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JVA > SEC Filings for JVA > Form 10-Q on 11-Sep-2013All Recent SEC Filings

Show all filings for COFFEE HOLDING CO INC

Form 10-Q for COFFEE HOLDING CO INC


11-Sep-2013

Quarterly Report


ITEM 2. 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 Operations" and elsewhere in this quarterly 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-Q 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 retain key personnel;

? 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 SEC.


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In some cases, you can identify forward-looking statements by terminology such as "may," "will," "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 quarterly 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 quarterly report.

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; and

? the roasting, blending, packaging and sale of our seven brands of coffee.

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, the supply of green coffee and the selling prices of our products; and

? our ability to manage inventory and 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 acquisitions of certain assets of Premier Roasters, LLC, which included equipment and a roasting facility in La Junta, Colorado, a West Coast Brand Manager to market our S&W brand and to increase sales of S&W coffee to new customers, our joint venture with Caruso's Coffee, Inc. of Brecksville, Ohio the transaction with Organic Products and the addition of three sales persons from the Café Bustelo division of Folgers to assist with the expansion of our Café Caribe and Supremo brands. We believe these efforts will allow us to expand our business.


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Our net sales are affected by the price of green coffee. We purchase our green coffee from dealers located primarily within the United States. The dealers supply us with coffee beans from many countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. For example, in Brazil, which produces approximately 40% of the world's green coffee, the coffee crops are historically susceptible to frost in June and July and drought in September, October and November. However, because we purchase coffee from a number of countries and are able to freely substitute one country's coffee for another in our products, price fluctuations in one country generally have not had a material impact on the price we pay for coffee. Accordingly, price fluctuations in one country generally have not had a material effect on our results of operations, liquidity and capital resources. Historically, because we generally have been able to pass green coffee price increases through to customers, increased prices of green coffee generally result in increased net sales.

We have used, and continue to use, short-term coffee futures and options contracts primarily for the purpose of partially hedging and minimizing the effects of changing green coffee prices and to reduce our cost of sales. In addition, 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 and we generally remain exposed to loss when prices decline significantly in a short period of time. In addition, we would remain exposed to supply risk in the event of non-performance by the counterparties to any futures contracts. If the hedges that we enter into 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 increase of our losses. See Item 3, Quantitative and Qualitative Disclosures About Market Risk.

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 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 $122,500 for the quarter ended July 31, 2013. 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.

? 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 $96,600 for the quarter ended July 31, 2013.


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? 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. Accordingly, our net deferred tax asset as of July 31, 2013 of $441,000 may require a valuation allowance if we do not generate taxable income.

? Our goodwill consists of the cost in excess of the fair market value of the acquired net assets of OPTCO. This company has been integrated into a structure which does not provide the basis for separate reporting units. Consequently, the Company is a single reporting unit for goodwill impairment testing purposes. We also have intangible assets consisting of customer list and relationships and trademarks acquired from OPTCO. At July 31, 2013 our balance sheet reflected goodwill and intangible assets as set forth below:

                 Customer list and relationships, net   $ 125,625
                 Trademarks                               180,000
                 Goodwill                                 440,000

                                                        $ 745,625

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 circumstances indicate that an impairment or decline in value may have occurred.

Three Months Ended July 31, 2013 Compared to the Three Months Ended July 31, 2012

Net Income (Loss). We had a net loss of $2,108,911, or $0.33 per share basic and diluted, for the three months ended July 31, 2013 compared to net income of $1,231,196 or $0.19 per share basic and diluted, for the three months ended July 31, 2012. The decrease in net income reflects losses realized in our hedging activities as coffee prices continued to decrease on an unabated slide to a four year low during the period.

Net Sales. Net sales totaled $32,370,692 for the three months ended July 31, 2013, a decrease of $12,113,761, or 27%, from $44,484,453 for the three months ended July 31, 2012. The decrease in net sales reflects lower coffee prices as coffee prices continued to decrease on an unabated slide to a four year low during the same period, partially offset by a 13.7% increase in pounds of green coffee sold as our business continued to shift to sales of green coffee from private label sales.

Cost of Sales. Cost of sales for the three months ended July 31, 2013 was $33,526,657 or 100.3% of net sales, as compared to $40,606,840 or 91.3% of net sales for the three months ended July 31, 2012. The increase in cost of sales reflects losses realized in our hedging activities and lower prices paid for green coffee during this period compared to the same period during 2012.


