COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2015 AND 2014
(UNAUDITED)
On February 17, 2009, the Company entered into a financing agreement with Sterling National Bank (“Sterling”) for a $5,000,000 credit facility. The credit facility is a revolving $5,000,000 line of credit and the Company can draw on the line at an amount up to 85% of eligible accounts receivable and 25% of eligible inventory consisting of green coffee beans and finished coffee not to exceed $1,000,000. Sterling shall have the right from time to time to adjust the foregoing percentages based upon, among other things, dilution, its sole determination of the value or likelihood of collection of eligible accounts receivables owed to the Company and considerations regarding inventory. The credit facility is payable monthly in arrears on the average unpaid balance of the line of credit at an interest rate equal to a per annum reference rate (3.25% and 3.75%) at July 31, 2015 and October 31, 2014, respectively.
On July 22, 2010, the credit facility was increased to $7,000,000. In addition, OPTCO was added as a co-borrower and the inventory sublimit was raised from $1,000,000 to $2,000,000. Subsequent to July 31, 2010, $1,800,000 of the credit facility was allocated to OPTCO.
On February 3, 2011, the Company amended their credit facility regarding the creation of a sublimit within the revolving line of credit in the form of a $300,000 term loan for the benefit of GCC. The Company provided a corporate guarantee to Sterling in connection with the amendment.
The initial term of the credit facility was for three years and expired on February 17, 2012. The initial terms of the credit facility provided that the credit facility may be automatically extended for successive periods of one year each unless one party shall have provided the other party with a written notice of termination at least ninety days prior to the expiration of the then current term. Prior to the expiration of the initial term, and effective as of February 12, 2012, the term was extended until February 17, 2014 and the interest rate was reduced to the Wall Street Journal Prime rate (which is currently 3.25%) plus one percent (1%). On May 10, 2013, the credit facility was extended until February 17, 2015.
On March 10, 2015, the Company entered into a loan modification agreement (the “Modification Agreement”) with Sterling. Pursuant to the Modification Agreement, the credit facility was modified to, among other things, (i) extend the term of the financing agreement until February 28, 2017; (ii) increase the maximum amount of the credit facility from $7,000,000 to $9,000,000; (iii) reduce the interest rate on the average unpaid balance of the line of credit from an interest rate equal to a per annum reference rate of 3.75% to an interest rate per annum equal to the Wall Street Journal Prime Rate (currently 3.25%); and (iv) require the Company to pay, upon the occurrence of certain termination events, a prepayment premium of .50% of the maximum amount of the credit facility in effect as of the date of the termination event. The credit facility is secured by all tangible and intangible assets of the Company.
The credit facility contains covenants that place annual restrictions on the Company’s operations, including covenants relating to debt restrictions, capital expenditures, minimum deposit restrictions, tangible net worth, net profit, leverage, employee loan restrictions, distribution restrictions (common stock and preferred stock), dividend restrictions, and restrictions on intercompany transactions. The credit facility also requires that the Company maintain a minimum working capital at all times. The Company was in compliance with all required financial covenants at July 31, 2015 and October 31, 2014.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2015 AND 2014
(UNAUDITED)
NOTE 8 - LINE OF CREDIT (cont’d):
As of July 31, 2015 and October 31, 2014, the outstanding balance under the bank line of credit was $3,031,458 and $2,498,458, respectively.
Also on March 10, 2015, the Company, as guarantor, and OPTCO (the “Borrower”), as borrower, entered into a new loan facility agreement with Sterling. The new loan facility is a revolving line of credit for a maximum of $3,000,000 (the “New Loan Facility”). The New Loan Facility terminates on February 28, 2017. The Borrower is able to draw on the New Loan Facility at an amount up to 85% of eligible accounts receivable, not to exceed 25% of all accounts of the Borrower. The New Loan Facility is payable monthly in arrears on the average unpaid balance of the line of credit at an interest rate per annum equal to the Wall Street Journal Prime Rate (currently 3.25%). The New Loan Facility is secured by all tangible and intangible assets of the Company. In connection with the New Loan Facility, the Company entered into a security agreement with Sterling and provided Sterling with a guarantee of the Borrower’s obligations.
