Cautionary Note on Forward-Looking Statements
Some of the matters discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operation," "Business," "Risk
Factors" and elsewhere in this annual report include forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. We have based these forward-looking statements upon
information available to management as of the date of this Form 10-K and
management's expectations and projections about future events, including, among
other things:
? our dependency on a single commodity could affect our revenues and
profitability;
? our success in expanding our market presence in new geographic regions;
? the effectiveness of our hedging policy may impact our profitability;
? the success of our joint ventures;
? our success in implementing our business strategy or introducing new products;
? our ability to attract and retain customers;
? our ability to obtain additional financing;
? our ability to comply with the restrictive covenants we are subject to under
our current financing;
? the effects of competition from other coffee manufacturers and other beverage
alternatives;
? the impact to the operations of our Colorado facility;
? general economic conditions and conditions which affect the market for coffee;
? the potential adverse impact of the COVID-19 pandemic on our operations and
results, including as a result of the loss of adequate labor, any prolonged
closures, or series of temporary closures, of our supply chain, or changes in
consumer behaviors, when stay-at-home restriction orders are lifted and/or as
a result of the COVID-19 pandemic's impact on financial markets and economic
conditions;
? our expectations regarding, and the stability of, our supply chain, including
potential shortages or interruptions in the supply or delivery of green
coffee, as a result of COVID-19 or otherwise;
? the macro global economic environment;
? our ability to maintain and develop our brand recognition;
? the impact of rapid or persistent fluctuations in the price of coffee beans;
? fluctuations in the supply of coffee beans;
? the volatility of our common stock; and
? other risks which we identify in future filings with the Securities and
Exchange Commission (the "SEC"). 22
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.
22
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, and the transaction with OPTCO. On June 29, 2016, we purchased
substantially all the assets, including equipment, inventory, customer lists and
relationships of Coffee Kinetics, LLC., a Washington limited liability company.
On February 24, 2017, we acquired 100% of the capital stock of Comfort Foods,
Inc. ("CFI"), a Massachusetts based medium sized coffee roaster, manufacturing
both branded and private label coffee for retail and foodservice customers. In
April 2018, Generations Coffee Company, the entity formed as a result of our
joint venture with Caruso's Coffee, Inc., purchased substantially all the assets
of Steep & Brew, Inc. In October 2020, we entered into the Jordre Well Agreement
to become a 49% owner in The Jordre Well, a CBD beverage company. Under the
terms of the Jordre Well Agreement, The Jordre Well will assist us in the
development and commercialization of CBD-infused line extensions for the
existing coffee brands within our portfolio, as well as launch new brands that
are intended to serve consumer demand for non-coffee CBD-infused beverages and
products. We believe these efforts will allow us to expand our 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 40% of the
world's green coffee, the coffee crops are historically susceptible to frost in
June and July and drought in September, October and November. However, because
we purchase coffee from a number of countries and are able to freely substitute
one country's coffee for another in our products, price fluctuations in one
country generally have not had a material impact on the price we pay for coffee.
Accordingly, price fluctuations in one country generally have not had a material
effect on our results of operations, liquidity and capital resources.
Historically, because we generally have been able to pass green coffee price
increases through to customers, increased prices of green coffee generally
result in increased net sales, irrespective of sales volume.
The supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond our control. Historically, we
have used, and intend to continue to use in a limited capacity, short-term
coffee futures and options contracts primarily for the purpose of partially
hedging the effects of changing green coffee prices, as further explained in
Note 2 of the Notes to the Consolidated Financial Statements in this Report. In
addition, we acquired, and expect to continue to acquire, futures contracts with
longer terms, generally three to four months, primarily for the purpose of
guaranteeing an adequate supply of green coffee. Realized and unrealized gains
or losses on options and futures contracts are reflected in our cost of sales.
