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: January 31, 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
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 February 28, 2006
PAGE
PART I
Item 1. Financial Statements ..............................................1
Condensed Balance Sheets
January 31, 2006 (unaudited) and October 31, 2005 .............1
Condensed Statements of Income
Three Months Ended January 31, 2006 and 2005 (unaudited) ......2
Condensed Statements of Cash Flows
Three Months Ended January 31, 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 .........................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......14
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 ................................................16
Item 6. Exhibits .........................................................16
Signatures ...................................................................17
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COFFEE HOLDING CO., INC.
CONDENSED BALANCE SHEETS
JANUARY 31, 2006 AND OCTOBER 31, 2005
January 31, October 31,
2006 2005
-------------- --------------
(unaudited)
- ASSETS -
CURRENT ASSETS:
Cash $ 1,845,600 $ 735,468
Due from broker 2,672,863 2,994,394
Accounts receivable, net of allowance for
doubtful accounts of $420,349 for 2006 and 2005 4,404,636 5,159,576
Inventories 3,456,891 4,496,578
Prepaid expenses and other current assets 314,923 284,170
Deferred tax asset 269,600 318,600
-------------- --------------
TOTAL CURRENT ASSETS 12,964,513 13,988,786
Property and equipment, at cost, net of accumulated
depreciation of $3,840,341 and $3,727,524 for 2006
and 2005, respectively 2,341,331 2,379,952
Deposits and other assets 210,556 176,575
-------------- --------------
TOTAL ASSETS $ 15,516,400 $ 16,545,313
============== ==============
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,392,866 $ 4,431,577
Current portion of obligations under capital lease -- 1,329
Line of credit borrowings 471,125 1,063,167
Income taxes payable - current 288,114 218,864
-------------- --------------
TOTAL CURRENT LIABILITIES 4,152,105 5,714,937
Income taxes payable - deferred 34,000 53,700
Deferred compensation payable 169,035 135,054
-------------- --------------
TOTAL LIABILITIES 4,355,140 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 5,530 5,530
Additional paid-in capital 7,327,023 7,327,023
Retained earnings 3,828,707 3,309,069
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 11,161,260 10,641,622
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,516,400 $ 16,545,313
============== ==============
See notes to Condensed Financial Statements.
1
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED JANUARY 31, 2006 AND 2005
(Unaudited)
2006 2005
-------------- --------------
NET SALES $ 13,844,845 $ 8,060,280
COST OF SALES 11,519,402 5,988,013
-------------- --------------
GROSS PROFIT 2,325,443 2,072,267
-------------- --------------
OPERATING EXPENSES:
Selling and administrative 1,282,837 1,268,065
Officers' salaries 135,975 127,321
-------------- --------------
TOTALS 1,418,812 1,395,386
-------------- --------------
INCOME FROM OPERATIONS 906,631 676,881
-------------- --------------
OTHER INCOME (EXPENSE)
Interest income 30,566 3,270
Interest expense (15,459) (26,470)
-------------- --------------
15,107 (23,200)
-------------- --------------
INCOME BEFORE INCOME TAXES 921,738 653,681
Provision for income taxes 402,100 251,400
-------------- --------------
NET INCOME $ 519,638 $ 402,281
============== ==============
Basic and diluted earnings per share $ .09 $ .10
============== ==============
Weighted average common shares outstanding:
Basic 5,529,830 3,999,650
============== ==============
Diluted 5,593,250 3,999,650
============== ==============
See notes to Condensed Financial Statements.
