ITEM 1A. RISK FACTORS
An
investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should
carefully consider the risks and uncertainties described below together with all of the other information included in this report.
In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations.
The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose
all of your investment.
Risks
affecting our Company
Because
our business is highly dependent upon a single commodity, coffee, any decrease in demand for coffee could materially adversely
affect our revenues and profitability. Our business is centered on essentially one commodity: coffee. Our operations have
primarily focused on the following areas of the coffee industry:
● the roasting, blending, packaging and distribution of private label coffee;
● the sale of wholesale specialty green coffee.
Demand
for our products is affected by:
● consumer tastes and preferences;
● global economic conditions;
● demographic trends; and
● the type, number and location of competing products.
Because
we rely on a single commodity, any decrease in demand for coffee would harm our business more than if we had more diversified
product offerings and could materially adversely affect our revenues and operating results.
The
COVID-19 pandemic has, and may continue to have, an adverse impact on our business, financial condition and results of operations.
The World Health Organization declared the novel coronavirus (COVID-19), first identified in Wuhan, China, a pandemic
in March 2020. Our business, financial condition and results of operations have been and are expected to continue to be adversely
affected by the COVID-19 pandemic. The COVID-19 pandemic has affected nearly all regions of the world, and preventative measures
taken to contain or mitigate the outbreak have caused, and are continuing to cause, business slowdown or shutdown in affected
areas. This has and could continue to negatively affect the global economy, including reduced consumer spending and disruption
of global supply chains. We cannot predict the degree to which our business, financial condition and results of operations will
be affected by the COVID-19 pandemic, but the effects could be material.
In
addition to the factors above, the COVID-19 pandemic has subjected our business to additional risk, including, but not limited
to:
At
this time, we cannot assess the ultimate economic impact of the COVID-19 pandemic on our business, operations or financial performance,
which will be determined by, among other things, the duration, severity and magnitude of such circumstances and governmental responses
and requirements relating to the pandemic, nor can we predict the long-term effects of governmental and public responses to changing
conditions. The extent to which the COVID-19 pandemic will impact our operations, liquidity or financial results in subsequent
periods is uncertain, but such impact could be material. If the COVID-19 pandemic becomes prolonged, and/or more severe, it could
exacerbate the negative impacts on our business and results of operations and may also heighten many of the other risks described
in this section entitled “Risk Factors.”
If
we are unable to geographically expand our branded and private label products, our growth will be impeded which could result in
reduced sales and profitability. Our business strategy emphasizes, among other things, geographic expansion of our branded
and private label products as opportunities arise. We may not be able to implement successfully this portion of our business strategy.
Our ability to implement this portion of our business strategy is dependent on our ability to:
● market our products on a national scale;
● increase our brand recognition on a national scale;
Our
sales and profitability may be adversely affected if we fail to successfully expand the geographic distribution of our branded
and private label products. In addition, our expenses could increase and our profits could decrease as we implement our growth
strategy.
If
our hedging policy is not effective, we may not be able to control our coffee costs, we may be forced to pay greater than market
value for green coffee and our profitability may be reduced. The supply and price of coffee beans are subject to volatility
and are influenced by numerous factors which are beyond our control. We have used and expect to continue to use to a lesser extent
short-term coffee futures and options contracts for the purpose of hedging the effects of changing green coffee prices. In addition,
we have acquired and expect to continue to acquire to a lesser extent futures contracts with longer terms, generally three to
four months, for the purpose of guaranteeing an adequate supply of green coffee. Realized and unrealized gains or losses on options
and futures contracts are reflected in our cost of sales. Gains on options and futures contracts reduce our cost of sales and
losses on options and futures contracts increase our cost of sales.
The
use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices. However, no
strategy can entirely eliminate pricing risks and we generally remain exposed to losses on futures contracts when prices decline
significantly in a short period of time, and we would generally remain exposed to supply risk in the event of non-performance
by the counterparties in any one of our physical contracts. Historically, we generally have been able to pass green coffee price
increases through to customers, thereby maintaining our gross profits, however, we may not be able to pass price increases through
to our customers in the future. Failure to properly design and implement an effective hedging strategy may materially adversely
affect our business and operating results. If the hedges that we enter do not adequately offset the risks of coffee bean price
volatility or our hedging results in losses, our cost of sales may increase, resulting in a decrease in profitability or an increase
in losses. Although we have had net gains on options and futures contracts in the past, we have incurred losses on options and
futures contracts during some reporting periods. In these cases, our cost of sales has increased, resulting in a decrease in our
profitability or an increase in losses. Such losses have and could in the future materially increase our cost of sales and materially
decrease our profitability or increase losses and adversely affect our stock price.
