Unassociated Document
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-Q
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended: July
31, 2006
OR
[_] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from __________
to __________
Commission
file number: 001-32491
Coffee
Holding Co., Inc.
(Exact
name of registrant as specified in its charter)
Nevada
|
11-2238111
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
4401
First Avenue, Brooklyn, New York
|
11232-0005
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(718)
832-0800
(Registrant’s
telephone number including area code)
N/A
(Former
name, former address and former fiscal year,
if
changed from last Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X
No
__.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). Check
one:
Large
accelerated filer ___ Accelerated
filer ___
Non-accelerated filer X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes __
No
X
.
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date.
5,529,830
shares of common stock, par value $0.001 per share, outstanding at August 31,
2006
PAGE
PART
I — FINANCIAL INFORMATION
Item
1. Financial
Statements
|
|
|
1
|
|
|
|
|
|
|
Condensed
Balance Sheets
|
|
|
|
|
July
31, 2006 (unaudited) and October 31, 2005
|
|
|
1
|
|
|
|
|
|
|
Condensed
Statements of Operations
|
|
|
|
|
Nine
and Three Months Ended July 31, 2006 and 2005 (unaudited)
|
|
|
2
|
|
|
|
|
|
|
Condensed
Statements of Cash Flows
|
|
|
|
|
Nine
Months Ended July 31, 2006 and 2005 (unaudited)
|
|
|
3
|
|
|
|
|
|
|
Notes
To Condensed Financial Statements (unaudited)
|
|
|
4 |
|
|
|
|
|
|
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
8
|
|
|
|
|
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
|
|
|
15
|
|
|
|
|
|
|
Item
4. Controls
and Procedures
|
|
|
16
|
|
|
|
|
|
|
PART
II —
OTHER INFORMATION
|
|
|
|
|
|
Item
1. Legal
Proceedings
|
|
|
17
|
|
|
|
|
|
|
Item
1A. Risk
Factors
|
|
|
17
|
|
|
|
|
|
|
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
|
17
|
|
|
|
|
|
|
Item
3. Defaults
Upon Senior Securities
|
|
|
17
|
|
|
|
|
|
|
Item
4. Submission
of Matters to a Vote of Security Holders
|
|
|
17
|
|
|
|
|
|
|
Item
5. Other
Information
|
|
|
17
|
|
|
|
|
|
|
Item
6. Exhibits
|
|
|
17
|
|
|
|
|
|
|
Signatures
|
|
|
18 |
|
PART
I —
FINANCIAL INFORMATION
Item
1.
Financial Statements
COFFEE
HOLDING CO., INC.
CONDENSED
BALANCE SHEETS
JULY
31, 2006 AND OCTOBER 31, 2005
|
|
July
31, 2006
|
|
October
31, 2005
|
|
|
|
(unaudited)
|
|
|
|
-
ASSETS -
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
3,039,506
|
|
$
|
735,468
|
|
Due
from brokers
|
|
|
3,170,874
|
|
|
2,994,394
|
|
Accounts
receivable, net of allowance for doubtful accounts of $425,770 and
$420,349 for 2006 and 2005, respectively
|
|
|
5,067,933
|
|
|
5,159,576
|
|
Inventories
|
|
|
4,214,884
|
|
|
4,496,578
|
|
Prepaid
expenses and other current assets
|
|
|
568,832
|
|
|
284,170
|
|
Deferred
tax asset
|
|
|
245,000
|
|
|
318,600
|
|
TOTAL
CURRENT ASSETS
|
|
|
16,307,029
|
|
|
13,988,786
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost, net of accumulated depreciation of $4,056,485
and
$3,727,524 for 2006 and 2005, respectively
|
|
|
2,208,631
|
|
|
2,379,952
|
|
Investment
in joint ventures
|
|
|
614,394
|
|
|
-
|
|
Deposits
and other assets
|
|
|
366,669
|
|
|
176,575
|
|
TOTAL
ASSETS
|
|
$
|
19,496,723
|
|
$
|
16,545,313
|
|
|
|
|
|
|
|
|
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY -
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
4,625,829
|
|
$
|
4,431,577
|
|
Line
of credit borrowings
|
|
|
3,562,549
|
|
|
1,063,167
|
|
Current
portion of obligations under capital lease
|
|
|
-
|
|
|
1,329
|
|
Income
taxes payable - current
|
|
|
-
|
|
|
218,864
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
8,188,378
|
|
|
5,714,937
|
|
|
|
|
|
|
|
|
|
Deferred
compensation payable
|
|
|
225,669
|
|
|
135,054
|
|
Income
taxes payable - deferred
|
|
|
26,200
|
|
|
53,700
|
|
TOTAL
LIABILITIES
|
|
|
8,440,247
|
|
|
5,903,691
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
Preferred
stock, par value $.001 per share; 10,000,000 shares authorized; none
issued
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $.001 per share; 30,000,000 shares authorized, 5,529,830
shares issued and outstanding for 2006 and 2005,
respectively
|
|
|
5,530
|
|
|
5,530
|
|
Additional
paid-in capital
|
|
|
7,327,023
|
|
|
7,327,023
|
|
Retained
earnings
|
|
|
3,723,923
|
|
|
3,309,069
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
11,056,476
|
|
|
10,641,622
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
19,496,723
|
|
$
|
16,545,313
|
|
See
Notes
to Condensed Financial Statements.