2
COFFEE HOLDING CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2006 AND 2005
(Unaudited)
2006 2005
-------------- --------------
OPERATING ACTIVITIES:
Net income $ 519,638 $ 402,281
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 112,817 105,000
Deferred taxes 29,300 (40,600)
Changes in operating assets and liabilities:
Due from broker 321,531 (66,251)
Accounts receivable 754,940 924,301
Inventories 1,039,687 (728,721)
Prepaid expenses and other assets (64,734) 26,982
Accounts payable and accrued expenses (1,038,711) (1,576,078)
Deferred compensation payable 33,981 --
Income taxes payable 69,250 35,500
-------------- --------------
Net cash provided by (used in) operating activities 1,777,699 (917,586)
-------------- --------------
INVESTING ACTIVITIES:
Purchases of property and equipment (74,196) (14,402)
Deposits and other assets -- (8,025)
-------------- --------------
Net cash (used in) investing activities (74,196) (22,427)
-------------- --------------
FINANCING ACTIVITIES:
Principal payments on term loan -- (252,000)
Advances under bank line of credit 10,317,070 3,480,045
Principal payments under bank line of credit (10,909,112) (2,685,045)
Principal payments of obligations under capital leases (1,329) (38,657)
-------------- --------------
Net cash (used in) provided by financing activities (593,371) 504,343
-------------- --------------
NET INCREASE (DECREASE) IN CASH 1,110,132 (435,670)
Cash, beginning of year 735,468 642,145
-------------- --------------
CASH, END OF PERIOD $ 1,845,600 $ 206,475
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 13,176 $ 32,366
============== ==============
Income taxes paid $ 299,321 $ 256,500
============== ==============
See notes to Condensed Financial Statements.
3
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JANUARY 31, 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.
NOTE 2 - BASIS OF PRESENTATION:
The interim financial information as of January 31, 2006 and for the
three-month periods ended January 31, 2006 and 2005 has been
prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and
regulations, although we believe that the disclosures made are
adequate to provide for fair presentation. These Financial
Statements should be read in conjunction with the Financial
Statements and the notes thereto, included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended October 31, 2005,
previously filed with the SEC.
In the opinion of management, all adjustments (which include normal
recurring adjustments) necessary to present a fair statement of
financial position as of January 31, 2006, and results of operations
and cash flows for the three months ended January 31, 2006 and 2005,
as applicable, have been made. The results of operations for the
three months ended January 31, 2006 are not necessarily indicative
of the operating results for the full fiscal year or any future
periods.
NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In May 2005, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards SFAS No. 154, Accounting
Changes and Error Corrections which replaces APB Opinion No. 20
Accounting Changes and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements--An Amendment of APB Opinion No. 28.
SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle
unless it is not practicable. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005 and is required to be adopted by
the Company in the fiscal year beginning November 1, 2006. Although
the Company will continue to evaluate the application of SFAS No.
154, management does not currently believe adoption will have a
material impact on the Company's results of operations or financial
position.
4
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JANUARY 31, 2006 AND 2005
(Unaudited)
NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued):
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No.123 (revised 2004), "Share-Based Payment" ("SFAS No.
123 (R)"), which requires the measurement and recognition of
compensation expense based on estimated fair value for all
share-based payment awards including stock options, employee stock
purchases under employee stock purchase plans, non-vested share
awards (restricted stock) and stock appreciation rights. SFAS No.
123 (R) supersedes our previous accounting under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). In March 2005, the SEC issued Staff
Accounting Bulletin ("SAB") No. 107, which provides the Staff's
views regarding implementation issues related to SFAS No. 123 (R).
The Company is required to adopt the provisions of SFAS No. 123 (R)
effective from the first interim period starting after December 15,
2005, which in the Company's case will be the quarter beginning
February 1, 2006. Management does not believe that the adoption of
SFAS No. 123 (R) will have any impact on the Company's results of
operations or financial position, as no employee options have been
issued to-date.
NOTE 4 - INVENTORIES:
Inventories at January 31, 2006 and October 31, 2005 consisted of
the following:
January 31, October 31,
2006 2005
-------------- --------------
Packed coffee $ 1,111,146 $ 1,276,050
Green coffee 1,568,466 2,483,061
Packaging supplies 777,279 737,467
-------------- --------------
Totals $ 3,456,891 $ 4,496,578
============== ==============
NOTE 5 - 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 January 31, 2006, the Company held 350 options (generally with
terms of two months or less) covering an aggregate of 13,125,000
pounds of green coffee beans at a price of $1.20 per pound. The fair
market value of these options, which was obtained from major
financial institutions, was $700,500 at January 31, 2006.