Any
inability to successfully implement our strategy of growth through selective acquisitions, licensing arrangements and other strategic
alliances, including joint ventures, could materially affect our revenues and profitability. Part of our growth strategy
utilizes the selective acquisition of coffee companies, the selective acquisition or licensing of additional coffee brands and
other strategic alliances including joint ventures, presents risks that could result in increased expenditures and could materially
adversely affect our revenues and profitability, including:
In
addition, any such acquisitions, licensing arrangements or strategic alliances may result in:
● potentially dilutive issuances of our equity securities;
● the incurrence of additional debt
● restructuring charges; and
As
has been our practice in the past, we will continuously evaluate any such acquisitions, licensing opportunities or strategic alliances
as they arise. However, we have not reached any new agreements or arrangements with respect to any such acquisition, licensing
opportunity or strategic alliance (other than those described herein) at this time and we may not be able to consummate any acquisitions,
licensing arrangements or strategic alliances on terms favorable to us or at all. The failure to consummate any such acquisitions,
licensing arrangements or strategic alliances may reduce our growth and expansion. In addition, if these acquisitions, licensing
opportunities or strategic alliances are not successful, our earnings could be materially adversely affected by increased expenses
and decreased revenues.
Our
revenues and profitability could be adversely affected if our joint ventures or acquisitions are not successful. We have
historically utilized joint ventures and acquisitions to grow our business and we intend to continue to seek opportunities for
new joint ventures and acquisitions that will be complimentary to our business. While we believe that our joint ventures will
be successful, losses in our joint ventures or any future joint ventures would hurt our profitability. In addition, we generally
will not be in a position to exercise sole decision-making authority regarding our joint ventures. Investments in joint ventures
may under certain circumstances, involve risks not present when a third party is not involved, including the possibility that
joint venture partners might become bankrupt or fail to fund their share of the required capital contributions. Joint venture
partners may have business interests, strategies or goals that are inconsistent with our business interests, strategies or goals
and may be, in cases where we have a minority interest, in a position to take actions contrary to our policies, strategies or
objectives. Any disputes that may arise between us and our joint venture partners may result in litigation or arbitration that
could increase our expenses and could prevent our officers and/or directors from focusing their time and effort exclusively on
our business strategies. In addition, we may in certain circumstances be liable for the actions of our third-party joint venture
partners.
Acquisitions
including strategic investments or alliances entail numerous risks, which may include:
● diversion of management’s attention from our existing businesses;
Our
failure to successfully complete the integration of any acquired business, and any adverse consequences associated with our acquisition
activities, could have a material adverse effect on our business, financial condition and operating results.
The
loss of any of our key customers, could negatively affect our revenues and decrease our earnings. No one customer accounted
for greater than 10% of our net sales during our 2020 fiscal year. We generally do not enter long-term contracts with most of
our customers, but we do enter into one and two year agreements with most our key customers on our private label business. Accordingly,
some of our customers can stop purchasing our products at any time without penalty and are free to purchase products from our
competitors. The loss of, or reduction in sales to any of our other customers to which we sell a significant amount of our products
or any material adverse change in the financial condition of such customers would negatively affect our revenues and decrease
our earnings.
If
we lose our key personnel, including Andrew Gordon and David Gordon, our revenues and profitability could suffer. Our
success depends to a large degree upon the services of Andrew Gordon, our President, Chief Executive Officer, Chief Financial
Officer and Treasurer, and David Gordon, our Executive Vice President – Operations and Secretary. We also depend to a large
degree on the expertise of our coffee roasters. We do not have employment contracts with our coffee roasters. Our ability to source
and purchase a sufficient supply of high quality coffee beans and to roast coffee beans consistent with our quality standards
could suffer if we lose the services of any of these individuals. As a result, our business and operating results would be adversely
affected. We may not be successful in obtaining and retaining a replacement for either Andrew Gordon or David Gordon if they elect
to stop working for us. In addition, we do not have key-person insurance on the lives of Andrew Gordon or David Gordon.
Our
indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business
downturns. From time to time, we utilize borrowings under our credit facility in connection with operations. Outstanding
debt could have important negative consequences to the holders of our securities, including the following:
● general domestic and global economic conditions;
● we may be subject to covenants that could restrict our operations.
Our
ability to make payments on our indebtedness and to fund our operations depends on our ability to generate cash in the future.
Our future operating performance is subject to market conditions and business factors that are beyond our control. If we are unable
to make payments on our debt, we may have to reduce or delay capital expenditures, sell assets, seek additional capital or restructure
or refinance our debt.
Our
credit facility contains covenants that place annual restrictions on our 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 we maintain a minimum working capital at all times. There can be no assurance that we will be in compliance
with all covenants in the future or that we will be able to modify the terms of the credit facility should that become necessary.
Failure to comply with any of these covenants and restrictions would result in an event of default under the loan agreement.