COFFEE
HOLDING CO., INC.
CONDENSED
STATEMENTS OF OPERATIONS
NINE
AND THREE MONTHS ENDED JULY 31, 2006 AND 2005
(Unaudited)
|
|
Nine
Months Ended
July
31,
|
|
Three
Months Ended
July,
31
|
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
NET
SALES
|
|
$
|
37,714,354
|
|
$
|
29,016,190
|
|
$
|
11,858,581
|
|
$
|
10,782,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
32,584,566
|
|
|
23,657,607
|
|
|
9,916,930
|
|
|
9,749,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
5,129,788
|
|
|
5,358,583
|
|
|
1,941,651
|
|
|
1,033,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative
|
|
|
3,916,707
|
|
|
3,801,669
|
|
|
1,414,412
|
|
|
1,420,090
|
|
Bad
debt expense
|
|
|
5,421
|
|
|
270,000
|
|
|
5,421
|
|
|
270,000
|
|
Officers’
salaries
|
|
|
408,155
|
|
|
399,271
|
|
|
135,975
|
|
|
135,975
|
|
TOTALS
|
|
|
4,330,283
|
|
|
4,470,940
|
|
|
1,555,808
|
|
|
1,826,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
799,505
|
|
|
887,643
|
|
|
385,843
|
|
|
(792,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
90,907
|
|
|
25,426
|
|
|
33,618
|
|
|
18,219
|
|
Equity
in loss of joint venture
|
|
|
(74,611
|
)
|
|
-
|
|
|
(69,289
|
)
|
|
-
|
|
Interest
expense
|
|
|
(80,951
|
)
|
|
(88,130
|
)
|
|
(42,726
|
)
|
|
(24,908
|
)
|
|
|
|
(64,655
|
)
|
|
(62,704
|
)
|
|
(78,397
|
)
|
|
(6,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
734,850
|
|
|
824,939
|
|
|
307,446
|
|
|
(799,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision)
benefit for income taxes
|
|
|
(319,996
|
)
|
|
(272,179
|
)
|
|
(127,996
|
)
|
|
351,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
414,854
|
|
$
|
552,760
|
|
$
|
179,450
|
|
$
|
(447,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share
|
|
$
|
.08
|
|
$
|
.12
|
|
$
|
.03
|
|
$
|
(.08
|
)
|
See
Notes to Condensed Financial
Statements.
COFFEE
HOLDING CO., INC.
CONDENSED
STATEMENTS OF CASH FLOWS
NINE
MONTHS ENDED JULY 31, 2006 AND 2005
(Unaudited)
|
|
2006
|
|
2005
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
414,854
|
|
$
|
552,760
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
328,962
|
|
|
281,409
|
|
Bad
debts
|
|
|
5,421
|
|
|
270,000
|
|
Deferred
taxes
|
|
|
46,100
|
|
|
(77,000
|
)
|
Loss
from joint venture
|
|
|
74,611
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Due
from brokers
|
|
|
(176,480
|
)
|
|
(1,281,036
|
)
|
Accounts
receivable
|
|
|
86,222
|
|
|
(334,705
|
)
|
Inventories
|
|
|
281,694
|
|
|
(1,301,542
|
)
|
Prepaid
expenses and other current assets
|
|
|
(284,662
|
)
|
|
266,425
|
|
Accounts
payable and accrued expenses
|
|
|
194,252
|
|
|
(1,977,786
|
)
|
Other
assets
|
|
|
(99,479
|
)
|
|
-
|
|
Income
taxes payable
|
|
|
(218,864
|
)
|
|
(160,000
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
652,631
|
|
|
(3,761,475
|
)
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(157,641
|
)
|
|
(357,936
|
)
|
Security
deposits
|
|
|
-
|
|
|
(8,025
|
)
|
Investment
in joint ventures
|
|
|
(689,005
|
)
|
|
-
|
|
Net
cash (used in) investing activities
|
|
|
(846,646
|
)
|
|
(365,961
|
)
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
Principal
payments on term loan
|
|
|
-
|
|
|
(252,000
|
)
|
Advances
under bank line of credit
|
|
|
31,322,458
|
|
|
17,315,427
|
|
Net
proceeds from IPO
|
|
|
-
|
|
|
6,436,016
|
|
Principal
payments under bank line of credit
|
|
|
(28,823,076
|
)
|
|
(18,672,311
|
)
|
Principal
payments of obligations under capital leases
|
|
|
(1,329
|
)
|
|
(107,699
|
)
|
Net
cash provided by financing activities
|
|
|
2,498,053
|
|
|
4,719,433
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
2,304,038
|
|
|
591,997
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of year
|
|
|
735,468
|
|
|
642,145
|
|
|
|
|
|
|
|
|
|
CASH,
END OF PERIOD
|
|
$
|
3,039,506
|
|
$
|
1,234,142
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW DATA:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
36,034
|
|
$
|
81,495
|
|
Income
taxes paid
|
|
$
|
269,784
|
|
$
|
297,145
|
|
See
Notes to Condensed Financial
Statements.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
July
31, 2006 AND 2005
(Unaudited)
NOTE
1 - BUSINESS
ACTIVITIES:
Coffee
Holding Co., Inc. (the “Company”) conducts wholesale coffee operations,
including manufacturing, roasting, packaging, marketing and distributing roasted
and blended coffees for private labeled accounts and its own brands, and sells
green coffee. The Company’s sales are primarily to customers that are located
throughout the United States. See Note 9 for recent activity.