5
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JANUARY 31, 2006 AND 2005
(Unaudited)
NOTE 5 - HEDGING (Continued):
At January 31, 2005, the Company held 330 options (generally with
terms of two months or less) covering an aggregate of 12,375,000
pounds of green coffee beans at prices aggregating $.98, $1.00 and
$1.05 per pound. The fair market value of these options, which was
obtained from a major financial institution, was $1,012,688 at
January 31, 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 January 31, 2005, the Company
did not hold any futures contracts.
At January 31, 2006, the Company held 10 futures contracts for the
purchase of 375,000 pounds of coffee at an average price of $1.1820
per pound for April 2006 contracts. The market price of coffee
applicable to such contracts was $1.1820 per pound at that date.
Included in cost of sales and due from broker for the three months
ended January 31, 2006 and 2005, the Company recorded realized and
unrealized gains and losses respectively, on these contracts as
follows:
Three Months Ended January 31,
2006 2005
--------------- ---------------
Gross realized gains $ 616,213 $ 809,263
Gross realized losses $ (554,449) $ (296,443)
Unrealized gains $ 383,700 $ 207,934
NOTE 6 - 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 at LIBOR plus 2.15%. The facility
expires on October 31, 2006. This 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 January 31, 2006.
NOTE 7 - 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.
6
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JANUARY 31, 2006 AND 2005
(Unaudited)
NOTE 8 - EARNINGS PER SHARE:
The Company presents "basic" and "diluted" earnings per common share
pursuant to the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share". Basic earnings per share is
based on the weighted-average number of common shares outstanding
and diluted earnings per share is based on the weighted-average
number of common shares outstanding plus all potential dilutive
common shares outstanding.
Quarters Ended January 31,
2006 2005
------------ ------------
Net Income $ 519,638 $ 402,281
============ ============
BASIC EARNINGS:
Weighted average number of common
shares outstanding 5,529,830 3,999,650
============ ============
Basic earnings per common share $ 0.09 $ 0.10
============ ============
DILUTED EARNINGS:
Weighted average number of common
shares outstanding 5,529,830 3,999,650
Warrants - common stock equivalents 63,420 0
------------ ------------
Weighted average number of common
shares outstanding - as adjusted 5,593,250 3,999,650
============ ============
Diluted earnings per common share $ 0.09 $ 0.10
============ ============
NOTE 9 - ECONOMIC DEPENDENCY:
For the three months ended January 31, 2006, sales to one customer
was in excess of 10% of the Company's total sales. Sales to this
customer were approximately $3,750,000 and the corresponding
accounts receivable at January 31, 2006 from this customer was
approximately $719,000.
For the three months ended January 31, 2005, sales to one customer
was in excess of 10% of the Company's total sales. Sales to this
customer were approximately $1,839,000 and the corresponding
accounts receivable at January 31, 2005 from this customer was
approximately $480,000.
For the three months ended January 31, 2006, purchases from two
suppliers, were in excess of 10% of the Company's total purchases.
Purchases from these suppliers were approximately $3,872,000 and
$1,154,000 and the corresponding accounts payable to these suppliers
at January 31, 2006 were approximately $1,315,000 and $91,000,
respectively.
7
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JANUARY 31, 2006 AND 2005
(Unaudited)
NOTE 9 - ECONOMIC DEPENDENCY (Continued):
For the three months ended January 31, 2005, purchases from two
suppliers, were in excess of 10% of the Company's total purchases.
Purchases from these suppliers were approximately $2,657,000 and
$693,000 and the corresponding accounts payable to these suppliers
at January 31, 2005 were approximately $698,000 and $260,000,
respectively.
NOTE 10 - STOCK OPTION PLAN:
The Company has a stock option plan whereby options may be granted
to the Company's directors, officers, other key employees and
consultants. The Company has reserved 800,000 shares of common stock
for issuance under this plan. As of January 31, 2006 no options have
been granted.