We
received a loan under the Paycheck Protection Program of the CARES Act, and all or a portion of the loan may not be forgivable.
In July, 2020, we received a $634,400 loan (the “PPP Loan”) pursuant to the Paycheck Protection Program of
the CARES Act. The receipt of the funds, and the forgiveness of the PPP Loan is dependent on us having initially qualified for
the loan and qualifying for the forgiveness of such loan based on our adherence to the forgiveness criteria. In June 2020, the
United States Congress passed the Payroll Protection Program Flexibility Act that made several significant changes to PPP Loan
provisions, including providing greater flexibility for loan forgiveness. We are using the proceeds from the PPP Loan to fund
payroll costs in accordance with the relevant terms and conditions of the CARES Act. We are following the government guidelines
and tracking costs to insure 100% forgiveness of the PPP Loan. To the extent the PPP Loan is not forgiven, we will be required
to repay that portion at an interest rate of 1% over a period of two years. If the conditions outlined in the loan program are
adhered to by us, all or part of such loan could be forgiven. However, we cannot provide any assurance that we will be eligible
for loan forgiveness or that any amount of the PPP Loan will ultimately be forgiven.
If
we fail to promote, enhance and maintain our brands, the value of our brands could decrease and our revenues and profitability
could be adversely affected. We believe that promoting and enhancing our brands is critical to our success. If our brand-building
strategy is unsuccessful, these expenses may never be recovered, and we may be unable to increase awareness of our brands or protect
the value of our brands. If we are unable to achieve these goals, our revenues and ability to implement our business strategy
could be adversely affected.
Our
success in promoting and enhancing our brands will also depend on our ability to provide customers with high quality products
and service. Although we take measures to ensure that we sell only fresh roasted coffee, we have no control over our roasted coffee
products once they are purchased by our customers. Accordingly, wholesale customers may store our coffee for longer periods of
time or resell our coffee without our consent, in each case, potentially affecting the quality of the coffee prepared from our
products. Although we believe we are less susceptible to quality control problems than many of our competitors because our products
are processed in-house under strict quality control guidelines which have been in place for more than 40 years, if consumers do
not perceive our products and service to be of high quality, then the value of our brands may be diminished and, consequently,
our operating results and ability to implement our business strategy may be adversely affected.
Our
roasting methods are not proprietary, so competitors may be able to duplicate them, which could harm our competitive position.
If our competitive position is weakened, our revenues and profitability could be materially adversely affected.
We consider our roasting methods essential to the flavor and richness of our roasted coffee and, therefore, essential
to our brands of coffee. Because we do not hold any patents for our roasting methods, it may be difficult for us to prevent competitors
from copying our roasting methods if such methods become known. If our competitors copy our roasting methods, the value of our
coffee brands may be diminished, and we may lose customers to our competitors. In addition, competitors may be able to develop
roasting methods that are more advanced than our roasting methods, which may also harm our competitive position.
The
success of our brand also depends in part on our intellectual property. We rely on a combination of trademarks, copyrights, service
marks, trade secrets and similar rights to protect our intellectual property. The success of our growth strategy depends on our
continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our
brand in both domestic and international markets. If our efforts to protect our intellectual property are not adequate, or if
any third party misappropriates or infringes on our intellectual property, the value of our brand may be harmed, which could have
a material adverse effect on our business. We may become engaged in litigation to protect our intellectual property, which could
result in substantial costs to us as well as diversion of management attention.
Since
we rely heavily on common carriers to ship our coffee on a daily basis, any disruption in their services or increase in shipping
costs could adversely affect our relationship with our customers, which could result in reduced revenues, increased operating
expenses, a loss of customers or reduced profitability. We rely on a number of common carriers to deliver coffee to our
customers and to deliver coffee beans to us. We have no control over these common carriers and the services provided by them may
be interrupted as a result of labor shortages, contract disputes and other factors. If we experience an interruption in these
services, we may be unable to ship our coffee in a timely manner, which could reduce our revenues and adversely affect our relationship
with our customers. In addition, a delay in shipping could require us to contract with alternative, and possibly more expensive,
common carriers and could cause orders to be cancelled or receipt of goods to be refused. Any significant increase in shipping
costs could lower our profit margins or force us to raise prices, which could cause our revenue and profits to suffer.
If
there was a significant interruption in the operation of our Colorado, Ohio or Massachusetts facilities, we may not have the capacity
to service all of our customers and we may not be able to service our customers in a timely manner, thereby reducing our revenues
and earnings. We are dependent on the continued operations of our Colorado, Ohio and Massachusetts coffee roasting and
distribution facilities. Our ability to maintain our computer and telecommunications equipment in effective working order and
to protect against damage from fire, natural disaster, power loss, telecommunications failure or similar events. In addition,
growth of our customer base may strain or exceed the capacity of our systems and lead to degradations in performance or systems
failure. Although we continually review and consider upgrades to our order fulfillment infrastructure and provide for system redundancies
to limit the likelihood of systems overload or failure, substantial damage to our systems or a systems failure that causes interruptions
for a number of days could adversely affect our business. Additionally, if we are unsuccessful in updating and expanding our order
fulfillment infrastructure, our ability to grow may be constrained. As a result, our revenues and earnings could be materially
adversely affected.
