U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: April 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _________________
Commission file number: 001-32491
Coffee Holding Co., Inc.
(Exact name of registrant as specified in its charter)
Nevada 11-2238111
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4401 First Avenue, Brooklyn, New York 11232-0005
(Address of principal executive offices) (Zip Code)
(718) 832-0800
(Registrant's telephone number including area code)
N/A
-------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
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 twelve 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 [X] No [_].
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act). Check
one:
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act. Yes [_] No [X].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
5,529,830 shares of common stock, par value $0.001 per share outstanding
at May 31, 2006
PAGE
PART I
Item 1. Financial Statements..................................................................................1
Condensed Balance Sheets
April 30, 2006 (unaudited) and October 31, 2005...................................................1
Condensed Statements of Income
Six and Three Months Ended April 30, 2006 and 2005 (unaudited)....................................2
Condensed Statements of Cash Flows
Six Months Ended April 30, 2006 and 2005 (unaudited)..............................................3
Notes To Condensed Financial Statements (unaudited)...................................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................15
Item 4. Controls and Procedures..............................................................................15
PART II
Item 1. Legal Proceedings ...................................................................................16
Item 1A. Risk Factors.........................................................................................16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .........................................16
Item 3. Defaults Upon Senior Securities .....................................................................16
Item 4. Submission of Matters to a Vote of Security Holders .................................................16
Item 5. Other Information ...................................................................................17
Item 6. Exhibits.............................................................................................17
Signatures ......................................................................................................18
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COFFEE HOLDING CO., INC.
CONDENSED BALANCE SHEETS
APRIL 30, 2006 AND OCTOBER 31, 2005
April 30, October 31,
2006 2005
------------ ------------
(unaudited)
- ASSETS -
CURRENT ASSETS:
Cash $ 1,385,412 $ 735,468
Due from broker 2,979,951 2,994,394
Accounts receivable, net of allowance for doubtful accounts of $420,349 for 2006 and 2005 4,259,922 5,159,576
Inventories 3,546,157 4,496,578
Prepaid expenses and other current assets 505,643 284,170
Deferred tax asset 269,600 318,600
------------ ------------
TOTAL CURRENT ASSETS 12,946,685 13,988,786
Property and equipment, at cost, net of accumulated depreciation of $3,955,431 and
$3,727,524 for 2006 and 2005, respectively 2,265,801 2,379,952
Investments in joint ventures 445,179 --
Deposits and other assets 266,711 176,575
------------ ------------
TOTAL ASSETS $ 15,924,376 $ 16,545,313
============ ============
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,928,823 $ 4,431,577
Current portion of obligations under capital lease -- 1,329
Line of credit borrowings 879,712 1,063,167
Income taxes payable - current 1,800 218,864
------------ ------------
TOTAL CURRENT LIABILITIES 4,810,335 5,714,937
Deferred compensation payable 203,015 135,054
Income taxes payable - deferred 34,000 53,700
------------ ------------
TOTAL LIABILITIES 5,047,350 5,903,691
------------ ------------
COMMITMENTS AND CONTINGENCIES
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, 5,529,830
shares issued and outstanding for 2006 and 2005, respectively 5,530 5,530
Additional paid-in capital 7,327,023 7,327,023
Retained earnings 3,544,473 3,309,069
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,877,026 10,641,622
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'S EQUITY $ 15,924,376 $ 16,545,313
============ ============
See notes to condensed financial statements.
1
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF INCOME
SIX AND THREE MONTHS ENDED APRIL 30, 2006 AND 2005
(Unaudited)
Six Months Ended Three Months Ended
April 30, April, 30
2006 2005 2006 2005
------------ ------------ ------------ ------------
NET SALES $ 25,855,773 $ 18,233,510 $ 12,010,928 $ 10,173,230
COST OF SALES 22,667,636 13,908,385 11,148,234 7,920,372
------------ ------------ ------------ ------------
GROSS PROFIT 3,188,137 4,325,125 862,694 2,252,858
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling and administrative 2,502,295 2,381,578 1,219,458 1,113,512
Officers' salaries 272,180 263,296 136,205 135,975
------------ ------------ ------------ ------------
2,774,475 2,644,874 1,355,663 1,249,487
------------ ------------ ------------ ------------
TOTALS
INCOME (LOSS) FROM OPERATIONS 413,662 1,680,251 (492,969) 1,003,371
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 57,289 7,207 26,723 3,937
Equity in loss of joint venture (5,322) -- (5,322) --
Interest expense (38,225) (63,222) (22,766) (36,752)
------------ ------------ ------------ ------------
13,742 (56,015) (1,365) (32,815)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 427,404 1,624,236 (494,334) 970,556
Benefit (provision) for income taxes (192,000) (623,600) 210,100 (372,200)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 235,404 $ 1,000,636 $ (284,234) $ 598,356
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ .04 $ .25 $ (.05) $ .15
============ ============ ============ ============
See notes to condensed financial statements.