NOTE 11 - NON-QUALIFIED DEFERRED COMPENSATION PLAN:
In January 2005, the Company established the "Coffee Holding Co.,
Inc. Non-Qualified Deferred Compensation Plan". Currently, there is
only one participant in the plan. Within the plan guidelines, this
employee is deferring a portion of his current salary and bonus. The
deferred amounts are invested in a qualified rabbi trust and are
classified on the Company's balance sheet as other assets.
8
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.
9
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. As a result of these efforts, net sales increased in our specialty
green coffee, private label and branded coffee business lines in both dollars
and pounds sold since the date of the acquisition. In addition, we 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. 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 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.
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, and we generally remain exposed to supply risk in the event of
non-performance by the counter-parties to any futures contracts. 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.
10
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.
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 $48,000.
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 writedown would have
reduced operating income by approximately $35,000 for the three
months ended January 31, 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.
11
Comparison of Results of Operations for the Three Months Ended January 31, 2005
and 2006
Net Income and Earnings Per Share. Net income increased $117,357, or
29.2%, to $519,638 or $.09 per share for the three months ended January 31, 2006
compared to $402,281 or $.10 per share for the three months ended January 31,
2005. The increase in net income primarily reflects increased net sales, offset
in part by an increase in cost of sales. While net income increased, earnings
per share 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 three months ended January 31, 2006 than we
did during the three months ended January 31, 2005. If the number of outstanding
shares of common stock had remained constant, our basic and diluted earnings per
share, based on the 3,999,650 shares outstanding during the three months ended
January 31, 2005, would have been $.13 per share for the three months ended
January 31, 2006.
Net Sales. Net sales totaled $13,844,845 for the three months ended
January 31, 2006, an increase of $5,784,565 or 71.8% from $8,060,280 for the
three months ended January 31, 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. For the quarter, sales of our Cafe Caribe
brand, as measured by Information Resources Incorporated data, increased
approximately 21.0% over the same period in 2005 due to new distribution and
increased promotional activity. The number of our customers in the specialty
green coffee area grew approximately 5.7% from 262 customers at January 31, 2005
to 277 customers at January 31, 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 January 31, 2006
was $11,519,402 or 83.2% of net sales, as compared to $5,988,013 or 74.3% of net
sales for the three months ended January 31, 2005. 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 increase in cost of sales
reflects increased purchases of green coffee in the amount of approximately
$5,022,000 due to increased pounds sold and high green coffee prices during the
period, an increase in packaging costs associated with the increase in net sales
of approximately $203,000, and a decrease in net gains on future contracts of
$275,290. As the price of coffee is cyclical and volatile and subject to many
factors, including weather, politics and economics, we are unable to predict the
purchase price of green coffee for fiscal 2006. 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 $445,464 for the three months ended January 31,
2006 compared to $720,754 for the three months ended January 31, 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 January 31, 2006 was
$2,325,443, an increase of $253,176 or 12.2%, from $2,072,267 for the three
months ended January 31, 2005. Gross profit as a percentage of net sales
decreased by 8.9% to 16.8% for the three months ended January 31, 2006 from
25.7% for the three months ended January 31, 2005. The decrease in our margins
is mainly attributable to decreased net gains on future contracts during the
three months ended January 31, 2006 compared to the same period the previous
year and a 61% increase in robusta coffee prices on the London Robusta Market
from the same period last year.
Operating Expenses. Total operating expenses increased by $23,426 or 1.7%
to $1,418,812 for the three months ended January 31, 2006 from $1,395,386 for
the three months ended January 31, 2006. Increases in shipping costs, office
salaries and professional fees were partially offset by decreases in travel
expenses and packaging development costs. 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 fees
associated with the failed acquisition of a west coast coffee company. The
decrease in packaging development costs was due to the completion in 2005 of our
label redesign initiative. The decrease in travel expenses was due to reduced
travel by officers during the 2006 period. Officers' salaries remained
relatively static at $135,975 for the three months ended January 31, 2006
compared to $127,321 for the three months ended January 31, 2006.