NOTE
2 - BASIS
OF PRESENTATION:
In
the
opinion of management, the accompanying unaudited condensed financial statements
reflect all adjustments, consisting of normal recurring accruals, necessary
to
present fairly the financial position of the Company as of July 31, 2006, its
results of operations and its cash flows for the nine months ended July 31,
2006
and 2005. Information included in the balance sheet as of October 31, 2005
has
been derived from the Company’s audited balance sheet included in the Company’s
Annual Report on Form 10-KSB for the year ended October 31, 2005 (the “Form
10-KSB”) previously filed with the Securities and Exchange Commission (the
“SEC”). Pursuant to the rules and regulations of the SEC for interim financial
statements, certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted from these
financial statements unless significant changes have taken place since the
end
of the most recent fiscal year. Accordingly, these unaudited condensed financial
statements should be read in conjunction with the audited financial statements
and the other information in the Form 10-KSB.
Operating
results for the nine months ended July 31, 2006 are not necessarily indicative
of the results that may be expected for the year ending October 31, 2006 or
any
other period.
NOTE
3 - INVENTORIES:
Inventories
at July 31, 2006 and October 31, 2005 consisted of the following:
|
|
July
31, 2006
|
|
October
31, 2005
|
|
Packed
coffee
|
|
$
|
1,269,290
|
|
$
|
1,276,050
|
|
Green
coffee
|
|
|
2,180,668
|
|
|
2,483,061
|
|
Packaging
supplies
|
|
|
764,926
|
|
|
737,467
|
|
Totals
|
|
$
|
4,214,884
|
|
$
|
4,496,578
|
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
July
31, 2006 AND 2005
(Unaudited)
NOTE
4 - HEDGING:
The
Company uses options and futures contracts to partially hedge the effects of
fluctuations in the price of green coffee beans. Options and futures contracts
are marked to market with current recognition of gains and losses on such
positions. The Company does not defer such gains and losses since its positions
are not considered hedges for financial reporting purposes. The Company’s
accounting for options and futures contracts may increase earnings volatility
in
any particular period.
At
July
31, 2006, the Company held 243 options (generally with terms of two months
or
less) covering an aggregate of 9,112,500 pounds of green coffee beans at prices
of $.975 and $1.10 per pound. The fair market value of these options, which
was
obtained from major financial institutions, was $487,961 at July 31, 2006.
At
July
31, 2005, the Company held 60 options (generally with terms of two months or
less) covering an aggregate of 2,250,000 pounds of green coffee beans at a
price
of $1.05 per pound. The fair market value of these options, which was obtained
from a major financial institution, was $84,375 at July 31, 2005.
The
Company acquires futures contracts with longer terms (generally three to four
months) primarily for the purpose of guaranteeing an adequate supply of green
coffee.
At
July
31, 2006, the Company held 58 futures contracts for the purchase of 2,175,000
pounds of coffee at prices ranging from $.9755 up to $.9930 per pound for
September 2006 contracts. The market price of coffee applicable to such
contracts was $.995 per pound at that date.
At
July
31, 2005, the Company held 192 futures contracts for the purchase of 7,200,000
pounds of coffee at prices ranging from $.9975 up to $1.15 per pound for
September 2005 contracts. The market price of coffee applicable to such
contracts was $1.02 per pound at that date.