Gains on options and futures contracts reduce our cost of sales and losses on
options and futures contracts increase our cost of sales. The use of these
derivative financial instruments has generally enabled us to mitigate the effect
of changing prices. We believe that, in normal economic times, our hedging
policies remain a vital element to our business model not only in controlling
our cost of sales, but also giving us the flexibility to obtain the inventory
necessary to continue to grow our sales while trying to minimize margin
compression during a time of historically high coffee prices. However, no
strategy can entirely eliminate pricing risks and we generally remain exposed to
losses on futures contracts when prices decline significantly in a short period
of time, and we would generally remain exposed to supply risk in the event of
non-performance by the counterparties to any of our futures contracts. Although
we have had net gains on options and futures contracts in the past, we have
incurred significant losses on options and futures contracts during some recent
reporting periods. In these cases, our cost of sales has increased, resulting in
a decrease in our profitability or increase our losses. Such losses have and
could in the future materially increase our cost of sales and materially
decrease our profitability and adversely affect our stock price. See "Item 1A -
Risk Factors - If our hedging policy is not effective, we may not be able to
control our coffee costs, we may be forced to pay greater than market value for
green coffee and our profitability may be reduced." Failure to properly design
and implement an effective hedging strategy may materially adversely affect our
business and operating results. If the hedges that we enter do not adequately
offset the risks of coffee bean price volatility or our hedges result in losses,
our cost of sales may increase, resulting in a decrease in profitability or
increased losses. As previously announced, as a result of the volatile nature of
the commodities markets, we have and are continuing to scale back our use of
hedging and short-term trading of coffee futures and options contracts, and
intend to continue to use these practices in a limited capacity going forward.
23
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP"). Our significant accounting
policies are described in Note 2 - Summary of Significant Accounting Policies to
our consolidated financial statements attached hereto. We believe the following
critical accounting policies involve the most significant judgements and
estimates used in the preparation of our consolidated financial statements.
? The Company recognizes revenue in accordance with the five-step model as
prescribed by the Financial Accounting Standards Board ("FASB") Accounting
Codification ("ASC") Topic 606 ("ASC 606") in which the Company evaluates the
transfer of promised goods or services and recognizes revenue when its
customer obtains control of promised goods or services in an amount that
reflects the consideration which the Company expects to be entitled to receive
in exchange for those goods or services. To determine revenue recognition for
the arrangements that the Company determines are within the scope of ASC 606,
the Company performs the following five steps: (1) identify the contract(s)
with a customer, (2) identify the performance obligations in the contract, (3)
determine the transaction price, (4) allocate the transaction price to the
performance obligations in the contract and (5) recognize revenue when (or as)
the entity satisfies a performance obligation.
? Our goodwill consists of the cost in excess of the fair market value of the
acquired net assets of OPTCO, SONO, CFI and Steep & Brew, through GCC, 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 SONO. At October 31, 2021 our balance sheet reflected goodwill
and intangible assets as set forth below:
October 31, 2021
Customer list and relationships, net $ 447,869
Non-compete, net 29,700
Goodwill 2,488,785
Trademarks and tradenames 408,000
$ 3,374,354
Goodwill and the trademarks which are deemed to have indefinite lives are
subject to annual impairment tests. Goodwill impairment tests require the
comparison of the fair value and carrying value of reporting units. We assess
the potential impairment of goodwill and indefinite lived intangible assets
annually and on an interim basis whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Upon completion of such
review, if impairment is found to have occurred, a corresponding charge will be
recorded. The value assigned to the customer list and relationships is being
amortized over a twenty year period and a recoverability test is performed
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable.
Because the Company is a single reporting unit, the company used a hybrid
approach to determine the fair market value of the Company, which included an
income approach to conduct the annual impairment assessment. Goodwill and the
indefinite lived intangible assets are tested annually at the end of each fiscal
year to determine whether they have been impaired. Upon completion of each
annual review, there can be no assurance that a material charge will not be
recorded. Impairment testing is required more often than annually if an event or
circumstance indicates that an impairment or decline in value may have occurred.
For the years ending October 31, 2021 and 2020, no impairment charges were
recorded to the carrying value of goodwill and the reporting unit has a fair
value in excess of its carrying value by approximately 4% as of October 31,
2021. For the year ended October 31, 2021 we recorded impairment on two of our
trademarks totaling $1,080,000 as the carrying amount of these trademarks
exceeded the respective fair values on the test date which were determined using
a relief from royalty method.
