10-K
1
form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
For
the fiscal year ended October 31, 2020
For
the transition period from ____________ to _______________.
Commission
file number: 001-32491
COFFEE
HOLDING CO., INC.
(Exact
name of registrant as specified in its charter)
3475 Victory Boulevard, Staten Island, New York 10314
(Address of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (718) 832-0800
Securities
registered under Section 12(b) of the Act:
Title of each class: Trading Symbol Name of each exchange on which registered:
Common Stock, Par Value $0.001 Per Share JVA NASDAQ Capital Market
Securities
registered under Section 12(g) of the Exchange Act: None
Indicate
by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [X]
Indicate
by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Emerging
Growth Company [ ]
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of the common equity held by non-affiliates of the registrant, computed by reference to the closing price
of the registrant’s common stock on the NASDAQ Capital Market on April 30, 2020, was $13,910,209.
As
of January 20, 2021, the registrant had 5,708,599 shares of common stock, par value $0.001 per share, outstanding.
Documents
incorporated by reference
Portions
of the registrant’s proxy statement for the 2020 annual meeting of stockholders to be filed pursuant to Regulation 14A within
120 days after the registrant’s fiscal year ended October 31, 2020, are incorporated by reference in Part III of this Form
10-K.
TABLE
OF CONTENTS
Page
PART I 1
ITEM 1. BUSINESS 1
ITEM 1A. RISK FACTORS 9
ITEM 1B. UNRESOLVED STAFF COMMENTS 18
ITEM 2. PROPERTIES 18
ITEM 3. LEGAL PROCEEDINGS 18
ITEM 4. MINE SAFETY DISCLOSURES 18
ITEM 6. SELECTED FINANCIAL DATA 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27
ITEM 9A. CONTROLS AND PROCEDURES 28
ITEM 9B. OTHER INFORMATION 28
PART III 29
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 29
ITEM 11. EXECUTIVE COMPENSATION 29
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 29
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 30
SIGNATURES 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
i
PART
I
ITEM 1. BUSINESS
General
Overview
Products
and Operations. We are an integrated wholesale coffee roaster and dealer in the United States. Our core products can be
divided into three categories:
Our
private label and branded coffee products are sold throughout the United States, Canada and certain countries in Asia to supermarkets,
wholesalers, and individually owned and multi-unit retail customers. Our unprocessed green coffee, which includes over 90 specialty
coffee offerings, is primarily sold to specialty gourmet roasters.
We
conduct our operations in accordance with strict freshness and quality standards. All of our private label and branded coffees
are produced from high quality coffee beans that are deep roasted for full flavor using a slow roasting process that has been
perfected utilizing our more than 40 years of experience in the coffee industry. In order to ensure freshness, our products are
delivered to our customers within 72 hours of roasting. We believe that our long history has enabled us to develop a loyal customer
base.
In
June 2016, we acquired substantially all of the assets of Coffee Kinetics LLC (doing business as Sonofresco) through our wholly-owned
subsidiary Sonofresco, LLC (“Sonofresco” or “SONO”), including equipment, inventory, customer lists, relationships
and accounts payable. In addition to our wholesale green coffee, private label coffee and branded coffee product offerings, we
currently sell tabletop coffee roasting equipment to our customers through Sonofresco.
On
February 23, 2017, we purchased all the outstanding common stock of Comfort Foods, Inc. (“CFI”). CFI is a medium sized
regional roaster, manufacturing both branded and private label coffee for retail and foodservice customers located predominantly
in the northeast United States marketplace.
On
April 24, 2018, pursuant to an Asset Purchase Agreement, by and among Generations Coffee Company, LLC (“GCC”) the
entity formed as a result of the Company’s joint venture with Caruso’s Coffee, Inc. and Steep & Brew, Inc. (“the
Seller”) a Wisconsin corporation and the stockholder of the Seller. GCC purchased substantially all the assets, including
equipment, inventory, customer lists and relationships of the Seller.
On
October 15, 2020, we entered into a Contribution and Equity Purchase Agreement (the “Jordre Well Agreement”) to become
a 49% owner in The Jordre Well, LLC (“The Jordre Well”), a cannabidiol (“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 plan to infuse our brands Café Caribe Latin Espresso and Harmony
Bay Gourmet coffee, with CBD as soon as we are comfortable with our formulations. We believe CBD coffee will be a fast growing
and profitable market for us and if the legislative environment surrounding CBD products continues to improve, our plan is to
offer all our customers the opportunity to infuses their products with CBD.