There
may be limitations on the effectiveness of our internal controls, and a failure of our control systems to prevent error or fraud
may materially harm our company. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report
by our management on, among other things, the effectiveness of our internal control over financial reporting. This assessment
includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented
or detected on a timely basis.
As
of October 31, 2020, we have identified material weaknesses in our internal control over financial reporting related to the accounting
for stock-based compensation awards and an overstatement in inventory levels and the valuation of inventory at one of our subsidiaries.
If our steps are insufficient to successfully remediate these material weaknesses and otherwise maintain an effective system of
internal control over financial reporting, the reliability of our financial reporting, investor confidence in us and the value
of our common stock could be adversely affected.
Effective
internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with
adequate disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Any failure to implement required
new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations.
Undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements
and require us to incur the expense of remediation.
Moreover,
we do not expect that disclosure controls or internal control over financial reporting will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Failure of our control systems to detect or prevent error or fraud could materially adversely impact us.
Our
remediation efforts may not enable us to avoid a material weakness in our internal control over financial reporting
in the future. Any of the foregoing occurrences, should they come to pass, could negatively impact the public perception of our
company, which could have a negative impact on our stock price.
The
failure of our suppliers or customers to adhere to the quality standards that we set for our products could lead to investigations, litigation,
write-offs, recalls or boycotts of our products, which could damage our reputation and our brand, increase our costs, and otherwise
adversely affect our business. Unfavorable allegations, government investigations and legal actions surrounding our products and/or
our business could harm our reputation, impair our ability to grow or sustain our business, and adversely affect our business,
financial condition and operating results. We do not control the operations of our suppliers or customers and we cannot
guarantee that our suppliers or customers will comply with applicable laws and regulations or operate in a legal, ethical and
responsible manner. Additionally, it is possible that we may not be able to identify noncompliance by our suppliers or customers
notwithstanding any precautionary measures we implement. Violation of applicable laws and regulations by our suppliers or customers,
or their failure to operate in a legal, ethical or responsible manner, could expose us to legal risks, cause us to violate laws
and regulations and reduce demand for our products if, as a result of such violation or failure, we attract negative publicity.
In addition, the failure of our suppliers and customers to adhere to the quality standards that we set for our products could
lead to government investigations, litigation, write-offs and recalls, which could damage our reputation and our brand, increase
our costs, and otherwise adversely affect our business.
We
rely on our reputation for offering great value, superior service and a broad assortment of high-quality, safe products. If we
become subject to unfavorable allegations, government investigations or legal actions involving our products or us, such circumstances
could harm our reputation and our brand and adversely affect our business, financial condition and operating results. If this
negative impact is significant, our ability to grow or sustain our business could be jeopardized.
As
disclosed further herein, we have been named as a defendant in one class action lawsuit, and we have agreed to indemnify a client
named in another class action lawsuit, alleging that our products were mislabeled and thus violate consumer protection and false
advertising statutes, among others. These lawsuits, which generally allege that our coffee products do not make the number of
servings as stated on the label, are affecting the entire coffee industry and numerous similar lawsuits have been filed against
numerous private label coffee manufacturers and retailers.
Negative
publicity surrounding product matters, including publicity about other retailers, may harm our reputation and affect the demand
for our products. In addition, if more stringent laws or regulations are adopted in the future, we may have difficulty complying
with the new requirements imposed by such laws and regulations, and in turn, our business, financial condition, and operating
results could be adversely affected. Moreover, regardless of whether any such changes are adopted, we may become subject to claims
or governmental investigations alleging violations of applicable laws and regulations. Any such matter may subject us to fines,
penalties, and/or litigation. Any one of these results could negatively affect our business, financial condition, and operating
results and impair our ability to grow or sustain our business.
Risks
related to the coffee industry
Increases
in the cost of high quality Arabica or Robusta coffee beans could reduce our gross margin and profit. Green coffee is
our largest single cost of sales. Coffee is a traded commodity and, in general, its price can fluctuate depending on:
● weather patterns in coffee-producing countries;
● foreign currency fluctuations; and
If
the cost of wholesale green coffee increases due to any of these factors, our margins could decrease and our profitability could
suffer accordingly. It is expected that coffee prices will remain volatile in the coming years. Although we have historically
attempted to raise the selling prices of our products in response to increases in the price of wholesale green coffee, when wholesale
green coffee prices increase rapidly or to significantly higher than normal levels, we are not always able to pass the price increases
through to our customers on a timely basis, if at all, which adversely affects our operating margins and cash flow. We may not
be able to recover any future increases in the cost of wholesale green coffee. Even if we are able to recover future increases,
our operating margins and results of operations may still be materially and adversely affected by time delays in the implementation
of price increases.