2
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2006 AND 2005
(Unaudited)
2006 2005
------------ ------------
OPERATING ACTIVITIES:
Net income $ 235,404 $ 1,000,636
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 227,907 192,347
Deferred Compensation 67,961 --
Deferred taxes 29,300 (27,400)
Loss from joint venture 5,322 --
Changes in operating assets and liabilities:
Due from broker 14,443 (559,855)
Accounts receivable 899,654 (290,042)
Inventories 950,421 (895,639)
Prepaid expenses and other current assets (221,473) 1,281
Accounts payable and accrued expenses (502,758) (536,569)
Other assets (87,636) --
Income taxes payable (217,064) 239,500
------------ ------------
Net cash provided by (used in) operating activities 1,401,485 (875,741)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (113,756) (345,022)
Security deposits (2,500) (8,025)
Investment in joint ventures (450,501) --
------------ ------------
Net cash (used in) investing activities (566,757) (353,047)
------------ ------------
FINANCING ACTIVITIES:
Principal payments on term loan -- (252,000)
Advances under bank line of credit 20,737,183 4,016,790
Principal payments under bank line of credit (20,920,638) (2,685,045)
Principal payments of obligations under capital leases (1,329) (79,360)
------------ ------------
Net cash (used in) provided by financing activities (184,784) 1,000,385
------------ ------------
NET (DECREASE) INCREASE IN CASH 649,944 (228,403)
Cash, beginning of period 735,468 642,145
------------ ------------
CASH, END OF PERIOD $ 1,385,412 $ 413,742
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 16,873 $ 47,800
============ ============
Income taxes paid $ 185,000 $ 155,000
============ ============
See notes to condensed financial statements.
3
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2006 AND 2005
(Unaudited)
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 sells green coffee. The Company's sales are
primarily to customers that are located throughout the United States.
See note 9 for recent activity.
NOTE 2 - BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position
of the Company as of April 30, 2006, its results of operations and its
cash flows for the six months ended April 30, 2006 and 2005.
Information included in the balance sheet as of October 31, 2005 has
been derived from the Company's audited balance sheet included in the
Company's Annual Report on Form 10-KSB for the year ended October 31,
2005 (the "Form 10-KSB") previously filed with the Securities and
Exchange Commission (the "SEC"). Pursuant to the rules and regulations
of the SEC for interim financial statements, certain information and
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted from these financial
statements unless significant changes have taken place since the end of
the most recent fiscal year. Accordingly, these unaudited condensed
financial statements should be read in conjunction with the audited
financial statements and the other information in the Form 10-KSB.
Operating results for the six months ended April 30, 2006 are not
necessarily indicative of the results that may be expected for the year
ending October 31, 2006 or any other period.
NOTE 3 - INVENTORIES:
Inventories at April 30, 2006 and October 31, 2005 consisted of the
following:
April 30, October 31,
2006 2005
------------ ------------
Packed coffee $ 1,115,152 $ 1,276,050
Green coffee 1,663,680 2,483,061
Packaging supplies 767,325 737,467
------------ ------------
Totals $ 3,546,157 $ 4,496,578
============ ============
4
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2006 AND 2005
(Unaudited)
NOTE 4 - HEDGING:
The Company uses options and futures contracts to partially hedge the
effects of fluctuations in the price of green coffee beans. Options and
futures contracts are marked to market with current recognition of
gains and losses on such positions. The Company does not defer such
gains and losses since its positions are not considered hedges for
financial reporting purposes. The Company's accounting for options and
futures contracts may increase earnings volatility in any particular
period.
At April 30, 2006, the Company held 282 options (generally with terms
of two months or less) covering an aggregate of 10,575,000 pounds of
green coffee beans at prices of $1.10 and $1.11 per pound. The fair
market value of these options, which was obtained from major financial
institutions, was $407,175 at April 30, 2006.
At April 30, 2005, the Company held 300 options (generally with terms
of two months or less) covering an aggregate of 11,250,000 pounds of
green coffee beans at prices of $1.20, $1.25 and $1.30 per pound. The
fair market value of these options, which was obtained from a major
financial institution, was $947,625 at April 30, 2005.