Included
in cost of sales and due from brokers for the three and nine months ended July
31, 2006 and 2005, the Company recorded realized and unrealized gains and losses
respectively, on these contracts as follows:
|
|
Three
Months Ended July 31,
|
|
|
|
2006
|
|
2005
|
|
Gross
realized gains
|
|
$
|
758,664
|
|
$
|
444,543
|
|
Gross
realized losses
|
|
$
|
(684,232
|
)
|
$
|
(383,584
|
)
|
Unrealized
gains and (losses)
|
|
$
|
89,206
|
|
$
|
(767,089
|
)
|
|
|
Nine
Months Ended July 31,
|
|
|
|
2006
|
|
2005
|
|
Gross
realized gains
|
|
$
|
1,569,909
|
|
$
|
2,757,254
|
|
Gross
realized losses
|
|
$
|
(1,344,993
|
)
|
$
|
(2,219,387
|
)
|
Unrealized
gains and (losses)
|
|
$
|
307,397
|
|
$
|
(283,575
|
)
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
July
31, 2006 AND 2005
(Unaudited)
NOTE
5 - LINE
OF CREDIT:
The
Company has a line of credit facility with Merrill Lynch Business Financial
Services, Inc. up to a maximum amount of $4.0 million with an interest rate
of
LIBOR plus 2.15% which at July 31, 2006 was 7.55%. The facility expires on
October 31, 2006. The loan is secured by a blanket lien on all the assets of
the
Company and the personal guarantees of two of the Company’s officer/shareholders
and also requires the Company to comply with various financial covenants. The
Company was in compliance with all financial covenants as of July 31, 2006.
NOTE
6 - LEGAL
PROCEEDINGS:
The
Company is a party to various legal proceedings. In the opinion of management,
these actions are routine in nature and will not have a material adverse effect
on the Company’s results of operations or financial position in future
periods.
NOTE
7 - EARNINGS
(LOSS) PER SHARE:
The
Company presents “basic” and “diluted” earnings (loss) per common share pursuant
to the provisions of Statement of Financial Accounting Standards No. 128,
“Earnings per Share”. Basic earnings (loss) per share is based on the
weighted-average number of common shares outstanding and diluted earnings (loss)
per share is based on the weighted-average number of common shares outstanding
plus all potential dilutive common shares outstanding.
NOTE
8 - ECONOMIC
DEPENDENCY:
For
the
nine months ended July 31, 2006, sales to one customer was in excess of 10%
of
the Company’s total sales. Sales to this customer were approximately $13,370,000
and the corresponding accounts receivable at July 31, 2006 from this customer
was approximately $1,009,000.
For
the
nine months ended July 31, 2005, sales to one customer were in excess of 10%
of
the Company’s total sales. Sales to this customer were approximately $8,690,000
and the corresponding accounts receivable at July 31, 2005 from this customer
was approximately $944,000.
For
the
nine months ended July 31, 2006, purchases from two suppliers were in excess
of
10% of the Company’s total purchases. Purchases from these suppliers were
approximately $11,718,000 and $3,827,000 and the corresponding accounts payable
to these suppliers at July 31, 2006 were approximately $934,000 and $94,000,
respectively.
For
the
nine months ended July 31, 2005, purchases from one supplier were in excess
of
10% of the Company’s total purchases. Purchases from this supplier were
approximately $10,487,000 and the corresponding accounts payable to this
supplier at July 31, 2005 was approximately $188,000.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
July
31, 2006
AND 2005
(Unaudited)
NOTE
9 - INVESTMENT
IN JOINT VENTURES:
Café
La Rica, LLC Investment:
The
Company and Coffee Bean Trading-Roasting LLC (“CBT”) formed a limited liability
company called Café La Rica, LLC (“CLR”) on March 10, 2006. The purpose of CLR
is to engage in the roasting, packaging and sale of branded and food service
coffee products in the Southeastern United States coffee markets. CLR was funded
by an initial contribution of $250,000 by the Company. In addition, the Company
contributed specified equipment valued at approximately $335,000 and CBT
contributed equipment and inventory of coffee and packaging materials valued
at
$119,316. The Company and CBT also entered into separate trademark licensing
agreements with CLR for the use of the Café Caribe trademark and the Café La
Rica trademark. The respective trademarks Café Caribe and Café La Rica are
licensed to CLR as exclusive, non-assignable, non-transferable, royalty free
rights to use them worldwide in connection with the manufacture, packaging,
sale, marketing and distribution of the licensed products (as defined) within
the territory (as defined) in the respective agreements. The Company and CBT
each have a 50% membership in the profits and losses of CLR.
Separate
agreements have been entered into between the Company and CLR for the Company
to
provide administrative services to CLR for a fee, to supply CLR with coffee
inventory at fair market prices and to pay CLR a roasting fee for all coffee
roasted and sold as one of the Company’s proprietary brands, for which CLR will
not receive a share of profits. CLR will engage in roasting other non-company
brands coffee for which the profits and losses will be shared by both
partners.