Disruptions
in the supply of green coffee could result in a deterioration of our relationship with our customers, decreased revenues or could
impair our ability to grow our business. Green coffee is a commodity and its supply is subject to volatility beyond our
control. Supply is affected by many factors in the coffee growing countries including weather, pest damage, economic conditions,
acts of terrorism, as well as efforts by coffee growers to expand or form cartels or associations. In addition, the political
situation in many of the Arabica coffee growing regions, including Africa, Indonesia, and Central and South America, can be unstable,
and such instability could affect our ability to purchase coffee from those regions. If Arabica coffee beans from a region become
unavailable or prohibitively expensive, we could be forced to discontinue particular coffee types and blends or substitute coffee
beans from other regions in our blends. Frequent substitutions and changes in our coffee product lines could lead to cost increases,
customer alienation and fluctuations in our gross margins.
Some
of the Arabica coffee beans of the quality we purchase do not trade directly on the commodity markets. Rather, we purchase the
high-end Arabica coffee beans that we use on a negotiated basis. We depend on our relationships with coffee brokers, exporters
and growers for the supply of our primary raw material, high quality Arabica coffee beans. If any of our relationships with coffee
brokers, exporters or growers deteriorate, we may be unable to procure a sufficient quantity of high quality coffee beans at prices
acceptable to us or at all. In such case, we may not be able to fulfill the demand of our existing customers, supply new retail
stores or expand other channels of distribution. A raw material shortage could result in a deterioration of our relationship with
our customers, decreased revenues or could impair our ability to expand our business.
The
coffee industry is highly competitive and if we cannot compete successfully, we may lose our customers or experience reduced sales
and profitability. The coffee markets in which we do business are highly competitive and competition in these markets
could become increasingly more intense due to the increasing popularity and growth of the coffee industry. The industry in which
we compete is particularly sensitive to price pressure, as well as quality, reputation and viability for wholesale and brand loyalty
for retail. To the extent that one or more of our competitors becomes more successful with respect to any key competitive factor,
our ability to attract and retain customers could be materially adversely affected. Our private label and branded coffee products
compete with other manufacturers of private label coffee and branded coffees. These competitors, such as Kraft Foods, Inc. (owner
of the Maxwell House brand), and J.M. Smucker Co. (owner of the Folgers and Café Bustelo brands), have much greater financial,
marketing, distribution, management and other resources than we do for marketing, promotions and geographic and market expansion.
In addition, there are a growing number of specialty coffee companies who provide specialty green coffee and roasted coffee for
retail sale. If we are unable to compete successfully against existing and new competitors, we may lose our customers or experience
reduced sales and profitability.
Besides
coffee, we face exposure to other commodity cost fluctuations, which could impair our profitability. In addition to the
increase in coffee costs discussed in the risk factor above, we are exposed to cost fluctuation in other commodities, including,
in particular, steel, natural gas and gasoline. In addition, an increase in the cost of fuel could indirectly lead to higher electricity
costs, transportation costs and other commodity costs. Much like coffee costs, the costs of these commodities depend on various
factors beyond our control, including economic and political conditions, foreign currency fluctuations, and global weather patterns.
To the extent we are unable to pass along such costs to our customers through price increases, our margins and profitability will
decrease.
Adverse
public or medical opinion about caffeine may harm our business. Coffee contains caffeine and other active compounds, the
health effects of some of which are not fully understood. A number of research studies conclude or suggest that excessive consumption
of caffeine may lead to increased heart rate, nausea and vomiting, restlessness and anxiety, depression, headaches, tremors, sleeplessness
and other adverse health effects. An unfavorable report on the health effects of caffeine or other compounds present in coffee
could significantly reduce the demand for coffee, which could harm our business and reduce our sales and profits. In addition,
we could become subject to litigation relating to the existence of such compounds in our coffee; litigation that could be costly
and could divert management attention.
Risks
related to our common stock
Our
operating results may fluctuate significantly, which makes our results of operations difficult to predict and could cause our
results of operations to fall short of expectations. Our operating results may fluctuate from quarter to quarter and year
to year as a result of a number of factors, many of which are outside of our control. These fluctuations could be caused by a
number of factors including:
● fluctuations in purchase prices and supply of green coffee;
● fluctuations in the selling prices of our products;
● the success of our hedging strategy;
● our ability to retain existing customers and attract new customers; and
As
a result of the foregoing, period-to-period comparisons of our operating results may not necessarily be meaningful and those comparisons
should not be relied upon as indicators of future performance. Accordingly, our operating results in future quarters may be below
market expectations. In this event, the price of our common stock may decline.
