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.
Unfavorable
global economic conditions and adverse developments with respect to financial institutions and associated liquidity risk could adversely
affect our business, financial condition and stock price.
The
global credit and financial markets are currently, and have from time to time experienced extreme volatility and disruptions, including
severely diminished liquidity and credit availability, rising interest and inflation rates, declines in consumer confidence, declines
in economic growth, increases in unemployment rates and uncertainty about economic stability. The financial markets and the global economy
may also be adversely affected by the current or anticipated impact of military conflict, including the ongoing conflict between Russia
and Ukraine, terrorism or other geopolitical events. Sanctions imposed by the United States and other countries in response to such conflicts,
including the one in Ukraine, may also adversely impact the financial markets and the global economy, and any economic countermeasures
by the affected countries or others could exacerbate market and economic instability. There can be no assurance that future credit and
financial market instability and a deterioration in confidence in economic conditions will not occur. Our general business strategy may
be adversely affected by any such economic downturn, liquidity shortages, volatile business environment or continued unpredictable and
unstable market conditions. If the equity and credit markets deteriorate, or if adverse developments are experienced by financial institutions,
it may cause short-term liquidity risk and also make any necessary debt or equity financing more difficult, more costly, more onerous
with respect to financial and operating covenants and more dilutive. Failure to secure any necessary financing in a timely manner and
on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require
us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, financial
institutions, manufacturers and other partners may be adversely affected by the foregoing risks, which could directly affect our ability
to attain our operating goals on schedule and on budget.
Adverse
global conditions, including economic uncertainty, may negatively impact our financial results.
Global
conditions, dislocations in the financial markets, any negative financial impacts affecting United States corporations operating on a
global basis as a result of tax reform or changes to existing trade agreements or tax conventions, or inflation, could adversely impact
our business in a number of ways, including longer sales cycles, lower prices for our products, reduced licensing renewals, customer
disruption or foreign currency fluctuations.
In
addition, the global macroeconomic environment could be negatively affected by, among other things, the COVID-19 pandemic or other epidemics,
instability in global economic markets, increased U.S. trade tariffs and trade disputes with other countries, instability in the global
credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of the withdrawal of the United Kingdom
from the European Union, the Russian invasion of Ukraine and the resulting prolonged conflict and other political tensions, and foreign
governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and
in global financial markets.
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 2023 fiscal year. We generally do not enter long-term contracts with most of our customers.
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.
If
our indefinitely lived intangible assets or amortizable intangible assets become impaired, then we could be required to record a significant
charge to earnings. GAAP requires us to test indefinite lived intangible asset impairment at least annually. In addition, we
review our indefinitely lived intangible assets and amortizable intangible assets for impairment when events or changes in circumstances
indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying
value of our indefinite lived intangible assets or amortizable intangible assets may not be recoverable include declines in stock price,
market capitalization or cash flows, and slower growth rates in our industry. Depending on the results of our review, we could be required
to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our
indefinite lived intangible assets or amortizable intangible assets were determined, negatively impacting our results of operations.
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. The line is
coming due at June 30, 2024. There is no assurance that it will be renewed. 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 fixed charge coverage
ratio, debt to tangible net worth and net worth. The Company as of October 31, 2023 has failed to comply with one of these covenants
and resulted in an event of default under the loan agreement. The lender has various defenses that it can apply against the Company,
which includes up to and calling the line of credit. There is no guarantee that the lender will not issue a waiver or not call the line
of credit.
There is
substantial doubt about our ability to continue as a going concern. The Company’s line of credit is maturing on June 30, 2024 and
in addition there are certain financial covenants that the Company are in violation with the lender. The Company has not received a waiver
from the lender. The lender has reserved its right to exercise its rights and remedies at any time at its sole discretion. The uncertainties
surrounding the ability to receive a waiver and extending its line of credit when it becomes due raise substantial doubt as to whether
existing cash and cash equivalents will be sufficient to meet its obligations as they become due within twelve months from the date the
consolidated financial statements were issued. Our audited consolidated financial statements do not include any adjustments for the recovery
and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue
as a going concern. If we are unable to continue as a going concern, our shareholders would likely lose some or all of their investment
in our securities.
There can be no assurance that we will be able to extend our line of credit
or complete any financing transaction in a timely manner or on acceptable terms or otherwise. If we are not successful to extend our line
of credit or to raise additional cash, we may be forced to suspend or curtail planned programs, or cease operations altogether.
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 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 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.
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. During the years ended October 31, 2020, 2021 and 2022, we identified material weaknesses in our
financial reporting, as set forth in Item 9A. Controls and Procedures. As of the date of this Annual Report, these material weaknesses
have not been remediated.
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;
● disruptions in our supply chain; 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.