As of July 31, 2015, the outstanding balance under the New Loan Facility was $1,237,000.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2015 AND 2014
(UNAUDITED)
NOTE 9 - EARNINGS PER SHARE:
The Company presents “basic” and “diluted” earnings per common share pursuant to the provisions included in the authoritative guidance issued by FASB, “Earnings per Share,” and certain other financial accounting pronouncements. Basic earnings per common share were computed by dividing net income by the sum of the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing the net income by the weighted-average number of common shares outstanding plus the dilutive effect of common shares issuable upon exercise of potential sources of dilution.
The weighted average common shares outstanding used in the computation of basic and diluted earnings per share were 6,215,894 for the three and nine months ended July 31, 2015. The weighted average common shares outstanding used in the computation of basic earnings per share were 6,344,487 and 6,362,933 for the three and nine months ended July 31, 2014. The weighted average common shares outstanding used in the computation of diluted earnings per share were 6,611,487 and 6,629,933 for the three and nine months ended July 31, 2014. In September 2011, the Company issued units to certain purchasers which contained warrants to purchase, in the aggregate, 267,000 shares of the Company’s common stock, all of which warrants are currently exercisable. The 267,000 shares of common stock underlying the warrants have been included in the diluted earnings per share calculation for the three and nine months ended July 31, 2014 because of their anti-dilutive impact.
NOTE 10 - ECONOMIC DEPENDENCY:
Approximately 57% of the Company’s sales were derived from one customer during the nine months ended July 31, 2015. This customer also accounted for approximately $5,400,000 of the Company’s accounts receivable balance at July 31, 2015. Approximately 52% of the Company’s sales were derived from one customer during the nine months ended July 31, 2014. This customer also accounted for approximately $7,900,000 of the Company’s accounts receivable balance at July 31, 2014. Concentration of credit risk with respect to other trade receivables is limited due to the short payment terms generally extended by the Company, by ongoing credit evaluations of customers, and by maintaining an allowance for doubtful accounts that management believes will adequately provide for credit losses.
For the nine months ended July 31, 2015, approximately 64% of the Company’s purchases were from four vendors. These vendors accounted for approximately $2,961,000 of the Company’s accounts payable at July 31, 2015. For the nine months ended July 31, 2014, approximately 62% of the Company’s purchases were from four vendors. These vendors accounted for approximately $2,844,000 of the Company’s accounts payable at July 31, 2014. Management does not believe the loss of any one vendor would have a material adverse effect of the Company’s operations due to the availability of many alternate suppliers.
Approximately 48% of the Company’s sales were derived from one customer during the three months ended July 31, 2015. Approximately 52% of the Company’s sales were derived from one customer during the three months ended July 31, 2014.
For the three months ended July 31, 2015, approximately 60% of the Company’s purchases were from four vendors. For the three months ended July 31, 2014, approximately 58% of the Company’s purchases were from three vendors. Management does not believe the loss of any one vendor would have a material adverse effect on the Company’s operations due to the availability of many alternate suppliers.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2015 AND 2014
(UNAUDITED)
NOTE 11 -RELATED PARTY TRANSACTIONS:
The Company has engaged its 40% partner in GCC as an outside contractor (the “Partner”). Included in contract labor expense are expenses incurred by the Partner during the three and nine months ended July 31, 2015 of $97,694 and $313,729, respectively, for the processing of finished goods.
An employee of one of the top four vendors is a director of the Company. Purchases from that vendor totaled approximately $17,900,000 and $3,000,000 for the nine and three months ended July 31, 2015 and $13,200,000 and $4,100,000 for the nine and three months ended July 31, 2014. The corresponding accounts payable balance to this vendor was approximately $608,000 and $387,000 at July 31, 2015 and 2014, respectively.
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: Andrew Gordon, the Company’s Chief Executive Officer. Within the plan guidelines, this employee is deferring a portion of his current salary and bonus. The assets are held in a separate trust. The deferred compensation payable represents the liability due to an officer of the Company. The assets are included in the Deposits and other assets in the accompanying balance sheets. The deferred compensation asset and liability at July 31, 2015 and October 31, 2014 were $477,478 and $515,549, respectively.
NOTE 12 - STOCKHOLDER’ EQUITY:
a. Treasury Stock. The Company utilizes the cost method of accounting for treasury stock. The cost of reissued shares is determined under the last-in, first-out method. The Company did not purchase any shares during the three and nine months ended July 31, 2015.
b. Share Repurchase Program. On January 24, 2014, the Company announced that the Board of Directors had approved a share repurchase program (the “Share Repurchase Program”) pursuant to which the Company may repurchase up to $1 million of the outstanding common stock from time to time on the open market and in privately negotiated transactions subject to market conditions, share price and other factors. The Share Repurchase Program may be discontinued or suspended at any time. As of July 31, 2015, pursuant to the terms of the Share Repurchase Program, the Company repurchased shares of outstanding common stock in an amount equal in value to $995,728.82.