The
Gordon family has the ability to influence action requiring stockholder approval. Members of the Gordon family, including
Andrew Gordon, our President, Chief Executive Officer, Chief Financial Officer and Treasurer, and David Gordon, our Executive
Vice President and Secretary, own, in the aggregate, approximately 15.3% of our outstanding shares of common stock. As a result,
the Gordon family is able to influence the actions that require stockholder approval, including:
● the election of a majority of our directors;
● the amendment of our charter documents; and
As
a result, our other stockholders may have reduced influence over matters submitted for stockholder approval. In addition, the
Gordon family’s influence could preclude any unsolicited acquisition of us and consequently materially adversely affect
the price of our common stock.
The
market price of our common stock has been volatile over the year and may continue to be volatile. The market price and
trading volume of our common stock has been volatile over the past year and it may continue to be volatile. Over the past year,
our common stock has traded as low as $1.76 and as high as $5.37 per share. We cannot predict the price at which our common stock
will trade in the future and it may decline. The price at which our common stock trades may fluctuate significantly and may be
influenced by many factors, including our financial results, developments generally affecting the coffee industry, general economic,
industry and market conditions, the depth and liquidity of the market for our common stock, fluctuations in coffee prices, investor
perceptions of our business, reports by industry analysts, negative announcements by our customers, competitors or suppliers regarding
their own performances, and the impact of other “Risk Factors” discussed in this Annual Report.
Provisions
in our articles of incorporation, bylaws and of Nevada law have anti-takeover effects that could prevent a change in control that
could be beneficial to our stockholders, which could depress the market price of shares of our common stock. Our articles
of incorporation, bylaws and Nevada corporate law contain provisions that could delay, defer or prevent a change in control of
us or our management that could be beneficial to our stockholders. These provisions could also discourage proxy contests and make
it more difficult for our stockholders to elect directors and take other corporate actions. These provisions might also discourage
a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then
current market price for shares of our common stock. These provisions:
● limit the right of our stockholders to call a special meeting of stockholders;
We
are also subject to certain anti-takeover provisions under Nevada law. Under Nevada law, a corporation may not, in general, engage
in a business combination with any “interested stockholder” for two (2) years after the date the person first became
an interested stockholder, unless the combination meets all of the requirements of our articles of incorporation and (i) the purchase
of shares by the interested stockholder is approved by our board of directors before that date or (ii) the combination is approved
by our board of directors and, at or after that time, the combination is approved at an annual or special meeting of our stockholders,
and not by written consent, by the affirmative vote of the holders of stock representing at least sixty percent (60%) of our outstanding
voting power not beneficially owned by the interested stockholder or the affiliates or associates of the interested stockholder.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM 2. PROPERTIES
We
are headquartered at 3475 Victory Boulevard, Staten Island, New York, where we lease office and warehouse space. We pay annual
rent of $129,420 under the terms of the lease, which expires on October 31, 2023.
We
lease a 50,000 square foot facility located at 27700 Frontage Road in La Junta, Colorado from the City of La Junta. We pay annual
rent of $100,093 under the terms of the lease, which expires in January 2024.
We
lease production, warehouse and office space in North Arlington, MA. We pay annual rent of $168,288 under the terms of a lease,
which expires in May 2028.
We
lease production, warehouse and office space in Madison, WI. For Steep & Brew, through our joint venture with “GCC”.
We pay annual rent of $114,660 under the terms of a lease, which expires in September 2024.
We
also use a variety of independent, bonded commercial warehouses to store our green coffee beans. Our management believes that
our facilities are adequate for our current operations and for our contemplated operations in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We
were named as a defendant in a putative class action lawsuit filed in the United States District Court for the Northern District
of Illinois on or about December 21, 2020. The plaintiffs, Eileen Brodsky and Rhonda Diamond, purporting to represent a class
of individuals who purchased coffee products at one of our supermarket customers, generally allege that such
client sold private label coffee products manufactured by us and one of our partners, which falsely described the number
of cups of coffee that could be made from the amount of product purchased. These parties are also named as defendants in
the action. The complaint asserts a variety of claims under New York and California consumer protection laws, and seeks unspecified
monetary damages, including disgorgement and restitution, as well as other forms of relief including class certification, declaratory
and injunctive relief, attorneys’ fees, and interest. We believe the allegations in the complaint are wholly without merit
and that the claims asserted are legally deficient, and the company intends to vigorously defend the action. As of the filing
of this Form 10-K, we have not been served with the complaint. Therefore, we are unable to predict the ultimate outcome of this
lawsuit.