Increases
in shipping costs, long lead times, supply shortages, and supply changes could disrupt our supply chain and factors such as wage rate
increases and inflation can have a material adverse effect on our business, financial condition, and operating results. We may
experience supply delays and shortages due to a variety of macroeconomic factors, including disruptions on the global supply chain..
We have been able to make alternative delivery arrangements for limited quantities of goods, at increased cost.
While
we have not yet experienced material shortages in supply as a result of these disruptions and our alternative delivery arrangements,
if they were to be prolonged or expanded in scope, there could be resulting supply shortages that could impact our ability to deliver
our products to our customers. Accordingly, such supply shortages and delivery limitations could have and material adverse effect on
our business, financial condition, results of operations, and cash flows.
Furthermore,
increases in compensation, wage pressure, and other expenses for our employees and the employees of our suppliers, may adversely affect
our profitability. These cost increases may be the result of inflationary pressures that could further reduce our sales or profitability.
Increases in other operating costs, including changes in energy prices and lease and utility costs, may increase our cost of products
sold or selling, general, and administrative expenses. Our competitive price model and pricing pressures in the industry may inhibit
our ability to reflect these increased costs in the prices of our products, in which case such increased costs could have a material
adverse effect on our business, financial condition, and results of operations.
Increased
severe weather patterns may increase commodity costs, damage our facilities and disrupt our production capabilities and supply chain.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide
and other greenhouse gases in the atmosphere have caused and will continue to cause significant changes in weather patterns around the
globe and an increase in the frequency and severity of extreme weather events. Major weather phenomena are dramatically affecting coffee
growing countries. The wet and dry seasons are becoming unpredictable in timing and duration, causing improper development of the coffee
cherries. Decreased agricultural productivity in certain regions as a result of changing weather patterns may affect the quality, limit
the availability or increase the cost of key agricultural commodities, which are important ingredients for our business. Increased frequency
or duration of extreme weather conditions could damage our facilities, impair production capabilities, disrupt our supply chain or impact
demand for our products. As a result, the effects of climate change could have a long-term adverse impact on our business and results
of operations.
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 21.2% 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 fiscal year, our common
stock has traded as low as $0.67 and as high as $2.78 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.
Risks
Related to the Merger
Completion
of the Merger is subject to a number of conditions and if these conditions are not satisfied or waived, such transactions will not be
completed.
Our
obligation and the obligation of Delta to complete the Merger are subject to satisfaction or waiver of a number of conditions, including,
among others:
● approval of the Merger by our stockholders;
● absence of injunctions or certain legal impediments;
There
can be no assurance that the conditions to closing set forth in the Merger Agreement will be satisfied or waived or that the Merger itself
will be completed.
Failure
to complete the Merger could negatively impact our stock price, future business or operations.
If
the Merger is not completed, JVA and Delta may be subject to a number of material risks, including the following:
● we may be required under certain circumstances to pay Delta a termination fee;
Further,
if the Merger is terminated and either company’s board of directors determines to seek another merger or business combination,
there can be no assurance that it will be able to find a partner on terms as attractive as those provided for in the Merger Agreement.
In addition, while the Merger Agreement is in effect and subject to very narrowly defined exceptions, we are prohibited from soliciting,
initiating or encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination,
other than with Delta.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
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 ranging
from $182,749 to $297,864 under the terms of the lease, which expires on September 30, 2036.
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
own a 50,000 square foot facility located at 27700 Frontage Road in La Junta, Colorado.
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
are not currently a party to any material legal proceedings.
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, 15 2024, we had 170 holders of record.
ITEM 6. SELECTED FINANCIAL DATA
Reserved.
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; and
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
and 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 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. As of the fiscal
period ending January 31, 2022, we agreed with Generations to no longer move forward with this joint venture.
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.
Recent
Events
On
September 29, 2022, we entered into the Merger Agreement, Upon the terms and subject to the conditions set forth in the Merger Agreement,
Merger Sub will merge with and into JVA, with JVA surviving as a direct, wholly-owned subsidiary of Pubco. As a result of the Merger,
each issued and outstanding share of our common stock will be cancelled and converted for the right of the holder thereof to receive
one Pubco Ordinary Share.
Critical
Accounting Policies and Estimates
We
prepare our consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to our consolidated
financial statements attached hereto. We believe the following critical accounting policies involve the most significant judgements and
estimates used in the preparation of our consolidated financial statements.
We
recognize revenue in accordance with the five-step model as prescribed by the Financial Accounting Standards Board (“FASB”)
Accounting Codification (“ASC”) Topic 606 (“ASC 606”) in which we evaluate the transfer of promised goods or
services and recognizes revenue when our customer obtains control of promised goods or services in an amount that reflects the consideration
which we expect to be entitled to receive in exchange for those goods or services. To determine revenue recognition for the arrangements
that we determine are within the scope of ASC 606, we perform the following five steps: (1) identify the contract(s) with a customer,
(2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to
the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
We