The Company acquires futures contracts with longer terms (generally
three to four months) primarily for the purpose of guaranteeing an
adequate supply of green coffee. At April 30, 2006 and 2005, the
Company did not hold any futures contracts.
Included in cost of sales and due from broker for the three and six
months ended April 30, 2004 and 2003, the Company recorded realized and
unrealized gains and losses respectively, on these contracts as
follows:
Three Months Ended April 30,
2006 2005
----------- -----------
Gross realized gains $ 195,032 $ 1,503,448
Gross realized losses $ (106,312) $(1,539,360)
Unrealized gains and (losses) $ (154,399) $ 275,580
Six Months Ended April 30,
2006 2005
----------- -----------
Gross realized gains $ 811,245 $ 2,312,711
Gross realized losses $ (660,761) $(1,835,803)
Unrealized gains and (losses) $ 229,301 $ 483,514
5
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2006 AND 2005
(Unaudited)
NOTE 5 - LINE OF CREDIT:
The Company has a line of credit facility with Merrill Lynch Business
Financial Services, Inc. up to a maximum amount of $4.0 million with an
interest rate of LIBOR plus 2.15% which at April 30, 2006 was 7.17%.
The facility expires on October 31, 2006. The loan is secured by a
blanket lien on all the assets of the Company and the personal
guarantees of two of the Company's officer/shareholders and also
requires the Company to comply with various financial covenants. The
Company was in compliance with all financial covenants as of April 30,
2006.
NOTE 6 - LEGAL PROCEEDINGS:
The Company is a party to various legal proceedings. In the opinion of
management, these actions are routine in nature and will not have a
material adverse effect on the Company's results of operations or
financial position in future period.
NOTE 7 - EARNINGS (LOSS) PER SHARE:
The Company presents "basic" and "diluted" earnings (loss) per common
share pursuant to the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share". Basic earnings (loss) per
share is based on the weighted-average number of common shares
outstanding and diluted earnings (loss) per share is based on the
weighted-average number of common shares outstanding plus all potential
dilutive common shares outstanding. See Exhibit 11.1 for computation of
earnings (loss) per share.
NOTE 8 - ECONOMIC DEPENDENCY:
For the six months ended April 30, 2006, sales to one customer was in
excess of 10% of the Company's total sales. Sales to this customer were
approximately $9,217,000 and the corresponding accounts receivable at
April 30, 2006 from this customer was approximately $1,002,000.
For the six months ended April 30, 2005, sales to one customer was in
excess of 10% of the Company's total sales. Sales to this customer were
approximately $4,839,000 and the corresponding accounts receivable at
April 30, 2005 from this customer was approximately $800,000.
For the six months ended April 30, 2006, purchases from two suppliers,
were in excess of 10% of the Company's total purchases. Purchases from
these suppliers were approximately $7,454,000 and $2,662,000 and the
corresponding accounts payable to these suppliers at April 30, 2006
were approximately $723,000 and $284,000, respectively.
For the six months ended April 30, 2005, purchases from two suppliers,
were in excess of 10% of the Company's total purchases. Purchases from
these suppliers were approximately $5,045,000 and $1,412,000 and the
corresponding accounts payable to these suppliers at April 30, 2005
were approximately $1,198,000 and $237,000, respectively.
6
COFFEE HOLDING CO., INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2006 AND 2005
(Unaudited)
NOTE 9 - INVESTMENTS IN JOINT VENTURES:
Cafe La Rica, LLC Investment:
The Company and Coffee Bean Trading-Roasting LLC ("CBT") have formed a
joint venture entity Cafe La Rica, LLC, ("CLR") on March 10, 2006. The
purpose of the joint venture entity is to engage in the roasting,
packaging and sale of branded coffee products. CLR was funded by an
initial contribution of $250,000 by the Company. In addition, the
Company will contribute specified equipment valued at approximately
$450,000 and CBT will contribute equipment, and inventory of coffee and
packaging materials valued at $119,316. The Company and CBT will also
contribute their respective intellectual property consisting of
licenses for the use of Cafe Caribe Trademark and Cafe La Rica
Trademark as per separate licensing agreements. The respective
trademarks Cafe Caribe and Cafe La Rica are licensed to CLR as
exclusive, non-assignable, non-transferable, royalty free right to use
them worldwide in connection with manufacture, packaging, sale,
marketing and distribution of the licensed products (as defined) within
the Territory (as defined) in the respective agreements. The Company
and CBT each will have a 50% membership in the profits and losses of
CLR.