We
were incorporated on October 9, 1995 under the laws of the State of Nevada under the name Transpacific International Group Corp
(“Transpacific”). On April 16, 1998, Transpacific completed a merger with Coffee Holding Co., Inc., a New York corporation.
Upon the consummation of the merger, Coffee Holding Co., Inc. was merged into Transpacific and Transpacific changed its name to
Coffee Holding Co., Inc.
Our
corporate offices are located at 3475 Victory Boulevard, Staten Island, New York 10314. Our telephone number is (718) 832-0800
and our website address is www.coffeeholding.com. The information on our website is not incorporated by reference into this Annual
Report on Form 10-K.
Our
Competitive Strengths
To
achieve our growth objectives described below, we intend to leverage the following competitive strengths:
Positioned
to Profitably Grow Through Varying Cycles of the Coffee Market. We believe that we are one of the few coffee companies
to offer a broad array of branded and private label roasted ground coffees and wholesale green coffee across the spectrum of consumer
tastes, preferences and price points. While many of our competitors engage in distinct segments of the coffee business, we sell
products in each of the following areas:
● Retail branded coffee;
● Mainstream retail private label coffee;
● Specialty retail coffees both private label and branded;
● Wholesale specialty green and gourmet whole bean coffees;
● Single cup coffee pods;
● Food service;
● Instant coffees;
● Tea; and
● Tabletop coffee roasting equipment.
Our
branded and private label roasted ground coffees are sold at competitive and value price levels while some of our other branded
and specialty coffees are sold predominantly at premium price levels. Premium price level coffee is high-quality gourmet coffee,
such as AA Arabica coffee, which sell at a substantial premium over traditional retail canned coffee, while competitive and value
price level coffee is mainstream or traditional canned coffee. Because of this diversification, we believe that our profitability
is not dependent on any one area of the coffee industry and, therefore, is less sensitive than our competition to potential coffee
commodity price and overall economic volatility.
Wholesale
Green Coffee Market Presence. As a large roaster-dealer of green coffee, we believe that we are favorably positioned to
increase our specialty coffee sales. Since 1998, we have increased the number of our wholesale green coffee customers, including
coffee houses, single store operators, mall coffee stores and mail order sellers, by 813% from 150 to 1,370. We are a charter
member of the Specialty Coffee Association of America and one of the largest distributors of Swiss Water Processed Decaffeinated
Coffees and Dattera specialty Brazil coffees along the east coast of the United States. Our over 40 years of experience as a roaster
and a dealer of green coffee allows us to provide our roasting experience as a value added service to our gourmet roaster customers.
The assistance we provide to our customers includes training, coffee blending and market identification. We believe that our relationships
with wholesale green coffee customers and our focus on selling green coffee as a wholesaler has enabled us to participate in the
growth of the specialty coffee market while mitigating the risks associated with the competitive retail specialty coffee environment.
Diverse
Portfolio of Differentiated Branded Coffees. We have amassed a portfolio of eight proprietary name brands sold to supermarkets,
wholesalers and individually owned stores in the United States, including brands for specialty espresso, Latin espresso, Italian
espresso, 100% Colombian coffee and blended and flavored coffees. In addition, we have entered into a licensing agreement with
Del Monte Corporation for the exclusive right to use the S&W trademark in the United States and other countries approved by
Del Monte Corporation in connection with the production, manufacture and sale of roasted whole bean and ground coffee for distribution
to retail customers. Our existing portfolio of differentiated brands combined with our management expertise serve as a platform
to add additional name brands through acquisition or licensing agreements which target product niches and segments that do not
compete with our existing brands.
Management
Has Extensive Experience in the Coffee Industry. Andrew Gordon, our President, Chief Executive Officer, Chief Financial
Officer and Treasurer, and David Gordon, our Executive Vice President – Operations, have worked with Coffee Holding for
39 and 41 years, respectively. During this period, the company has successfully navigated varying cycles in both the coffee industry
and macro economy. David Gordon is an original member of the Specialty Coffee Association of America. We believe that our employees
and management are dedicated to our vision and mission, which is to produce high quality products, as well as to provide quality
and responsive service to our customers.