24
Year Ended October 31, 2021 (Fiscal Year 2021) Compared to the Year Ended
October 31, 2020 (Fiscal Year 2020)
Net Sales. Net sales totaled $63,922,402 for the fiscal year ended October 31,
2021, a decrease of $10,413,413, or 14%, from $74,335,815 for the fiscal year
ended October 31, 2020. The decrease in net sales was due to the impacts of the
COVID-19 pandemic which caused many of our green coffee customers who service
the restaurant and food service industry, as well as our customers in the food
service space to either close or suspend their business operations during the
period resulting in lost revenues from that segment of our customer base. Also,
supermarket sales returned to more traditional levels in the second half of the
fiscal year, as the stockpiling in the second quarter of the year did not repeat
for the remaining six months of the year.
Cost of Sales. Cost of sales for the fiscal year ended October 31, 2021 was
$47,901,126, or 75% of net sales, as compared to $61,256,926, or 82% of net
sales, for the fiscal year ended October 31, 2020. 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
was due to our decreased sales and our hedging of green coffee costs, partially
offset by higher packaging costs due to increases in materials, most notably
steel for our cans.
Gross Profit. Gross profit for the fiscal year ended October 31, 2021 was
$16,021,276, an increase of $2,942,387 from $13,078,889 for the fiscal year
ended October 31, 2020. Gross profit as a percentage of net sales increased to
25% for the fiscal year ended October 31, 2021 from 18% for the fiscal year
ended October 31, 2020. The increase in gross profits was attributable to
increased margins on our roasted and branded products and green coffee sales in
the last part of the year, partially due to the movement of lower cost green
coffee inventory built up in previous quarters, which was partially offset by
higher packaging costs due to increases in materials.
Operating Expenses. Total operating expenses increased by $671,914 to
$14,576,121 for the fiscal year ended October 31, 2021 from $13,904,207 for the
fiscal year ended October 31, 2020. Selling and administrative expenses
increased $740,121, or 6%, to $13,963,328 for the fiscal year ended October 31,
2021 from $13,223,207 for the fiscal year ended October 31, 2020. The recording
of $1,080,000 of trademark impairment partially offset by our efforts to control
costs through the elimination of redundancy in our operations was the primary
reason for this increase. Officers' salary decreased by $68,207 or 10% to
$612,793 for the fiscal year ended October 31, 2021 from $681,000 for the fiscal
year ended October 31, 2020. Each of our Chief Executive Officer, Andrew Gordon,
and our Vice President-Operations, David Gordon, reduced their compensation
during this period due to the uncertainty of the results due to the impacts of
the COVID-19 pandemic.
25
Other Income (Expense). Other expense for the fiscal year ended October 31, 2021
was $237,298, an increase of $684,859 from other income of $447,561 for the
fiscal year ended October 31, 2020. The increase in other expense was
attributable to our recognition of the forgiveness of the Paycheck Protection
Program government loan of $634,400 in fiscal year ended October 31, 2020 and an
increase in loss from equity investment of $154,144, partially offset by an
increase in interest income of $4,304 and a decrease in our interest expense of
$99,381, during the fiscal year ended October 31, 2021.
Income (Loss) Before provision for income Taxes and Non-controlling Interest in
Subsidiary. We had income of $1,207,857 before income taxes and non-controlling
interest in subsidiary for the fiscal year ended October 31, 2021 compared to a
loss of $377,757 for the fiscal year ended October 31, 2020, resulting in a net
change of $1,585,614 for the year ended October 31, 2021.
Income Taxes. Our provision for income taxes for the fiscal year ended October
31, 2021 totaled $340,180 compared to a benefit of $41,713 for the fiscal year
ended October 31, 2020. The change was attributable to the difference in the
income for the year ended October 31, 2021 versus fiscal year ended October 31,
2020.