NOTE 13 - SUBSEQUENT EVENTS:
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required further adjustment or disclosure in the condensed consolidated financial statements.
Cautionary Note on Forward-Looking Statements
Some of the matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this quarterly report include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements upon information available to management as of the date of this Form 10-Q and management’s expectations and projections about future events, including, among other things:
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our dependency on a single commodity could affect our revenues and profitability; |
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our success in expanding our market presence in new geographic regions; |
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the effectiveness of our hedging policy may impact our profitability; |
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the success of our joint ventures; |
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our success in implementing our business strategy or introducing new products; |
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our ability to attract and retain customers; |
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our ability to retain key personnel; |
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our ability to obtain additional financing; |
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our ability to comply with the restrictive covenants we are subject to under our current financing; |
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the effects of competition from other coffee manufacturers and other beverage alternatives; |
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the impact to the operations of our Colorado facility; |
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general economic conditions and conditions which affect the market for coffee; |
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the macro global economic environment; |
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our ability to maintain and develop our brand recognition; |
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the impact of rapid or persistent fluctuations in the price of coffee beans; |
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fluctuations in the supply of coffee beans; |
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the volatility of our common stock; and |
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other risks which we identify in future filings with the SEC. |
In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate” and similar expressions (or the negative of such expressions). Any or all of our forward-looking statements in this quarterly report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. In addition, we undertake no responsibility to update any forward-looking statement to reflect events or circumstances that occur after the date of this quarterly report.
Overview
We are an integrated wholesale coffee roaster and dealer in 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:
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the sale of wholesale specialty green coffee;
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the roasting, blending, packaging and sale of private label coffee; and
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the roasting, blending, packaging and sale of our eight brands of coffee.
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Our operating results are affected by a number of factors including:
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the level of marketing and pricing competition from existing or new competitors in the coffee industry;
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our ability to retain existing customers and attract new customers;
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our hedging policy;
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fluctuations in purchase prices, the supply of green coffee and the selling prices of our products; and
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our ability to manage inventory and operations and maintain gross margins.
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Our net sales are driven primarily by the success of our sales and marketing efforts and our ability to retain existing customers and attract new customers. For this reason, we have made, and will continue to evaluate, strategic decisions to invest in measures that are expected to increase net sales. These transactions include our acquisitions of certain assets of Premier Roasters, LLC, which included equipment and a roasting facility in La Junta, Colorado, the engagement of a West Coast Brand Manager to market our S&W brand and to increase sales of S&W coffee to new customers, our joint venture with Caruso’s Coffee, Inc. of Brecksville, Ohio, the transaction with OPTCO and the addition of three sales persons from the Café Bustelo division of Folgers to assist with the expansion of our Café Caribe and Supremo brands. We believe these efforts will allow us to expand our business.
Our net sales are affected by the price of green coffee. We purchase our green coffee from dealers located primarily within the United States. The dealers supply us with coffee beans from many countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. For example, in Brazil, which produces approximately 40% of the world’s green coffee, the coffee crops are historically susceptible to frost in June and July and drought in September, October and November. However, because we purchase coffee from a number of countries and are able to freely substitute one country’s coffee for another in our products, price fluctuations in one country generally have not had a material impact on the price we pay for coffee or on our results of operations, liquidity and capital resources. Historically, because we generally have been able to pass green coffee price increases through to customers, increased prices of green coffee generally result in increased net sales.