Separate agreements have been entered into between the Company and CLR
for the Company to provide administrative services to CLR for a fee, to
supply CLR with coffee inventory at fair market prices and to pay CLR a
roasting fee for all coffee roasted and sold as one of the Company's
proprietary brands, for which CLR will not receive a share of profits.
CLR will engage in roasting other non-company brands coffee for which
the profits/losses will be shared by both partners.
Generations Coffee Company LLC Investment:
The Company and PMD Enterprises, Inc (DBA Caruso's Coffee, ("Caruso")
have formed a Limited Liability Company called Generations Coffee
Company, LLC ("GCC") effective April 7, 2006. The purpose of GCC is to
engage in roasting, packaging and sale of private label specialty
coffees for sale and distribution throughout the United States. The
initial capital contribution by the Company will be equipment and by
Caruso will be use of equipment and plant/warehouse space. These
contributions have not yet been made. The Company and Caruso will share
in profits and losses in the ratio of 60:40 and initial membership
interests will be 600 shares and 400 shares, respectively. The
agreement provides for an increase of capital contribution by Caruso to
make each partner equal and enjoy a 50% sharing ratio in profits and
losses.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Note on Forward Looking Statements
This report contains 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 on our current expectations and
projections about future events, including, among other things:
o the impact of rapid or persistent fluctuations in the price of
coffee beans;
o fluctuations in the supply of coffee beans;
o general economic conditions and conditions which affect the market
for coffee;
o our success in implementing our business strategy or introducing new
products;
o our ability to attract and retain customers;
o our success in expanding our market presence in new geographic
regions;
o the effects of competition from other coffee manufacturers and other
beverage alternatives;
o changes in tastes and preferences for, or the consumption of,
coffee;
o our ability to obtain additional financing; and
o other risks which we identify in future filings with the Securities
and Exchange Commission.
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 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 which occur after the date of this 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:
o the sale of wholesale specialty green coffee;
o the roasting, blending, packaging and sale of private label coffee;
and
o the roasting, blending, packaging and sale of our seven brands of
coffee.
8
Our operating results are affected by a number of factors including:
o the level of marketing and pricing competition from existing or new
competitors in the coffee industry;
o our ability to retain existing customers and attract new customers;
o fluctuations in purchase prices and supply of green coffee and in
the selling prices of our products; and
o 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 the strategic decision to invest in
measures that will increase net sales. In February 2004, we acquired certain
assets of Premier Roasters. We also hired a West Coast Brand Manager to market
our S&W brand and to increase sales of S&W coffee to new customers and increased
attendance at trade shows to promote our food service and private label coffee
business. In March 2006, we entered into a joint venture with Coffee Bean
Trading-Roasting LLC and formed Cafe La Rica, LLC, a Delaware limited liability
company. The joint venture engages in the roasting, packaging and sale of the
Cafe La Rica brand coffee and other coffee products in Miami, Florida. We own
50% of the joint venture and are the primary supplier of its coffee inventory.
By operating a new production facility in Florida through the Cafe La Rica joint
venture, we believe that we will be able to service the Southeastern U.S.
markets more effectively and will be in an excellent position to gain market
share in the Florida food service market. We believe that the operation of a new
facility in Florida will accelerate the significant growth opportunities that
the state of Florida has for our Hispanic-targeted brands. In April 2006, we
entered into a joint venture with Caruso's Coffee of Brecksville, Ohio and
formed Generations Coffee Company, LLC, a Delaware limited liability company,
which will engage in the roasting, packaging and sale of private label specialty
coffee products. We own 60% of the joint venture and are the exclusive supplier
of its coffee inventory. We believe that the Generations Coffee joint venture
will allow us to bid on the private label gourmet whole bean business we have
not been equipped to pursue from an operational standpoint in the past. With
this specialty roasting facility in place, in many cases right in the backyard
of our most important wholesale and retail customers, we believe that we are in
an ideal position to combine our current canned private label business with
high-end private label specialty whole bean business. High-end specialty whole
bean coffee sells for as much as three times more per pound than the canned
coffees in which we currently specialize. As of April 30, 2006, Generations
Coffee had not conducted any operations.
As a result of these efforts, we have increased net sales in our specialty
green coffee, private label and branded coffee business lines in both dollars
and pounds sold. In addition, we have increased the number of our customers in
all three areas.
Our net sales are also affected by the price of green coffee. We import
green coffee from Colombia, Mexico, Kenya, Brazil and Uganda, among others. The
supply and price of coffee beans are subject to volatility and are influenced by
numerous factors which are beyond our control. For example, coffee crops in
Brazil, which produces over one-third of the world's green coffee, are
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. 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. However, increased green coffee prices also
generally result in increased cost of sales. Cost of sales consists primarily of
the cost of green coffee and packaging materials and realized and unrealized
gains or losses on hedging activity.
