revenues, book value, assets or other established criteria of value. The present limited quotations of our common stock should not be considered indicative of the actual value of Growers Direct Coffee Company, Inc. or our common stock.
(f) Growers Direct common stock (OTC:BB "GWDC.OB") is deemed to be a "penny stock" as that term is defined in Rule 3a51-1 of the Securities and Exchange Commission. Penny stocks are stocks (1) with a price of less than $5.00 per share; (2) that are not traded on a "recognized" national exchange; (3) whose prices are not quoted on the NASDAQ automated quotation system until recently, there had been no "established public market" for our common stock during the last five years. While our stock has traded between $0.08 and $1.95 per share over the past twelve months, there is no assurance that this price level
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