A
significant customer of ours was named as a defendant in a putative class action lawsuit filed in the United States District Court
for the District of Massachusetts on or about February 2, 2021, concerning the labeling on private label coffee productions we
sold to the customer. The plaintiff, David Cohen, purporting to represent a class of individuals who purchased coffee products
from our customer, generally allege that the customer sold private label coffee products manufactured by us which falsely described
the number of cups of coffee that could be made from the amount of product purchased. We are not named as a defendant in the action,
but we have agreed to indemnify the customer for the costs and expenses incurred in defending the lawsuit and for any liability
the customer may suffer as a result. The complaint asserts a variety of claims under Massachusetts consumer protection laws, and
seeks unspecified monetary damages as well as other forms of relief including class certification, declaratory and injunctive
relief, attorneys’ fees, and interest. We believe the allegations in the complaint are wholly without merit and that the
claims asserted are legally deficient, and we intend to vigorously support the customer in defending the action. As of the filing
of this Form 10-K, we are unable to predict the ultimate outcome of this lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
II
Our
common stock trades on the NASDAQ Capital Market under the symbol “JVA.” We do not currently pay cash dividends on
our common stock. Our board of directors does not have any intention of paying a dividend in the future.
As
of January 20, 2021, we had 170 holders of record.
ITEM 6. SELECTED FINANCIAL DATA
The
following table sets forth selected financial data for the last five years from the consolidated financial statements of Coffee
Holding Co., Inc. The following information is only a summary, and you should read it in conjunction with our consolidated financial
statements and notes beginning on page F-1.
For the Years Ended October 31,
(Dollars in thousands, except per share data)
Income Statement Data:
At October 31,
(Dollars in thousands, except per shares data)
Balance Sheet Data:
At October 31,
Per Common Share Data:
Basic & Diluted EPS $ (.02 ) $ (.02 ) $ .19 $ .08 $ (.36 )
Cash dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Cautionary
Note on Forward-Looking Statements
Some
of the matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results
of Operation,” “Business,” “Risk Factors” and elsewhere in this annual report include forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have based
these forward-looking statements upon information available to management as of the date of this Form 10-K and management’s
expectations and projections about future events, including, among other things:
● our success in expanding our market presence in new geographic regions;
● the effectiveness of our hedging policy may impact our profitability;
● the success of our joint ventures;
● our success in implementing our business strategy or introducing new products;
● our ability to attract and retain customers;
● our ability to obtain additional financing;
● the impact to the operations of our Colorado facility;
● general economic conditions and conditions which affect the market for coffee;
● the macro global economic environment;
● our ability to maintain and develop our brand recognition;
● the impact of rapid or persistent fluctuations in the price of coffee beans;
● fluctuations in the supply of coffee beans;
● the volatility of our common stock; and
In
some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,”
“predict,” “potential,” “continue,” “expect,” “anticipate,” “future,”
“intend,” “plan,” “believe,” “estimate” and similar expressions (or the negative
of such expressions). Any or all of our forward looking statements in this annual report and in any other public statements we
make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties.
Consequently, no forward-looking statement can be guaranteed. In addition, we undertake no responsibility to update any forward-looking
statement to reflect events or circumstances, that occur after the date of this annual report.
Overview
We
are an integrated wholesale coffee roaster and dealer in the United States and one of the few coffee companies that offers a broad
array of coffee products across the entire spectrum of consumer tastes, preferences and price points. As a result, we believe
that we are well-positioned to increase our profitability and endure potential coffee price volatility throughout varying cycles
of the coffee market and economic conditions.
Our
operations have primarily focused on the following areas of the coffee industry:
● the sale of wholesale specialty green coffee;
● the roasting, blending, packaging and sale of private label coffee;
● the roasting, blending, packaging and sale of our eight brands of coffee; and
● sales of our tabletop coffee roasting equipment.