Generations
Coffee Company LLC Investment:
The
Company and PMD Enterprises, Inc. (DBA Caruso’s Coffee) (“Caruso”) formed a
limited liability company called Generations Coffee Company, LLC (“GCC”) on
April 7, 2006. The purpose of GCC is to engage in the roasting, packaging and
sale of private label specialty coffees for sale and distribution throughout
the
United States. The initial capital contribution by the Company will be equipment
and by Caruso will be use of equipment and plant/warehouse space. The
Company has made an initial deposit on a piece of equipment in the amount of
$103,296 as of July 31, 2006. The Company and Caruso will share in
profits and losses in the ratio of 60:40 and initial membership interests are
600 shares and 400 shares, respectively. GCC’s operating agreement provides
that, in the event Caruso makes additional capital contributions, the sharing
ratio in profits and losses will be adjusted so that the Company and Caruso
will
each have a 50% interest in GCC. As of July 31, 2006, GCC had not conducted
any
operations.
Item
2. Management’s
Discussion and Analysis of
Financial Condition and Results of Operations.
Cautionary
Note on Forward Looking Statements
This
report contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. We have
based these forward-looking statements on our current expectations and
projections about future events, including, among other things:
|
·
|
the
impact of rapid or persistent fluctuations in the price of coffee
beans;
|
|
·
|
fluctuations
in the supply of coffee beans;
|
|
·
|
general
economic conditions and conditions which affect the market for
coffee;
|
· our
success in implementing our business strategy or introducing new
products;
· our
ability to attract and retain customers;
· our
success in expanding our market presence in new geographic regions;
|
·
|
the
effects of competition from other coffee manufacturers and other
beverage
alternatives;
|
|
·
|
changes
in tastes and preferences for, or the consumption of, coffee;
|
|
·
|
our
ability to obtain additional financing;
and
|
|
·
|
other
risks which we identify in future filings with the Securities and
Exchange
Commission.
|
In
some
cases, you can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “could,” “predict,” “potential,” “continue,” “expect,”
“anticipate,” “future,” “intend,” “plan,” “believe,” “estimate” and similar
expressions (or the negative of such expressions). Any or all of our forward
looking statements in this annual report and in any other public statements
we
make may turn out to be wrong. They can be affected by inaccurate assumptions
we
might make or by known or unknown risks and uncertainties. Consequently, no
forward-looking statement can be guaranteed. In addition, we undertake no
responsibility to update any forward-looking statement to reflect events or
circumstances which occur after the date of this report.
Overview
We
are an
integrated wholesale coffee roaster and dealer in the United States and one
of
the few coffee companies that offers a broad array of coffee products across
the
entire spectrum of consumer tastes, preferences and price points. As a result,
we believe that we are well positioned to increase our profitability and endure
potential coffee price volatility throughout varying cycles of the coffee market
and economic conditions.
Our
operations have primarily focused on the following areas of the coffee
industry:
|
·
|
the
sale of wholesale specialty green
coffee;
|
|
·
|
the
roasting, blending, packaging and sale of private label coffee;
and
|
|
·
|
the
roasting, blending, packaging and sale of our seven brands of coffee.
|
Our
operating results are affected by a number of factors including:
|
·
|
the
level of marketing and pricing competition from existing or new
competitors in the coffee industry;
|
|
·
|
our
ability to retain existing customers and attract new
customers;
|
|
·
|
fluctuations
in purchase prices and supply of green coffee and in the selling
prices of
our products; and
|
|
·
|
our
ability to manage inventory and fulfillment operations and maintain
gross
margins.
|
Our
net
sales are driven primarily by the success of our sales and marketing efforts
and
our ability to retain existing customers and attract new customers. For this
reason, we have made the strategic decision to invest in measures that will
increase net sales. In February 2004, we acquired certain assets of Premier
Roasters, a roaster-dealer located in La Junta, Colorado. We also hired a West
Coast Brand Manager to market our S&W brand and to increase sales of S&W
coffee to new customers and increased attendance at trade shows to promote
our
food service and private label coffee business. In March 2006, we entered into
a
joint venture with Coffee Bean Trading-Roasting LLC and formed Café La Rica,
LLC, a Delaware limited liability company. The joint venture engages in the
roasting, packaging and sale of the Café La Rica brand coffee and other branded
and food service coffee products in Miami, Florida. We own 50% of the joint
venture and are the primary supplier of its coffee inventory. By operating
a new
production facility in Florida through the Cafe La Rica joint venture, we
believe that we will be able to service the Southeastern United States markets
more effectively and will be in an excellent position to gain market share
in
the Florida food service and Hispanic coffee markets. We believe that the
operation of a new facility in Florida will accelerate the significant growth
opportunities that the state of Florida has for our Hispanic-targeted brands.