Net Income (Loss). We had a net income of $1,255,354 or $0.22 per share basic
and diluted, for the fiscal year ended October 31, 2021 compared to a net loss
of ($94,301), or ($0.02) per share basic and diluted for the fiscal year ended
October 31, 2020. The increase in net income was due to our results as described
above.
Liquidity and Capital Resources
As of October 31, 2021, we had working capital of $19,983,435, which represented
a $4,056,103 decrease from our working capital of $24,039,538 as of October 31,
2020. Our working capital decreased primarily due to decreases of $1,141,127 in
inventory and $69,353 in prepaid and refundable taxes, increases of $2,011,542
in accounts payable and accrued expenses, $3,799,975 in our short term
borrowings, $411,078 in income taxes payable, partially offset by increases of
$821,155 in cash, $1,891,073 in accounts receivable, $469,004 in due from
broker, $51,978 in prepaid expenses and other current assets and a decrease of
$143,763 in lease liability - current portion. As of October 31, 2021, the
outstanding balance on our line of credit was $3,800,850 compared to $3,796,822
as of October 31, 2020.
On April 25, 2017, us and OPTCO (collectively, the "Borrowers") entered into an
Amended and Restated Loan and Security Agreement (the "A&R Loan Agreement") and
Amended and Restated Loan Facility (the "A&R Loan Facility") with Sterling
National Bank ("Sterling"), which consolidated (i) the financing agreement
between the Company and Sterling, dated February 17, 2009, as modified, (the
"Company Financing Agreement") and (ii) the financing agreement between us, as
guarantor, OPTCO and Sterling, dated March 10, 2015 (the "OPTCO Financing
Agreement"), amongst other things.
On March 13, 2020, we reached an agreement for a new loan modification agreement
and credit facility with Sterling. The terms of the new agreement among other
things: (i) provides for a new maturity date of March 31, 2022 and (ii)
decreases the interest rate per annum to LIBOR plus 1.75% (with such interest
rate not to be lower than 3.50%).
26
Each of the A&R Loan Facility and A&R Loan Agreement contains covenants, subject
to certain exceptions, that place annual restrictions on the Borrowers'
operations, including covenants relating to debt restrictions, capital
expenditures, indebtedness, minimum deposit restrictions, tangible net worth,
net profit, leverage, employee loan restrictions, dividend and repurchase
restrictions (common stock and preferred stock), and restrictions on
intercompany transactions. We were in compliance with all covenants as of
October 31, 2021 and October 31, 2020.
Each of the A&R Loan Facility and the A&R Loan Agreement is secured by all of
our tangible and intangible assets. Other than as amended and restated by the
A&R Loan Agreement, the Company Financing Agreement and the OPTCO Financing
Agreement remains in full force and effect.
Pursuant to the terms of the Jordre Well Agreement, we issued to The Jordre Well
139,250 shares of our Common Stock on the effective date of the Jordre Well
Agreement and are obligated to issue an additional 139,250 shares of Common
Stock once $500,000 in revenue is generated from the joint venture.
For the fiscal year ended October 31, 2021, our operating activities provided
net cash of $4,709,519 as compared to the fiscal year ended October 31, 2020
when operating activities provided net cash of $4,385,757. The increased cash
flow from operations for the fiscal year ended October 31, 2021 was primarily
due to our inventories usage and our accounts receivable and accounts payable
activity during the year ended October 31, 2021.
For the fiscal year ended October 31, 2021, our investing activities used net
cash of $3,887,317 as compared to the fiscal year ended October 31, 2020 when
net cash used by investing activities was $537,835. The increase in our uses of
cash in investing activities was due to our increased outlays for purchases of
machinery and equipment and our other investment during the fiscal year ended
October 31, 2021.
For the fiscal year ended October 31, 2021, our financing activities used net
cash of $1,047 compared to net cash used in financing activities of $3,375,358
for the fiscal year ended October 31, 2020. The change in cash flow from
financing activities for the fiscal year ended October 31, 2021 was due to our
decreased principal reductions on our line of credit.
We expect to fund our operations, including paying our liabilities, funding
capital expenditures and making required payments on our indebtedness, through
October 31, 2022 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.
© Edgar Online, source Glimpses