Our
operating results are affected by a number of factors including:
● our ability to retain existing customers and attract new customers;
● our hedging policy;
Our
net sales are driven primarily by the success of our sales and marketing efforts and our ability to retain existing customers
and attract new customers. For this reason, we have made, and will continue to evaluate, strategic decisions to invest in
measures that are expected to increase net sales. These transactions include our acquisition of Premier Roasters, LLC,
including equipment and a roasting facility in La Junta, Colorado, the addition of a west coast sales manager to increase
sales of our private label and branded coffees to new customers, our joint venture with Caruso’s Coffee, Inc. of
Brecksville, Ohio, the transaction with OPTCO. On June 29, 2016, we purchased substantially all the assets, including
equipment, inventory, customer lists and relationships of Coffee Kinetics, LLC, a Washington limited liability
company. On June 29, 2016, we purchased through SONO, substantially all the assets, including equipment, inventory, customer
list and relationships of Coffee Kinetics, LLC, a Washington limited liability company. On February 24, 2017, we acquired
100% of the capital stock of Comfort Foods, Inc. (“CFI”), a Massachusetts based medium sized coffee roaster,
manufacturing both branded and private label coffee for retail and foodservice customers. In April 2018, Generations Coffee
Company, the entity formed as a result of our joint venture with Caruso’s Coffee, Inc., purchased substantially all the
assets of Steep & Brew, Inc. In October 2020, we entered into the Jordre Well Agreement to become a 49% owner in The
Jordre Well, a CBD beverage company. Under the terms of the Jordre Well Agreement, The Jordre Well will assist us in the
development and commercialization of CBD-infused line extensions for the existing coffee brands within our portfolio, as well
as launch new brands that are intended to serve consumer demand for non-coffee CBD-infused beverages and products. We believe
these efforts will allow us to expand our business. We believe these efforts will allow us to expand our business.
Our
net sales are affected by the price of green coffee. We purchase our green coffee from dealers located primarily within the United
States. The dealers supply us with coffee beans from many countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and
Uganda. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond
our control. For example, in Brazil, which produces approximately 40% of the world’s green coffee, the coffee crops are
historically susceptible to frost in June and July and drought in September, October and November. However, because we purchase
coffee from a number of countries and are able to freely substitute one country’s coffee for another in our products, price
fluctuations in one country generally have not had a material impact on the price we pay for coffee. Accordingly, price fluctuations
in one country generally have not had a material effect on our results of operations, liquidity and capital resources. Historically,
because we generally have been able to pass green coffee price increases through to customers, increased prices of green coffee
generally result in increased net sales, irrespective of sales volume.
The
supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control.
Historically, we have used, and intend to continue to use in a limited capacity, short-term coffee futures and options contracts
primarily for the purpose of partially hedging the effects of changing green coffee prices, as further explained in Note 2 of
the Notes to the Consolidated Financial Statements in this Report. In addition, we acquired, and expect to continue to acquire,
futures contracts with longer terms, generally three to four months, primarily for the purpose of guaranteeing an adequate supply
of green coffee. Realized and unrealized gains or losses on options and futures contracts are reflected in our cost of sales.
Gains on options and futures contracts reduce our cost of sales and losses on options and futures contracts increase our cost
of sales. The use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices.
We believe that, in normal economic times, our hedging policies remain a vital element to our business model not only in controlling
our cost of sales, but also giving us the flexibility to obtain the inventory necessary to continue to grow our sales while trying
to minimize margin compression during a time of historically high coffee prices. However, no strategy can entirely eliminate pricing
risks and we generally remain exposed to losses on futures contracts when prices decline significantly in a short period of time,
and we would generally remain exposed to supply risk in the event of non-performance by the counterparties to any of our futures
contracts. Although we have had net gains on options and futures contracts in the past, we have incurred significant losses on
options and futures contracts during some recent reporting periods. In these cases, our cost of sales has increased, resulting
in a decrease in our profitability or increase our losses. Such losses have and could in the future materially increase our cost
of sales and materially decrease our profitability and adversely affect our stock price. See “Item 1A – Risk Factors
- If our hedging policy is not effective, we may not be able to control our coffee costs, we may be forced to pay greater than
market value for green coffee and our profitability may be reduced.” Failure to properly design and implement an effective
hedging strategy may materially adversely affect our business and operating results. If the hedges that we enter do not adequately
offset the risks of coffee bean price volatility or our hedges result in losses, our cost of sales may increase, resulting in
a decrease in profitability or increased losses. As previously announced, as a result of the volatile nature of the commodities
markets, we have and are continuing to scale back our use of hedging and short-term trading of coffee futures and options contracts,
and intend to continue to use these practices in a limited capacity going forward.
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, business combinations, carrying amounts of intangible assets
and goodwill, deferred taxes, income taxes, commodities held 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:
Customer list and relationships, net $ 490,621
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 an event or circumstance
indicates that an impairment or decline in value may have occurred.
Year
Ended October 31, 2020 (Fiscal Year 2020) Compared to the Year Ended October 31, 2019 (Fiscal Year 2019)
Net
Sales. Net sales totaled $74,335,815 for the fiscal year ended October 31, 2020, a decrease of $12,131,617, or 14%, from
$86,467,432 for the fiscal year ended October 31, 2019. The decrease in net sales was due to the COVID-19 pandemic which caused
many of our green coffee customers who service the restaurant and food service industry as well as our customers in the food service
space to either close or suspend their business operations during the period resulting in lost revenues from that segment of our
customer base. Also, supermarket sales returned to more traditional levels, as the stockpiling in the second quarter of the year
did not repeat for the remaining six months of the year.
Cost