In
April 2006, we entered into a joint venture with Caruso's Coffee of Brecksville,
Ohio and formed Generations Coffee Company, LLC, a Delaware limited liability
company, which will engage in the roasting, packaging and sale of private label
specialty coffee products. We own 60% of the joint venture and are the exclusive
supplier of its coffee inventory. We believe that the Generations Coffee joint
venture will allow us to bid on the private label gourmet whole bean
business we have not been equipped to pursue from an operational standpoint
in
the past. With this specialty roasting facility in place, in many cases right
in
the backyard of our most important wholesale and retail customers,
we believe that we are in an ideal position to combine our current canned
private label business with high-end private label specialty whole bean
business. High-end specialty whole bean coffee sells for as much as three times
more per pound than the canned coffees in which we currently specialize. As
of
July 31, 2006, Generations Coffee had not conducted any operations.
As
a
result of these efforts, we have increased net sales in our specialty green
coffee, private label and branded coffee business lines in both dollars and
pounds sold. In addition, we have increased the number of our customers in
all
three areas.
Our
net
sales are affected by the price of green coffee. We import green coffee from
Colombia, Mexico, Kenya, Brazil and Uganda, among others. The supply and price
of coffee beans are subject to volatility and are influenced by numerous factors
which are beyond our control. For example, coffee crops in Brazil, which
produces over one-third of the world’s green coffee, are susceptible to frost in
June and July and drought in September, October and November. However, because
we purchase coffee from a number of countries and are able to freely substitute
one country’s coffee for another in our products, price fluctuations in one
country generally have not had a material impact on the price we pay for coffee
and generally have not had a material effect on our results of operations,
liquidity and capital resources. Because we generally have been able to pass
green coffee price increases through to customers, increased prices of green
coffee generally result in increased net sales. However, increased green coffee
prices also generally result in increased cost of sales. Cost of sales consists
primarily of the cost of green coffee and packaging materials and realized
and
unrealized gains or losses on hedging activity. Increased green coffee prices
cause our margins to shrink to the extent we are unable to pass the full amount
of increase through to our customers.
Historically,
we have used short-term coffee futures and options contracts primarily for
the
purpose of partially hedging and minimizing the effects of changing green coffee
prices and to reduce our cost of sales. In addition, 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 enabled us to
mitigate the effect of changing prices, no strategy can entirely eliminate
pricing risks and we generally remain exposed to loss when prices decline
significantly in a short period of time. 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.
Critical
Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in
the financial statements and accompanying notes. Estimates are used for, but
not
limited to, the accounting for the allowance for doubtful accounts, inventories,
income taxes and loss contingencies. Management bases its estimates on
historical experience and on various other assumptions that are believed to
be
reasonable under the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
We
believe the following critical accounting policies, among others, may be
impacted significantly by judgment, assumptions and estimates used in the
preparation of the financial statements:
|
·
|
We
recognize revenue in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”).
Under SAB 104, revenue is recognized at the point of passage to the
customer of title and risk of loss, when there is persuasive evidence
of
an arrangement, the sales price is determinable, and collection of
the
resulting receivable is reasonably assured. We generally recognize
revenue
at the time of shipment. Sales are reflected net of discounts and
returns.
|
|
·
|
Our
allowance for doubtful accounts is maintained to provide for losses
arising from customers’ inability to make required payments. If there is
deterioration of our customers’ credit worthiness and/or there is an
increase in the length of time that the receivables are past due
greater
than the historical assumptions used, additional allowances may be
required. For example, every additional one percent of our accounts
receivable that becomes uncollectible, would reduce our operating
income
by approximately $55,000.
|
|
·
|
Inventories
are stated at cost (determined on a first-in, first-out basis). Based
on
our assumptions about future demand and market conditions, inventories
are
subject to be written-down to market value. If our assumptions about
future demand change and/or actual market conditions are less favorable
than those projected, additional write-downs of inventories may be
required. Each additional one percent of potential inventory write-down
would have reduced operating income by approximately $42,000 for
the three
months ended July 31, 2006.
|
|
·
|
We
account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No.
109”). Under SFAS No. 109, deferred tax assets and liabilities are
determined based on the liabilities, using enacted tax rates in effect
for
the year in which the differences are expected to reverse. Deferred
tax
assets are reflected on the balance sheet when it is determined that
it is
more likely than not that the asset will be realized. Accordingly,
our net
deferred tax asset of $218,800 could need to be written off if we
do not
remain profitable.
|
Comparison
of Results of Operations for the Three Months Ended July 31, 2005 and
2006
Net
Income.
We had
net income of $179,450, or $.03 per share, for the three months ended July
31,
2006 compared to a net loss of $447,875, or ($.08) per share, for the three
months ended July 31, 2005. The increase in net income primarily reflects
increased gross profit and decreased operating expenses. This increase was
partially offset by a $71,708 increase in other expense, $69,289 of which was
attributable to a loss by our Café La Rica joint venture. We believe the loss by
Café La Rica, which was formed in March 2006, is consistent with the typical
initial performance of a start-up venture of this type.
Net
Sales.