Our
Growth Strategy
We
believe that significant growth opportunities exist by selectively pursuing strategic acquisitions and alliances, targeting the
rapidly growing Latin market in the United States, increasing penetration with existing customers by adding new products, and
developing our Harmony Bay brand and increase the number of our wholesale green coffee customers. By capitalizing on this strategy,
we hope to continue to grow our business with our commitment to quality and personalized service to our customers. We do not intend
to compete on price alone nor do we intend to expand sales at the expense of profitability.
Selectively
Pursue Strategic Acquisitions and Alliances. We have expanded our operations by acquiring coffee companies, entering into
strategic alliances and acquiring or licensing brands, which complement our business objectives and we intend to continue to seek
such opportunities.
Grow
Our Cafe Caribe and Cafe Supremo Products. We believe the Latin population in the United States is the fastest growing
and now represents the largest minority demographic in the United States. We believe there is significant opportunity for our
Café Caribe and Café Supremo brands to gain market share among Latin consumers in the United States. Café
Caribe, which has historically been our leading brand by poundage, is a specialty espresso coffee that targets espresso coffee
drinkers and, in particular, Latin consumers. Café Supremo is a specialty espresso coffee which is priced for the more
price sensitive Latin espresso coffee drinker.
Further
Market Penetration of Our Niche Products. We intend to capture additional market share through our existing distribution
channels by selectively adding or introducing new brand names and products across multiple price points, including:
● New licensing agreements;
● Specialty blends and foodservice opportunities;
● CBD coffee products as legislation allows; and
● Sales of our tabletop coffee roasting equipment.
Our
Core Products
Our
core products can be divided into three categories:
Wholesale
Green Coffee. The specialty coffee market remains the fastest growing area of our industry. The number of gourmet coffee
houses have been increasing in all areas of the United States. The growth in specialty coffee sales has created a marketplace
for higher quality and differentiated products, which can be priced at a premium in the marketplace. As a large roaster-dealer
of green coffee, we are favorably positioned to increase our specialty coffee sales. We sell green coffee beans to small roasters
and coffee shop operators located throughout the United States and carry over approximately 90 different varieties. Specialty
green coffee beans are sold unroasted, direct from warehouses to small roasters and gourmet coffee shop operators, which then
roast the beans themselves. We sell from as little as one bag (132 pounds) to a full truckload (44,000 pounds) of specialty green
coffee beans, depending on the size and need of the customer. We believe that we can increase sales of wholesale green coffee
without an increase in infrastructure as well as without venturing into the highly competitive retail specialty coffee environment.
We believe that by utilizing our current strategy we can be as profitable or more profitable than our competitors in this segment
by selling “one bag at a time” rather than “one cup at a time.”
Private
Label Coffee. We roast, blend, package and sell coffee under private labels for companies throughout the United States
and Canada. Our private label coffee is sold in cans, brick packages and instants in a variety of sizes. As of October 31, 2020,
we supplied coffee under approximately 21 different labels to wholesalers and retailers. We produce private label coffee
for customers who desire to sell coffee under their own name but do not want to engage in the manufacturing process. Our private
label customers seek a quality similar to the national brands at a lower cost, which represents a better value for the consumer.
Branded
Coffee. We roast and blend our branded coffee according to our own recipes and package the coffee at our facilities in
La Junta, Colorado, North Andover, Massachusetts and Brecksville, Ohio. We then sell the packaged coffee under our brand labels
to supermarkets, wholesalers and individually-owned stores throughout the United States.
We
hold trademarks for each of our proprietary name brands and have the exclusive right to use the S&W, IL CLASSICO brand names
in the United States in connection with the production, manufacture and sale of roasted whole bean and ground coffee for distribution
at the retail level. For further information regarding our trademark rights, see “Business—Trademarks.”
Each
of our name brands is directed at a particular segment of the coffee market. Our branded coffees are:
Cafe
Caribe, a specialty espresso coffee that targets espresso coffee drinkers and, in particular, the Latin consumer market;
Don
Manuel, is produced from the finest 100% Colombian coffee beans. Don Manuel is an upscale quality product which
commands a substantial premium compared to the more traditional brown coffee blends. We also use this known trademark
in our food service business because of the high brand quality;
S&W,
an upscale canned coffee established in 1921 and includes Premium, Premium Decaf, French Roast, Colombian, Colombian Decaf, Swiss
Water Decaf, Kona, Mellow’d Roast and IL CLASSICO lines;
Cafe
Supremo, a specialty espresso that targets espresso drinkers of all backgrounds and tastes. It is designed to introduce
coffee drinkers to the tastes of dark roasted coffee;
Via
Roma, an Italian espresso targeted at the more traditional espresso drinker;
Premier
Roasters, a line of high quality retail and foodservice products packed in composite cans and poly bags and single serve;
Harmony
Bay, an upscale line of flavored beans in 11oz and 40oz bags, along with single serve offerings in a multitude of unique
flavor profiles; and
Steep
and Brew, a premium line of specialty coffees with over 30 years brand recognition. These coffees are comprised of Single
Origin, Blended and Flavored coffees sold throughout the upper Midwest region of the United States in bulk whole bean, whole bean
and ground bags and single serve format compatible with most single serve brewers.