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Gross Profit. Gross profit decreased $5,033,578 to $(1,155,965) for the three months ended July 31, 2013 as compared to gross profit of $3,877,613 for the three months ended July 31, 2012. Gross profit as a percentage of net sales decreased 12.2% for the three months ended July 31, 2013, as compared to gross profit as a percentage of net sales for the three months ended July 31, 2012. The decrease in our margins reflects losses realized in our hedging activities and lower prices paid for green coffee during this period compared to the same period during 2012.

Operating Expenses. Total operating expenses increased by $24,333, or 1.3%, to $1,883,005 for the three months ended July 31, 2013 as compared to operating expenses of $1,858,672 for the three months ended July 31, 2012. The increase in operating expenses was due to an additional pay cycle during the quarter partially offset by a decrease in selling and administrative expenses.

Other Expense. Other expenses decreased by $35,537 to an income amount of $1,670 for the three months ended July 31, 2013 compared to other expenses of $33,867 for the three months ended July 31, 2012. Interest income increased by $3,102, interest expense decreased by $36,220 and the loss on equity investment increased by $3,785 for the three months ended July 31, 2013. The increase in interest income resulted from the increase in pre-finance agreements with the coffee growing cooperatives. The decrease in interest expense resulted from a decrease in the average balance outstanding on our line of credit and the reduction of our interest rate under our credit facility.

Income Taxes. Our benefit for income taxes for the three months ended July 31, 2013 totaled $997,618 compared to a provision of $729,979 for the three months ended July 31, 2012. The decrease reflects lower pre-tax income for the quarter.

Nine Months Ended July 31, 2013 Compared to the Nine Months Ended July 31, 2012

Net Income (Loss). We had a net loss of $1,566,886, or $0.25 per share (basic and diluted), for the nine months ended July 31, 2013 compared to net income of $2,439,293 or $0.38 per share basic and $0.37 diluted, for the nine months ended July 31, 2012. The decrease in net income reflects losses realized in our hedging activities as coffee prices continued to decrease on an unabated slide to a four year low during the period.

Net Sales. Net sales totaled $100,375,542 for the nine months ended July 31, 2013, a decrease of $37,796,153, or 27.35%, from $138,171,695 for the nine months ended July 31, 2012. The decrease in net sales reflects lower coffee prices as coffee prices continued to decrease on an unabated slide to a four year low during the same period.

Cost of Sales. Cost of sales for the nine months ended July 31, 2013 was $96,463,019 or 96.1% of net sales, as compared to $128,472,249 or 93% of net sales for the nine months ended July 31, 2012. The increase in cost of sales reflects losses realized in our hedging activities and lower prices paid for green coffee during this period compared to the same period during 2012.

Gross Profit. Gross profit decreased $5,786,923 to $3,912,523 for the nine months ended July 31, 2013 as compared to gross profit of $9,699,446 for the nine months ended July 31, 2012. Gross profit as a percentage of net sales decreased by 3.1% for the nine months ended July 31, 2013 as compared to gross profit as a percentage of net sales for the nine months ended July 31, 2012. The decrease in our margins reflects losses realized in our hedging activities and lower prices paid for green coffee during this period compared to the same period during 2012.

Operating Expenses. Total operating expenses increased by $95,038, or 1.7%, to $5,674,149 for the nine months ended July 31, 2013 as compared to operating expenses of $5,579,111 for the nine months ended July 31, 2012. The increase in operating expenses was due to an additional pay cycle during the quarter and an increase in selling and administrative expenses.


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Other Expense. Other expenses decreased by $6,508 to $146,348 for the nine months ended July 31, 2013 compared to other expenses of $152,856 for the nine months ended July 31, 2012. Interest income increased by $2,267, interest expense decreased by $81,974 and the loss on equity investment increased by $77,733 for the nine months ended July 31, 2013. The decrease in interest expense resulted from a decrease in the average balance outstanding on our line of credit and the reduction of our interest rate under our credit facility.

Income Taxes. Our benefit for income taxes for the nine months ended July 31, 2013 totaled $490,108 compared to a provision of $1,460,792 for the nine months ended July 31, 2012. The decrease reflects lower pre-tax income for the period.