We have used, and intend to continue to use in a limited capacity, short-term coffee futures and options contracts primarily for the purpose of partially hedging and minimizing the effects of changing green coffee prices and to reduce our cost of sales. In addition, we acquire futures contracts with longer terms, generally three to four months, primarily for the purpose of guaranteeing an adequate supply of green coffee at favorable prices. Although the use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices, no strategy can entirely eliminate pricing risks and we generally remain exposed to loss when prices decline significantly in a short period of time. In addition, we would remain exposed to supply risk in the event of non-performance by the counterparties to any of our futures contracts. If the hedges that we enter into do not adequately offset the risks of coffee bean price volatility or our hedges result in losses, our cost of sales may increase, resulting in a decrease in profitability or increase of our losses. As previously announced, as a result of the volatile nature of the commodities markets, we have and are continuing to scale back our use of hedging and short-term trading of coffee futures and options contracts, and intend to continue to use these practices in a limited capacity going forward. See Item 3, Quantitative and Qualitative Disclosures About Market Risk.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventories, assets held for sale, income taxes and loss contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others, may be impacted significantly by judgment, assumptions and estimates used in the preparation of the financial statements:
Goodwill and the trademarks which are deemed to have indefinite lives are subject to annual impairment tests. Goodwill impairment tests require the comparison of the fair value and carrying value of reporting units. We assess the potential impairment of goodwill and intangible assets annually and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Upon completion of such review, if impairment is found to have occurred, a corresponding charge will be recorded. The value assigned to the customer list and relationships is being amortized over a twenty year period.
Because the Company is a single reporting unit, the closing NASDAQ Capital Market price of our common stock as of the acquisition date was used as a basis to measure the fair value of goodwill. Goodwill and the intangible assets will be tested annually at the end of each fiscal year to determine whether they have been impaired. Upon completion of each annual review, there can be no assurance that a material charge will not be recorded. Impairment testing is required more often than annually if circumstances indicate that an impairment or decline in value may have occurred.
Three Months Ended July 31, 2015 Compared to the Three Months Ended July 31, 2014
Net Sales. Net sales totaled $27,039,857 for the three months ended July 31, 2015, an increase of $411,286 or 1.5%, from $26,628,571 for the three months ended July 31, 2014. The increase in net sales reflects an increase in sales of our roasted product offerings of approximately $850,000, which was achieved despite a commodity pricing decrease of almost $0.75 per pound of green coffee period over period, which negatively impacted our wholesale green coffee sales.
Cost of Sales. Cost of sales for the three months ended July 31, 2015 was $24,991,366 or 92.4% of net sales, as compared to $23,574,095 or 88.5% of net sales for the three months ended July 31, 2014. The increase in cost of sales reflects higher production costs during the quarter.
Gross Profit. Gross profit decreased by $1,005,985, to $2,048,491 for the three months ended July 31, 2015 as compared to gross profit of $3,054,476 for the three months ended July 31, 2014. Gross profit as a percentage of net sales decreased by 3.9% for the three months ended July 31, 2015, as compared to gross profit as a percentage of net sales for the three months ended July 31, 2014. The decrease in our margins reflects a significant gain on hedging activity during the 2014 period as compared to the 2015 period and a commodity pricing decrease of almost $0.75 per pound of green coffee period over period, which negatively impacted our wholesale green coffee sales.
Operating Expenses. Total operating expenses increased by $71,119, or 3.9%, to $1,887,008 for the three months ended July 31, 2015 as compared to total operating expenses of $1,815,889 for the three months ended July 31, 2014. The increase in operating expenses was primarily due to an increase in selling and administrative expenses of $66,369.
Other Income Expense. Other expenses increased by $18,431 to $22,692 for the three months ended July 31, 2015 compared to other expenses of $4,261 for the three months ended July 31, 2014. Interest income increased by $305, interest expense increased by $18,885 and the loss on equity investment decreased by $149 for the three months ended July 31, 2015 compared to the three months ended July 31, 2014. The increase in interest income resulted from the increase in pre-finance agreements with the coffee growing cooperatives. The increase in interest expense resulted from an increase in the average balance outstanding on our line of credit.
Income Taxes. Our provision for income taxes for the three months ended July 31, 2015 totaled $40 compared to a provision of $450,952 for the three months ended July 31, 2014. The decrease reflects lower pre-tax income for the quarter.
Net Income. We had net income of $139,162, or $0.02 per share basic and diluted, for the three months ended July 31, 2015 compared to a net income of $758,947, or $0.12 per share basic and $0.11 per share diluted, for the three months ended July 31, 2014. In the three month period ended July 31, 2014, we had a gain resulting from our hedging activities, which impacted our net income for such period and our earnings per share by approximately $0.04 per share. Without the impact of hedging activities for the three months ended July 31, 2014 and 2015, our basic earnings per share would have been $0.08 for the 2014 period compared to approximately $0.05 per share for the 2015 period. The decrease in net income was due primarily to the reasons described above.