9
Historically, we have used 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,
during the latter half of fiscal 2000, we began to acquire futures contracts
with longer terms, generally three to six 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 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. 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.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
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, 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:
o We recognize revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, "Revenue Recognition"
("SAB 104"). Under SAB 104, revenue is recognized at the point of
passage to the customer of title and risk of loss, when there is
persuasive evidence of an arrangement, the sales price is
determinable, and collection of the resulting receivable is
reasonably assured. We generally recognize revenue at the time of
shipment. Sales are reflected net of discounts and returns.
o 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
reduce our operating income by approximately $43,000.
o Inventories are stated at cost (determined on a first-in, first-out
basis). 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 write-down would have
reduced operating income by approximately $35,000 for the three
months ended April 30, 2006.
o We account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax assets and
liabilities are determined based on the liabilities, using 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 of $235,600 could need to be written off if we do not remain
profitable.
10
Comparison of Results of Operations for the Six Months Ended April 30, 2005 and
2006
Net Income and Earnings Per Share. Net income decreased $765,232, or
76.5%, to $235,404 or $.04 per share for the six months ended April 30, 2006
compared to $1,000,636 or $.25 per share for the six months ended April 30,
2005. The decrease in net income primarily reflects increased cost of sales and
lower margins on our branded and private label offerings due to market
conditions and increased promotional activities, offset in part by increased net
sales and increased other income. Earnings per share also decreased for the
comparable periods because, as a result of our initial public offering in May
2005, we had approximately 40% more shares of common stock outstanding during
the six months ended April 30, 2006 than we did during the six months ended
April 30, 2005.
Net Sales. Net sales totaled $25,855,773 for the six months ended April
30, 2006, an increase of $7,622,263 or 41.8% from $18,233,510 for the six months
ended April 30, 2005. The increase in net sales reflects an increase in pounds
of coffee sold due to increased sales of our private label, branded and
specialty green coffees. The number of our customers in the specialty green
coffee area grew approximately 2.1% from 280 customers at April 30, 2005 to 286
customers at April 30, 2006. These customers are predominately independent
gourmet/specialty roasters, some of whom own their own retail outlets. Sales to
new customers in this area historically start slowly because many of these
companies are start up ventures. Because the specialty green coffee area is the
fastest growing segment of the coffee market, we believe that our customer base
and sales will grow in this area. The increase in the price of the underlying
commodity (coffee) also contributed to the increase in net sales.
Cost of Sales. Cost of sales for the six months ended April 30, 2006 was
$22,667,636 or 87.7% of net sales, as compared to $13,908,385 or 76.3% of net
sales for the six months ended April 30, 2005. The increase in cost of sales
reflects increased purchases of green coffee associated with the increase in net
sales. Purchases increased $7,010,255 from $11,353,356 to $18,580,150 due to
increased pounds sold and higher coffee prices. Cost of sales also increased due
to a decrease in net gains on future contracts of $580,637. We acquire futures
contracts with longer terms (generally three to six months) primarily for the
purpose of guaranteeing an adequate supply of green coffee at favorable prices.
We had net gains on futures contracts of $379,785 for the six months ended April
30, 2006 compared to $960,422 for the six months ended April 30, 2005. The use
of these derivative financial instruments has enabled us to mitigate the effect
of changing prices, to increase our margins as coffee prices have increased and
to be more competitive with our pricing.
Gross Profit. Gross profit for the six months ended April 30, 2006 was
$3,188,137, a decrease of $1,136,988 or 26.3%, from $4,325,125 for the six
months ended April 30, 2005. Gross profit as a percentage of net sales decreased
to 12.3% for the six months ended April 30, 2006 from 23.7% for the six months
ended April 30, 2005. The decrease in our margins is mainly attributable to
decreased net gains on future contracts during the six months ended April 30,
2006 compared to the same period the previous year and an increase in Robusta
coffee prices on the London Robusta Market of approximately 32% from the same
period last year which negatively affected margins on our leading brand Cafe
Caribe, by approximately 16%.