Net
sales totaled $11,858,581 for the three months ended July 31, 2006, an increase
of $1,075,901 or 10.0% from $10,782,680 for the three months ended July 31,
2006. The increase in net sales reflects an increase in pounds of coffee sold
due to increased sales of our private label, branded and specialty green
coffees. The number of our customers in the specialty green coffee area grew
approximately 7% from 290 customers at July 31, 2005 to 310
customers
at July 31, 2006. These customers are predominately independent
gourmet/specialty roasters, some of whom own their own retail outlets. Because
the specialty green coffee area is the fastest growing segment of the coffee
market, we believe that our customer base and sales will grow in this area.
Cost
of Sales.
Cost of
sales for the three months ended July 31, 2006 was $9,916,930 or 83.6% of net
sales, as compared to $9,749,222 or 90.4% of net sales for the three months
ended July 31, 2005. The increase in cost of sales reflects increased purchases
of green coffee associated with the increase in net sales and an increase in
the
price of robusta coffee on the London Robusta Market. Purchases increased
$1,479,752 from $7,717,080 to $9,196,832 due to increased pounds sold. The
increase in coffee purchases was partially offset by an increase in net gains
on
future contracts of $869,768. 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. We had net gains on futures
contracts of $163,638 for the three months ended July 31, 2006 compared to
net
losses of $706,130 for the three months ended July 31, 2005. The use of these
derivative financial instruments has enabled us to mitigate the effect of
changing prices, to increase our margins as coffee prices have increased and
to
be more competitive with our pricing.
Gross
Profit.
Gross
profit for the three months ended July 31, 2006 was $1,941,651, an increase
of
$908,193 or 87.9%, from $1,033,458 for the three months ended July 31, 2005.
Gross profit as a percentage of net sales increased to 16.4% for the three
months ended July 31, 2006 from 9.6% for the three months ended July 31, 2005.
The increase in our margins is primarily attributable to net gains on future
contracts during the three months ended July 31, 2006 compared to net losses
during the same period the previous year. Excluding
the impact of futures contracts, gross profit as a percentage of sales was
15.0%
and 16.1% for 2006 and 2005, respectively. During the period, our net
margins continued to be negatively impacted by an increase in robusta coffee
prices on the London Robusta Market. While the price of Arabica coffee on the
New York Arabica Market decreased approximately 18% from mid-April 2006 to
the
end of July 2006, robusta coffee prices on the London Robusta Market have
increased by approximately 26% since July 2005. As a result, the margins on
our
espresso brands (Café Caribe, Café Supremo and Via Roma) continued to be
negatively impacted. The increased cost of robusta coffee could not be offset
by
price increases or substitutions of other coffees in these blends. In addition,
we continued to promote these brands during the period, which further
exacerbated the situation of lower margins due to higher robusta costs. These
factors negatively affected margins on our leading brand, Café Caribe, by
approximately 16%.
Operating
Expenses.
Total
operating expenses decreased by $270,257 or 14.8% to $1,555,808 for the three
months ended July 31, 2006 from $1,826,065 for the three months ended July
31,
2005. The decrease in operating expenses primarily reflects a decrease in bad
debt expense, repairs and maintenance expense and advertising expense. This
decrease was partially offset by increases in shipping costs, office salaries
and insurance expense. The increase in shipping costs was attributable to
increased sales as well as higher trucking rates due to fuel surcharges
reflecting the higher price of oil. The increase in office salaries reflected
new personnel added to assist with the additional administrative duties
associated with our increase in net sales. The increased insurance expense
was
due to higher insurance premiums resulting from increased sales volume as well
as higher costs associated with insuring product stored in New Orleans following
Hurricane Katrina.
Other
Expense.
Other
expense increased $71,708 to $78,397 for the three months ended July 31, 2006
compared to $6,689 for the three months ended July 31, 2005. The increase in
other expense was primarily due to a loss by our Café La Rica joint venture. Our
share of the loss by the joint venture equaled $69,289. We believe the loss
by
Café La Rica, which was formed in March 2006, is consistent with the typical
initial performance of a start-up venture of this type.
Income
Before Taxes.
We had
income of $307,446 before income taxes for the three months ended July 31,
2006
compared to a loss of $799,296 before income taxes for the three months ended
July 31, 2005. The increase was attributable to increased income from
operations, partially offset by increased other expense.
Income
Taxes. Our
provision for income taxes for the three months ended July 31, 2006 totaled
$127,996 compared to a benefit of $351,421 for the three months ended July
31,
2005 as a result of income before taxes for the three months ended July 31,
2006
compared to a loss before taxes for the three months ended July 31,
2005.
Comparison
of Results of Operations for the Nine Months Ended July 31, 2005 and
2006
Net
Income and Earnings Per Share.
Net
income decreased $137,906, or 24.9%, to $414,854 or $.08 per share for the
nine
months ended July 31, 2006 compared to $552,760 or $.12 per share for the nine
months ended July 31, 2005. The decrease in net income primarily reflects
increased cost of sales and lower margins on our branded and private label
offerings due to market conditions, increased promotional activities and an
equity loss in our Café La Rica joint venture, offset in part by increased net
sales and decreased operating expenses. We believe the loss by Café La Rica,
which was formed in March 2006, is consistent with the typical initial
performance of a start-up venture of this type.
