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-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 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 ourColorado 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; ? our expectations regarding, and the stability of, our supply chain, including potential shortages or interruptions in the supply or delivery of green 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 theSecurities 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 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
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. -16-
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 acquire and invest in measures that are expected to increase net sales.
Our sales are affected by the price of green coffee. We purchase our green
coffee from dealers located primarily within
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. 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. 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.
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Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies during the three
months ended
Three Months Ended
Cost of Sales. Cost of sales for the three months ended
Gross Profit. Gross profit for the three months ended
Operating Expenses. Total operating expenses decreased by
Other Income (Expense). Other income for the three months ended
Income Taxes. Our benefit for income taxes for the three months ended
Net Income. We had a net loss of
Liquidity and Capital Resources
As of
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On
On
On
As further explained in Note 5 to the unaudited financial statements, the
Company is subject to certain covenants with respect to its line of credit
agreement. The Company was not in compliance with the net profit and
non-borrower affiliate covenants as of
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. The outstanding balance on the Company's lines of
credit were
For the three months ended
For the three months ended
For the three months ended
We expect to fund our operations, including paying our liabilities, funding capital expenditures and making required payments on our indebtedness, through at least the next twelve months from the date these consolidated financial statements are issued, 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.
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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.
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