Operating Expenses. Total operating expenses increased by $129,601 or 4.9%
to $2,774,475 for the six months ended April 30, 2006 from $2,644,874 for the
six months ended April 30, 2006, primarily due to increases in shipping costs,
office salaries and professional fees. The increase in shipping costs was
attributable to increased sales as well as higher trucking rates due to fuel
surcharges reflecting the higher price of oil. The increase in office salaries
reflected new personnel added to assist with the additional administrative
duties associated with our increase in net sales. Officers' salaries increased
by 3.4% to $272,180 for the six months ended April 30, 2006 compared to $263,296
for the six months ended April 30, 2006. Increased professional costs reflected
the formation of our Cafe La Rica and Generations Coffee joint venture. These
increases were partially offset by decreases in commissions paid and packaging
and development costs. The decrease in commissions paid reflected a higher
percentage of green coffee sales which do not customarily have commission
expense associated with them. The decrease in packaging development costs was
due to the completion in 2005 of our label redesign initiative.
11
Other Income. Other income increased by $69,757 to $13,742 for the six
months ended April 30, 2006 compared to other expense of $56,015 for the six
months ended April 30, 2005. The increase was attributable to both an increase
in interest income of $50,082 and a decrease in interest expense of $24,997
resulting from the improved cash flow and decreased reliance on line of credit
borrowings due to our initial public offering in May 2005. The increase was
partially offset by $5,322, being our share of the loss by our Cafe La Rica
joint venture which we formed in March 2006.
Income Before Taxes. We had income of $427,404 before income taxes for the
six months ended April 30, 2006 compared to income of $1,624,346 before income
taxes for the six months ended April 30, 2005. The decrease was attributable to
decreased income from operations, offset in part by increased other income.
Income Taxes. Our provision for income taxes for the six months ended
April 30, 2006 totaled $192,000 compared to $623,600 for the six months ended
April 30, 2005 as a result of decreased income before taxes.
Comparison of Results of Operations for the Three Months Ended April 30, 2005
and 2006
Net Loss. We had a net loss of $284,234, or ($.05) per share, for the
three months ended April 30, 2006 compared to net income of $598,356, or $.15
per share, for the three months ended April 30, 2005. The decrease in net income
primarily reflects increased cost of sales and lower margins on our branded and
private label offerings due to market conditions and increased promotional
activities, offset in part by increased net sales and decreased other expense.
Net Sales. Net sales totaled $12,010,928 for the three months ended April
30, 2006, an increase of $1,837,698 or 18.1% from $10,173,230 for the three
months ended April 30, 2006. The increase in net sales reflects an increase in
pounds of coffee sold due to increased sales of our private label, branded and
specialty green coffees. The number of our customers in the specialty green
coffee area grew approximately 2.1% from 280 customers at April 30, 2005 to 286
customers at April 30, 2006. These customers are predominately independent
gourmet/specialty roasters, some of whom own their own retail outlets. Sales to
new customers in this area historically start slowly because many of these
companies are start up ventures. Because the specialty green coffee area is the
fastest growing segment of the coffee market, we believe that our customer base
and sales will grow in this area. The increase in the price of the underlying
commodity (coffee) also contributed to the increase in net sales.
Cost of Sales. Cost of sales for the three months ended April 30, 2006 was
$11,148,234 or 92.8% of net sales, as compared to $7,920,372 or 77.9% of net
sales for the three months ended April 30, 2005. The increase in cost of sales
reflects increased purchases of green coffee associated with the increase in net
sales. Purchases increased $2,667,795 from $6,489,391 to $9,167,186 due to
increased pounds sold and higher coffee prices. Cost of sales also increased due
to a decrease in net gains on future contracts of $305,347. We acquire futures
contracts with longer terms (generally three to six months) primarily for the
purpose of guaranteeing an adequate supply of green coffee at favorable prices.
We had net losses on futures contracts of $65,679 for the three months ended
April 30, 2006 compared to net gains of $239,668 for the three months ended
April 30, 2005. The use of these derivative financial instruments has enabled us
to mitigate the effect of changing prices, to increase our margins as coffee
prices have increased and to be more competitive with our pricing.
Gross Profit. Gross profit for the three months ended April 30, 2006 was
$862,694, a decrease of $1,390,164 or 61.7%, from $2,252,858 for the three
months ended April 30, 2005. Gross profit as a percentage of net sales decreased
to 7.2% for the three months ended April 30, 2006 from 22.1% for the three
months ended April 30, 2005. The decrease in our margins is mainly attributable
to net losses on future contracts during the three months ended April 30, 2006
compared to net gains during the same period the previous year and an increase
in Robusta coffee prices on the London Robusta Market of approximately 32% from
the same period last year, which negatively affected margins on our leading
brand, Cafe Caribe, by approximately 16%.