Other
Products
We
also offer several niche products, including:
● tea; and
● table-top coffee roasters and grinders.
Raw
Materials
Coffee
is a commodity traded on the Commodities and Futures Exchange subject to price fluctuations. Over the past five years, the average
price per pound of coffee beans ranged from approximately $0.92 to $2.25. The price for coffee beans on the commodities market
as of October 31, 2020 and 2019 was $1.04 and $1.02 per pound, respectively. Specialty green coffee, unlike most coffee, is not
tied directly to the commodities cash markets. Instead, it tends to trade on a negotiated basis at a substantial premium over
commodity coffee pricing, depending on the origin, supply and demand at the time of purchase. We are a licensed Fair Trade dealer
for Fair Trade certified coffee. Fair Trade certified coffee helps small coffee farmers to increase their incomes and improve
the prospects of their communities and families by guaranteeing farmers a minimum price of ten cents above the current market
price. Our Ohio Facility operated by Generations Coffee Company, LLC (“GCC”), as well as our North Andover plant operated
by our Comfort Foods division, are certified organic by the Organic Crop Improvement Association (OCIA). All of our specialty
green coffees, as well as all of the other coffees we import for roasting, are subject to multiple levels of quality control.
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. For the fiscal years ended 2020 and 2019, approximately
23% of all of our green coffee purchases were from five suppliers. One of these suppliers, Rothfos Corporation, accounted for
approximately $5.3 million, or 8%, in 2020, and $8.3 million, or 12%, in 2019, of our total product purchases. An employee of
Rothfos Corporation is one of our directors. We do not have any formalized, material agreements or long-term contracts with any
of these suppliers. Rather, our purchases are typically made pursuant to individual purchase orders. We do not believe that the
loss of any one supplier, including Rothfos, would have a material adverse effect on our operations due to the availability of
alternate suppliers.
The
supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control.
Supply and price can be affected by factors such as weather, politics, currency fluctuations and economics within the countries
that export coffee. Increases in the cost of coffee beans can, to a certain extent, be passed on to our customers in the form
of higher prices for coffee beans and processed coffee. Drastic or prolonged increases in coffee prices may also adversely impact
our business as it could lead to a decline in overall consumption of coffee. Similarly, rapid decreases in the cost of coffee
beans may force us to lower our sale prices before realizing cost reductions in our purchases.
We
subject all of our private unroasted green coffee to both a pre-shipment sample approval and an additional sample approval upon
arrival into the United States. Once the arrival sample is approved, we then bring the coffee to one of our facilities to roast
and blend according to our own strict specifications. During the roasting and blending process, samples are pulled off the production
line and tested on an hourly basis to ensure that each batch roasted is consistent with the others and meets the strict quality
standards demanded by our customers and us.
Our
Use of Derivatives
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 and to reduce our costs of sales, 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 of 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 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 in any one of our physical 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 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. See “Quantitative and Qualitative Disclosures About Market Risk—Commodity
Price Risks.”
Trademarks
and Tradename
We
hold trademarks, registered with the United States Patent and Trademark Office, for all eight of our proprietary coffee brands
and an exclusive license for S&W, IL CLASSICO brands for sale in the United States. Trademark registrations are subject to
periodic renewal and we anticipate maintaining our registrations. We believe that our brands are recognizable in the marketplace
and that brand recognition is important to the success of our branded coffee business.
Customers
We
sell our private label and our branded coffee to some of the largest retail and wholesale customers in the United States (according
to Supermarket News).
Although
our agreements with wholesale customers generally contain only pricing terms, our contracts with certain customers also contain
minimum and maximum purchase obligations at fixed prices. Because our profits on a fixed-price contract could decline if coffee
prices increased, 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 or increased
losses 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 futures contracts.
See “Our Use of Derivatives.”