Liquidity and Capital Resources

As of July 31, 2013, we had working capital of $19,263,102, which represented a $141,503 decrease from our working capital of $19,404,605 as of October 31, 2012, and total stockholders' equity of $21,663,414, which decreased by $1,954,265 from our total stockholders' equity of $23,617,679 as of October 31, 2012. Our working capital decreased primarily due to a decrease of $4,085,354 in cash, a decrease of $1,643,753 in our inventories, an increase in our line of credit of 2,737,500 partially offset by a decrease of $6,713,568 in accounts payable and accrued expenses, an increase of $1,860,797 in prepaid and refundable taxes. At July 31, 2013, the outstanding balance on our line of credit was $3,300,000 compared to $562,500 at October 31, 2012. Total stockholders' equity decreased primarily due to a decrease in retained earnings as a result of our net loss and the payment of our quarterly dividend in December 2012. On June 13, 2013, the Company announced that the Board elected to terminate the dividend program.

For the nine months ended July 31, 2013, our operating activities used net cash of $6,078,667 as compared to the nine months ended July 31, 2012 when operating activities provided net cash of $767,773. The decreased cash flow from operations for the nine months ended July 31, 2013 was primarily due to a decrease in net income of $3,924,553, an increase in prepaid green coffee of $278,231 and an increase in prepaid and refundable taxes of $1,860,797.

For the nine months ended July 31, 2013, our investing activities used net cash of $356,810 as compared to the nine months ended July 31, 2012 when net cash used by investing activities was $2,617,033. The decrease in our uses of cash in investing activities was primarily due to our recovery of our equity investment in GM partially offset by our increased purchases of equipment.

For the nine months ended July 31, 2013, our financing activities provided net cash of $2,350,123 compared to net cash used in financing activities of $1,021,731 for the nine months July 31, 2012. The change in cash flow from financing activities for the nine months ended July 31, 2013 was primarily due to the reduced need for borrowing from our credit facility and partially offset by the payment of dividends of $387,377 during the nine months ended July 31, 2013.

On February 17, 2009, we entered into a financing agreement with Sterling National Bank ("Sterling") for a $5,000,000 credit facility. The credit facility is a revolving $5,000,000 line of credit and we can draw on the line at an amount up to 85% of eligible accounts receivable and 25% of eligible inventory consisting of green coffee beans and finished coffee not to exceed $1,000,000. Sterling has the right from time to time to adjust the foregoing percentages based upon, among other things, dilution, its sole determination of the value or likelihood of collection of eligible accounts receivables owed to us, considerations regarding inventory. The credit facility 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 (4.25% at July 31, 2013 and July 31, 2012).

On July 22, 2010, we had the credit facility increased to $7,000,000. In addition, OPTCO was added as a co-borrower and the inventory sublimit was raised from $1,000,000 to $2,000,000. Subsequent to July 31, 2010, $1,800,000 of the credit facility was allocated to OPTCO. The initial term of the credit facility was for three years and expired on February 17, 2012. The initial terms of the credit facility provided that the credit facility may be automatically extended for successive periods of one year each unless one party shall have provided the other party with a written notice of termination at least ninety days prior to the expiration of the then current term. Prior to the expiration of the initial term, and effective as of February 12, 2012, the term was extended until February 17, 2014 and the interest rate was reduced to the Wall Street Journal Prime rate (which is currently 3.25%) plus one percent (1%). The credit facility is secured by our tangible and intangible assets.


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The 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. As of July 31, 2013, we were in compliance with all required financial covenants.

On February 3, 2011, we amended their credit facility regarding the creation of a sublimit within the revolving line of credit in the form of a $300,000 term loan for the benefit of GCC. We provided a corporate guarantee to Sterling in connection with the amendment.

On July 23, 2010, we amended their credit facility regarding the payment of dividends. The facility agreement was changed to allow the payment of quarterly dividends of not more than three cents ($0.03) per share.

As of July 31, 2013 and October 31, 2012 the outstanding balance under the bank line of credit was $3,300,000 and $562,500, respectively.

Triodos Bank is one of the world's leading sustainable banks with a mission to make money work for positive social, environmental and cultural change. Triodos has offices in the Netherlands, Germany, Spain, UK and Belgium. The Company initiated a corporate guarantee on April 15, 2011 to Triodos Sustainable Trade Fund ("TSTF") up to a maximum amount of $250,000. TSTF provided financing to two coffee growing cooperatives for $1,000,000 based upon relationships established with OPTCO. As of January 28, 2013 the agreement between TSTF and the cooperatives had been fulfilled and the guarantee was released.

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.

Recent Accounting Pronouncements

See Note 3 to the Condensed Consolidated Financial Statements (the "Financial Statements") in Part I, Item 1 of this Quarterly Report on Form 10-Q.


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