Nine Months Ended July 31, 2015 Compared to the Nine Months Ended July 31, 2014
Net Sales. Net sales totaled $95,708,890 for the nine months ended July 31, 2015, an increase of $16,335,223, or 20.6%, from $79,373,667 for the nine months ended July 31, 2014. The increase in net sales reflects a combination of increased sales of green and roasted coffee.
Cost of Sales. Cost of sales for the nine months ended July 31, 2015 was $92,816,224 or 97.0% of net sales, as compared to $68,239,903, or 85.9% of net sales for the nine months ended July 31, 2014. The increase in cost of sales reflects approximately $5.4 million net loss due to losses resulting from the liquidation of many of our previously entered hedging positions as we implemented our plan to scale back our use of hedging and short term trading of coffee futures and options contracts.
Gross Profit. Gross profit decreased $8,241,098 to $2,892,666 for the nine months ended July 31, 2015 as compared to gross profit of $11,133,764 for the nine months ended July 31, 2014. Gross profit as a percentage of net sales decreased by 11.0% for the nine months ended July 31, 2015 as compared to gross profit as a percentage of net sales for the nine months ended July 31, 2014. The decrease in our margins reflects net losses resulting from the liquidation of many of our previously entered hedging positions as we implemented our plan to scale back our use of hedging and short term trading of coffee futures and options contracts and a decrease in commodity pricing period over period.
Operating Expenses. Total operating expenses increased by $222,189, or 4.0%, to $5,776,428 for the nine months ended July 31, 2015 as compared to operating expenses of $5,554,239 for the nine months ended July 31, 2014. The increase in operating expenses was due to an increase in selling and administrative expense of $192,054 and an increase in officers’ salaries of $30,135.
Other Expense. Other expenses increased by $116,505 to $127,628 for the nine months ended July 31, 2015 compared to other expenses of $11,123 for the nine months ended July 31, 2014. Interest income decreased by $5,762, interest expense increased by $111,428 and the loss on equity investment decreased by $685 for the nine months ended July 31, 2015. The decrease in interest income resulted from fewer prepaid coffee advances to our growers during the period. The increase in interest expense resulted from an increase in the average balance outstanding on our line of credit.
Income Taxes. Our benefit for income taxes for the nine months ended July 31, 2015 totaled $1,189,785 compared to a provision of $2,114,905 for the nine months ended July 31, 2014. The decrease reflects no pre-tax income for the period.
Net Income. We had a net loss of $1,841,597, or $0.30 per share basic and diluted, for the nine months ended July 31, 2015 compared to net income of $3,391,907 or $0.53 per share basic and $0.51 diluted, for the nine months ended July 31, 2014. The decrease in net income was due primarily to the reasons described above.
Liquidity and Capital Resources
As of July 31, 2015, we had working capital of $21,591,502, which represented a $1,885,300 decrease from our working capital of $23,476,802 as of October 31, 2014, and total stockholders’ equity of $23,880,274, which represented a decrease of $1,841,597 from our total stockholders’ equity of $25,721,871 as of October 31, 2014. Our working capital decreased primarily due to a decrease of $467,462 in cash, $3,424,104 in accounts receivable, $2,765,836 in inventory and an increase of $1,770,000 in our line of credit, partially offset by increases of $547,756 in prepaid green coffee, $29,039 in prepaid expenses and other current assets, $1,433,818 in prepaid and refundable income taxes, $1,099,090 in deferred income tax asset, decreases of $3,093,085 in accounts payable and accrued expenses, $8,263 in due to broker and $331,051 in income taxes payable. At July 31, 2015, the outstanding balance on our line of credit was $4,268,458, compared to $2,498,458 at October 31, 2014. Total stockholders’ equity decreased due to a decrease in retained earnings as a result of our net loss.
For the nine months ended July 31, 2015, our operating activities used net cash of $1,806,268 as compared to the nine months ended July 31, 2014, during which operating activities used net cash of $1,805,450. The decreased cash flow from operations for the nine months ended July 31, 2015 was primarily due to our net loss of $1,821,605, deferred income taxes of $1,149,500, prepaid and other current assets of $29,039, prepaid green coffee of $547,756, prepaid and refundable income taxes of $1,433,818, accounts payable and accrued expenses of $3,093,085 and income taxes payable of $331,051, partially offset by accounts receivable of $3,424,104 and inventories of $2,765,836.
For the nine months ended July 31, 2015, our investing activities used net cash of $351,194 as compared to the nine months ended July 31, 2014 when net cash used in investing activities was $398,847. The decrease in our uses of cash in investing activities was due to our decreased purchases of equipment.