12
Operating Expenses. Total operating expenses increased by $106,176 or 8.5%
to $1,355,663 for the three months ended April 30, 2006 from $1,249,487 for the
three months ended April 30, 2006, primarily due to increases in shipping costs,
office salaries and professional fees. The increase in shipping costs was
attributable to increased sales. The increase in office salaries reflected new
personnel added to assist with the additional administrative duties associated
with our increase in net sales. Increased professional costs reflected the
formation of our Cafe La Rica and Generations Coffee joint venture. These
increases were partially offset by decreases in commissions paid and packaging
and development costs. The decrease in commissions paid reflected a higher
percentage of green coffee sales which do not customarily have commission
expense associated with them. The decrease in packaging development costs was
due to the completion in 2005 of our label redesign initiative.
Other Expense. Other expense decreased $31,450 to $1,365 for the three
months ended April 30, 2006 compared to $32,815 for the three months ended April
30, 2005. The decrease was attributable to both an increase in interest income
of $22,786 and a decrease in interest expense of $13,986 resulting from the
improved cash flow and decreased reliance on line of credit borrowings due to
our initial public offering in May 2005. The decrease was partially offset by
$5,322, being our share of the loss by our Cafe La Rica joint venture which we
formed in March 2006.
Loss Before Taxes. We had a loss of $494,334 before income taxes for the
three months ended April 30, 2006 compared to income of $970,556 before income
taxes for the three months ended April 30, 2005. The decrease was attributable
to a loss from operations, partially offset by decreased other expense.
Income Taxes. Our benefit for income taxes for the three months ended
April 30, 2006 totaled $210,100 compared to a provision of $372,200 for the
three months ended April 30, 2005 as a result of a loss before taxes for the
three months ended April 30, 2006.
Liquidity and Capital Resources
As of April 30, 2006, we had working capital of $8,136,350 which
represented a $137,499 decrease from our working capital of $8,273,849 as of
October 31, 2005, and total stockholders' equity of $10,877,026, which increased
by $235,404 from our total stockholders' equity of $10,641,622 as of October 31,
2005. Our working capital decreased primarily due to a decrease in accounts
receivable of $899,654 and a decrease in inventories of $950,421, offset in part
by a $649,944 increase in cash, a decrease of $502,758 in accounts payable and
accrued expenses and an $183,455 decrease in line of credit borrowings. At April
30, 2006, the outstanding balance on our line of credit was $879,712 compared to
$1,063,167 at October 31, 2005. Total stockholders' equity primarily increased
due to net income for the six month period.
As of April 30, 2006, we had a financing agreement with Merrill Lynch
Business Financial Services Inc. This line of credit is for a maximum
$4,000,000, expires on October 31, 2006 and requires monthly interest payments
at a rate of LIBOR plus 2.15%. This loan is secured by a blanket lien on all of
our assets.
The credit facility contains covenants that place restrictions on our
operations. Among other things, these covenants: require us to maintain certain
financial ratios; require us to maintain a minimum net worth; and prohibit us
from merging with or into other companies, acquiring all or substantially all of
the assets of other companies, or selling all or substantially all of our assets
without the consent of the lender. These restrictions could adversely impact our
ability to implement our business plan, or raise additional capital, if needed.
In addition, if we default under our existing credit facility or if our lender
demands payment of a portion or all of our indebtedness, we may not have
sufficient funds to make such payments. As of April 30, 2006, we were in
compliance with all covenants contained in the credit facility.
For the six months ended April 30, 2006, our operating activities provided
net cash of $1,401,485 as compared to the six months ended April 30, 2005 when
net cash used by operating activities was $875,741. The increased cash flow from
operations for the six months ended April 30, 2006 was primarily due to
increased sales and collections from customers, offset by the increase in
prepaid expenses and other assets and a decrease in accounts payable and accrued
expenses, other assets and income taxes payable.
13
For the six months ended April 30, 2006, our investing activities used net
cash of $566,757 as compared to the six months ended April 30, 2005 when net
cash used by investing activities was $353,047. The increase in net cash used by
investing activities for the six months ended April 30, 2006 was due to our
investment in joint ventures. We believe that our investment in the Cafe La Rica
joint venture will enhance our prospects for long term growth by accelerating
growth opportunities in the state of Florida and that the Generations Coffee
joint venture will allow us to bid on the private label gourmet whole bean
business we have not been equipped to pursue from an operational standpoint in
the past and combine our current canned private label business with high-end
private label specialty whole bean business. High-end specialty whole bean
coffee sells for as much as three times more per pound than the canned coffees
in which we currently specialize. These increases were partially offset by a
decrease in purchases of property and equipment.