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Other Income. Other income increased $38,307 to $15,107 for the three
months ended January 31, 2006 compared to other expense of $23,200 for the three
months ended January 31, 2005. The increase was attributable to both an increase
in interest income of $27,296 and a decrease in interest expense of $11,011
resulting from the improved cash flow and decreased reliance on line of credit
borrowings due to our initial public offering in May 2005.
Income Before Taxes. We had income of $921,738 before income taxes for the
three months ended January 31, 2006 compared to income of $653,681 before income
taxes for the three months ended January 31, 2005. The increase was attributable
to increased income from operations and decreased other expense.
Income Taxes. Our provision for income taxes for the three months ended
January 31, 2006 totaled $402,100 compared to $251,400 for the three months
ended January 31, 2005 as a result of increased income before taxes.
Liquidity and Capital Resources
As of January 31, 2006, we had working capital of $8,812,408 which
represented a $538,559 increase from our working capital of $8,273,849 as of
October 31, 2005, and total stockholders' equity of $11,161,260, which increased
by $519,638 from our total stockholders' equity of $10,641,622 as of October 31,
2005. Our working capital increased primarily due to an increase of $1,110,132
in cash, a decrease in accounts receivable of $754,940 and a decrease in
inventories of $1,039,687, offset in part by a decrease of $1,038,711 in
accounts payable and accrued expenses. Obligations under our line of credit
borrowings also decreased by $592,042. At January 31, 2006, the outstanding
balance on our line of credit was $471,125 compared to $1,063,167 at October 31,
2005. Total stockholders' equity primarily increased due to net income for the
quarter.
As of January 31, 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 January 31, 2006, we were in
compliance with all covenants contained in the credit facility.
For the three months ended January 31, 2006, our operating activities
provided net cash of $1,777,699 as compared to the three months ended January
31, 2005 when net cash used by operating activities was $917,586. The increased
cash flow from operations for the three months ended January 31, 2006 was
primarily due to an increase of $1,768,408 in cash received from inventories and
an increase of $537,367 in accounts payable, offset in part by an increase of
$387,782 in the amount due from broker.
For the three months ended January 31, 2006, our investing activities used
net cash of $74,196 as compared to the three months ended January 31, 2005 when
net cash used by investing activities was $22,427. The increase in net cash used
by investing activities for the 2006 quarter was due to increased purchases of
property and equipment which reflected the purchase of equipment in a machinery
auction at the Winn Dixie roasting facility and the establishment of a food
service operation directly at our Brooklyn facility.
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For the three months ended January 31, 2006, our financing activities used
net cash of $593,371 as compared to the three months ended January 31, 2005 when
net cash provided by financing activities was $504,343. The decreased cash flow
from financing activities was primarily due to increased net cash payments under
our line of credit. In addition, during the three months ended January 31, 2005,
we used $252,000 to fully pay off a term loan we no longer utilize.
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,
changes in financial condition, revenues or expenses, 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 January 31, 2006, our debt consisted of
$471,125 of variable rate debt under our revolving line of credit. At January
31, 2006, interest on the variable rate debt was payable primarily at 6.71% (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 5 of the notes to
financial statements in this report. At January 31, 2006 we held 350 options
covering an aggregate of 13,125,000 pounds of green coffee beans at a price of
$1.20 per pound. The fair market value of these options, which was obtained from
major financial institutions, was $700,500 at January 31, 2006. 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
January 31, 2006, we held 10 futures contracts for the purchase of 375,000
pounds of coffee at an average price of $1.182 for April 2006 contracts. The
market price of coffee applicable to such contracts was $1.182 per pound at that
date. 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.
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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, Chief Executive Officer and 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 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.
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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. While we have not
yet used all of the offering proceeds, we used some of the proceeds to pay down
bank debt, to build up our inventories for sales expansion 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 January 31, 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.
During the three months ended January 31, 2006, no matters were submitted
to a vote of security holders.
Item 5. Other Information.
None.
Item 6. Exhibits.
31.1 Rule 13a - 14(a)/15d - 14a Certification.
32.1 Section 1350 Certification.
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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
March 16, 2006
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