For the nine months ended July 31, 2015, our financing activities provided net cash of $1,690,000 compared to net cash provided by financing activities of $1,558,040 for the nine months ended July 31, 2014. The change in cash flow from financing activities for the nine months ended July 31, 2015 was primarily due to fact that we did not purchase any treasury stock, partially offset by the increase in the payment of dividends of $28,000 and our reduced net borrowings from our credit facility
On February 17, 2009, the Company entered into a financing agreement with Sterling National Bank (“Sterling”) for a $5,000,000 credit facility. The credit facility is a revolving $5,000,000 line of credit and the Company can draw on the line at an amount up to 85% of eligible accounts receivable and 25% of eligible inventory consisting of green coffee beans and finished coffee not to exceed $1,000,000. Sterling shall have the right from time to time to adjust the foregoing percentages based upon, among other things, dilution, its sole determination of the value or likelihood of collection of eligible accounts receivables owed to the Company, considerations regarding inventory. The credit facility is payable monthly in arrears on the average unpaid balance of the line of credit at an interest rate equal to a per annum reference rate (3.25% and 3.75%) at July 31, 2015 and October 31, 2014, respectively.
On July 22, 2010, the credit facility was increased to $7,000,000. In addition, OPTCO was added as a co-borrower and the inventory sublimit was raised from $1,000,000 to $2,000,000. Subsequent to July 31, 2010, $1,800,000 of the credit facility was allocated to OPTCO.
On February 3, 2011, the Company amended their credit facility regarding the creation of a sublimit within the revolving line of credit in the form of a $300,000 term loan for the benefit of GCC. The Company provided a corporate guarantee to Sterling in connection with the amendment.
The initial term of the credit facility was for three years and expired on February 17, 2012. The initial terms of the credit facility provided that the credit facility may be automatically extended for successive periods of one year each unless one party shall have provided the other party with a written notice of termination at least ninety days prior to the expiration of the then current term. Prior to the expiration of the initial term, and effective as of February 12, 2012, the term was extended until February 17, 2014 and the interest rate was reduced to the Wall Street Journal Prime rate (which is currently 3.25%) plus one percent (1%). On May 10, 2013, the credit facility was extended until February 17, 2015.
On March 10, 2015, the Company entered into a loan modification agreement (the “Modification Agreement”) with Sterling. Pursuant to the Modification Agreement, the credit facility was modified to, among other things, (i) extend the term of the financing agreement until February 28, 2017; (ii) increase the maximum amount of the credit facility from $7,000,000 to $9,000,000; (iii) reduce the interest rate on the average unpaid balance of the line of credit from an interest rate equal to a per annum reference rate of 3.75% to an interest rate per annum equal to the Wall Street Journal Prime Rate (currently 3.25%); and (iv) require the Company to pay, upon the occurrence of certain termination events, a prepayment premium of .50% of the maximum amount of the credit facility in effect as of the date of the termination event. The credit facility is secured by all tangible and intangible assets of the Company.
The credit facility contains covenants that place annual restrictions on the Company’s operations, including covenants relating to debt restrictions, capital expenditures, minimum deposit restrictions, tangible net worth, net profit, leverage, employee loan restrictions, distribution restrictions (common stock and preferred stock), dividend restrictions, and restrictions on intercompany transactions. The credit facility also requires that the Company maintain a minimum working capital at all times. The Company was in compliance with all required financial covenants at July 31, 2015 and October 31, 2014.
As of July 31, 2015 and October 31, 2014, the outstanding balance under the bank line of credit was $3,031,458 and $2,498,458, respectively.
Also on March 10, 2015, the Company as guarantor, and OPTCO (the “Borrower”), as borrower, entered into a new loan facility agreement with Sterling. The new loan facility is a revolving line of credit for a maximum of $3,000,000 (the “New Loan Facility”). The New Loan Facility terminates on February 28, 2017. The Borrower is able to draw on the New Loan Facility at an amount up to 85% of eligible accounts receivable, not to exceed 25% of all accounts of the Borrower. The New Loan Facility is payable monthly in arrears on the average unpaid balance of the line of credit at an interest rate per annum equal to the Wall Street Journal Prime Rate (currently 3.25%). The New Loan Facility is secured by all tangible and intangible assets of the Company. In connection with the New Loan Facility, the Company entered into a security agreement with Sterling and provided Sterling with a guarantee of the Borrower’s obligations.