For the six months ended April 30, 2006, our financing activities used net
cash of $184,780 as compared to the six months ended April 30, 2005 when net
cash provided by financing activities was $1,000,385. The decreased cash flow
from financing activities was primarily due to increased net cash payments under
our line of credit. We expect to fund our operations, including paying our
liabilities, funding capital expenditures and making required payments on our
debts, through the next twelve months 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. We also believe we could, if necessary, obtain
additional loans by mortgaging our headquarters.
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,
results of operations, liquidity, capital expenditures or capital resources,
that is material to investors.
Item 3. 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. At April 30, 2006, our debt consisted of
$879,712 of variable rate debt under our revolving line of credit. At April 30,
2006, interest on the variable rate debt was payable primarily at 7.17% (or
2.15% above the one-month LIBOR rate) for the revolving line of credit.
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 short-term coffee futures and options contracts
primarily for the purpose of partially hedging and minimizing the effects of
changing green coffee prices, as further explained in Note 4 of the notes to
financial statements in this report. At April 30, 2006 we held 282 options
covering an aggregate of 10,575,000 pounds of green coffee beans at prices of
$1.10 and $1.11 per pound. The fair market value of these options, which was
obtained from major financial institutions, was $407,175 at April 30, 2006. The
use of these derivative financial instruments has enabled us to mitigate the
effect of changing prices although we generally remain exposed to loss when
prices decline significantly in a short period of time or remain at higher
levels, preventing us from obtaining inventory at favorable prices. We generally
have been able to pass green coffee price increases through to customers,
thereby maintaining our gross profits. However, we cannot predict whether we
will be able to pass inventory price increases through to our customers in the
future.
14
Item 4. Controls and Procedures.
Management, including our President, Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this report. Based upon that evaluation, the
President, and Chief Executive Officer, who is also the 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 to the Company's
management, including its President and Chief Executive Officer, who is also the
principal executive officer and principal financial officer, as appropriate to
allow timely discussions regarding disclosure.
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.
15
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
Not applicable.
Item 2. Unregistered Sales of Equity in Securities and Use of Proceeds.
On May 6, 2005, we concluded the public offering of 1,400,000 shares of
our common stock at a price of $5.00 per share and on June 16, 2005 the
underwriters exercised their option to purchase an additional 210,000 shares of
our common stock at a price of $5.00 per share. After underwriting discounts and
commissions and offering expenses, we received net proceeds of $6,436,016 in the
offering, after giving effect to the over-allotment option. We used portions of
the proceeds to pay down bank debt, to build up our inventories for sales
expansion, to fund our joint ventures and for general corporate purposes,
including working capital and capital expenditures. We also intend to use
certain proceeds to implement a branded sales and marketing campaign, to
purchase equipment for our La Junta, Colorado facility and to grow our food
service distribution. As strategic opportunities arise, we may use the proceeds
of the offering to fund acquisitions, licensing and other strategic alliances.
During the three months ended April 30, 2006, we did not repurchase any of
our common stock. We currently do not have a stock repurchase program in place.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On April 11, 2006, we held our annual meeting of stockholders. 4,605,571
shares, representing a majority of our issued and outstanding shares of common
stock, were represented.
At the meeting, Andrew Gordon, Daniel Dwyer and Barry Knepper were elected
to our Board of Directors for terms expiring at the 2009 annual meeting of
stockholders. David Gordon and John Rotelli were elected to our Board of
Directors for terms expiring at the 2008 annual meeting of stockholders. Gerard
DeCapua and Robert M. Williams were elected to our Board of Directors for terms
expiring at the 2007 annual meeting of stockholders. Election of directors was
the only proposal at the meeting.
16
The proposal submitted to shareholders and the tabulation of votes for the
proposal are as follows:
Election of Directors Votes For Votes Withheld
--------------------- --------- --------------
Gerard DeCapua 4,573,471 32,100
Daniel Dwyer 4,573,471 32,100
Andrew Gordon 4,605,571 0
David Gordon 4,605,571 0
Barry Knepper 4,605,571 0
John Rotelli 4,605,571 0
Robert M. Williams 4,605,571 0
Item 5. Other Information.
None.
Item 6. Exhibits.
11.1 Earnings Per Share Calculation
31.1 Rule 13a - 14(a)/15d - 14a Certification.
32.1 Section 1350 Certification.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coffee Holding Co., Inc.
----------------------------------------
(Registrant)
By: /s/ Andrew Gordon
------------------------------------
Andrew Gordon
President, Chief Executive Officer
and Chief Financial Officer
June 16, 2006