Marketing
We
market our private label and wholesale coffee through trade shows, industry publications, face-to-face contact and through the
use of our internal sales force and non-exclusive independent food and beverage sales brokers. We also use our web site (www.coffeeholding.com)
as a method of marketing our coffee products and ourselves.
For
our private label and branded coffees, we will, from time to time in conjunction with retailers and with wholesalers, conduct
in-store promotions, such as product demonstrations, coupons, price reductions, two-for-one sales and new product launches to
capture changing consumer taste preferences for upscale canned, bagged and single cup coffees.
We
evaluate opportunities for growth consistent with our business objectives. In addition, we have established relationships with
independent sales brokers to market our products across the United States, in areas of the country where we have not had a high
penetration of sales and Canada. We utilize our in-house sales personnel to market our private label brands. We intend to capture
additional market share in our existing distribution channels by selectively adding or introducing new brand names and products
across multiple price points, including niche specialty blends, private label “value” blends and tea and our own brands,
filter packages, and peripheral products.
Charitable
Activities
We
are also a supporter of several coffee-oriented charitable organizations and during fiscal 2020 and 2019, we donated approximately
$78,000 and $42,000, respectively, to charities.
Competition
The
coffee market is highly competitive. We compete in the following areas:
Wholesale
Green Coffee. There are many green coffee dealers throughout the United States. Many of these dealers have greater financial
resources than we do. However, we believe that we have both the knowledge and the capability to assist small specialty gourmet
coffee roasters with developing and growing their businesses. Our over 40 years of experience as a roaster and a dealer of green
coffee allows us to provide our roasting experience as a value added service to our gourmet roaster customers. While other coffee
merchants may be able to offer lower prices for coffee beans, we market ourselves as a value-added supplier to small roasters,
with the ability to help them market their specialty coffee products and develop a customer base. The assistance we provide our
customers includes training, coffee blending and market identification. Because specialty green coffee beans are sold unroasted
to small coffee shops and roasters that market their products to local gourmet customers, we do not believe that our specialty
green coffee customers compete with our private label or branded coffee lines of business. We believe that the addition of Organic
Products Trading Company, LLC (“OPTCO”), Sonofresco, CFI and Steep & Brew as well as our external green coffee
salespeople allows us to compete more effectively throughout the country and Canada.
Private
Label Competition. There are several major producers of coffee for private label sales in the United States. Many other
companies produce coffee for sale on a regional basis. Our main competitor is the Massimo Zanetti Beverage Company. The Massimo
Zanetti Beverage Company is larger and has more financial and other resources than we do and, therefore, is able to devote more
resources to product development and marketing. We believe that we remain competitive by providing a higher level of quality and
customer service. This service includes ensuring that the coffee produced for each label maintains a consistent taste and is delivered
on time and in the proper quantities.
Branded
Competition. Our proprietary brand coffees compete with many other brands that are sold in supermarkets and specialty
stores, primarily in the Northeastern United States. The branded coffee market in both the Northeast and elsewhere is dominated
by two large companies: Kraft Foods, Inc. (owner of the Maxwell House brand), and J.M. Smucker Co. (owner of the Folgers and Café
Bustelo brands). Our large competitors have greater access to capital and a greater ability to conduct marketing and promotions.
We believe that, while our competitors’ brands may be more nationally recognizable, our Café Caribe and Café
Supremo brands are competitive in the fast growing Latin demographic, our Harmony Bay has a strong regional presence in the northeast
and our S&W brand has been a popular and recognizable brand on the west coast for over 80 years.
Government
Regulation
Our
coffee roasting operations are subject to various governmental laws and regulations, which require us to obtain licenses relating
to customs, health and safety, building and land use and environmental protection. Our roasting facility is subject to state and
local air-quality and emissions regulation. If we encounter difficulties in obtaining any necessary licenses or if we have difficulty
complying with these laws and regulations, then we could be subject to fines and penalties, which could have a material adverse
effect on our profitability. In addition, our product offerings could be limited, thereby reducing our revenues.
We
believe that we are in compliance in all material respects with all such laws and regulations and that we have obtained all material
licenses and permits that are required for the operation of our business. We are not aware of any environmental regulations that
have or that we believe will have a material adverse effect on our operations.
Employees
We
have 82 full-time employees. None of our employees are represented by unions or collective bargaining agreements. Our management
believes that we maintain good working relationships with our employees. To supplement our internal sales staff, we sometimes
engage independent national and regional sales brokers as independent contractors who work on a commission basis.
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