Net
Sales.
Net
sales totaled $37,714,354 for the nine months ended July 31, 2006, an increase
of $8,698,164 or 30.0% from $29,016,190 for the nine months ended July 31,
2005.
The increase in net sales reflects an increase in pounds of coffee sold due
to
increased sales of our private label, branded and specialty green coffees.
The
number of our customers in the specialty green coffee area grew approximately
7%
from 290 customers at July 31, 2005 to 310 customers at July 31, 2006. These
customers are predominately independent gourmet/specialty roasters, some of
whom
own their own retail outlets. Because the specialty green coffee area is the
fastest growing segment of the coffee market, we believe that our customer
base
and sales will grow in this area.
Cost
of Sales.
Cost of
sales for the nine months ended July 31, 2006 was $32,584,566 or 86.4% of net
sales, as compared to $23,657,607 or 81.5% of net sales for the nine months
ended July 31, 2005. The increase in cost of sales reflects increased purchases
of green coffee associated with the increase in net sales, increased freight
in
costs and an increase in the price of robusta coffee on the London Robusta
Market. Purchases increased by $8,490,007 from $19,387,063 to $27,877,070 due
to
increased pounds sold. Freight in costs increased by $61,104 from $290,569
for
the nine months ended July 31, 2005 to $351,673 for the nine months ended July
31, 2006. These increases were partially offset by an increase in net gains
on
future contracts of $278,021. 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. We had net gains on futures
contracts of $532,313 for the nine months ended July 31, 2006 compared to
$254,292 for the nine months ended July 31, 2005. The use of these derivative
financial instruments has enabled us to mitigate the effect of changing prices,
to increase our margins as coffee prices have increased and to be more
competitive with our pricing.
Gross
Profit. Gross
profit for the nine months ended July 31, 2006 was $5,129,788, a decrease of
$228,795 or 4.3%, from $5,358,583 for the nine months ended July 31, 2005.
Gross
profit as a percentage of net sales decreased to 13.6% for the nine months
ended
July 31, 2006 from 18.5% for the nine months ended July 31, 2005. During the
period, our net margins continued to be negatively impacted by an increase
in
robusta coffee prices on the London Robusta Market, which have increased 26%
since July 2005. As a result, the margins on our espresso brands (Café Caribe,
Café Supremo and Via Roma) continued to be negatively impacted. The increased
cost of robusta coffee could not be offset by price increases or substitutions
of other coffees in these blends. In addition, we continued to promote these
brands during the period, which further exacerbated the situation of lower
margins due to higher robusta costs. These factors negatively affected margins
on our leading brand, Café Caribe, by approximately 16%.
Operating
Expenses.
Total
operating expenses decreased by $140,657 or 3.1% to $4,330,283 for the nine
months ended July 31, 2006 from $4,470,940 for the nine months ended July 31,
2006. The decrease in operating expenses primarily reflects a decrease in bad
debt expense, commission expense and advertising expense. The decrease in
commissions paid reflected a higher percentage of green coffee sales which
do
not customarily have commission expense associated with them. These decreases
were partially offset by increases in shipping costs, office salaries and
insurance. The increase in shipping costs was attributable to increased sales
as
well as higher trucking rates due to fuel surcharges reflecting the higher
price
of oil. The increase in office salaries reflected new personnel added to assist
with the additional administrative duties associated with our increase in net
sales. The
increase in insurance expense was due to higher premiums resulting from
increased sales volume as well as higher costs associated with insuring product
stored in New Orleans following Hurricane Katrina.
Other
Expense.
Other
expense increased by $1,951 to $64,655 for the nine months ended July 31, 2006
compared to other expense of $62,704 for the nine months ended July 31, 2005.
While
interest income increased and interest expense decreased between the two
periods, other expense for the nine months ended July 31, 2006 was adversely
affected by a loss by our Café La Rica joint venture. Our share of the loss
equaled $74,611. We
believe the loss by Café La Rica, which was formed in March 2006, is consistent
with the typical initial performance of a start-up venture of this type.
Increased
interest income of $65,481 and decreased interest expense of $7,179 resulted
from improved cash flow and decreased reliance on line of credit borrowings
due
to our initial public offering in May 2005.
Income
Before Taxes.
We had
income of $734,850 before income taxes for the nine months ended July 31, 2006
compared to income of $824,939 before income taxes for the nine months ended
July 31, 2005. The decrease was attributable to decreased income from
operations, including the loss by the Café La Rica joint venture.
Income
Taxes.
Our
provision for income taxes for the nine months ended July 31, 2006 totaled
$319,996 compared to $272,179 for the nine months ended July 31, 2005 as a
result of additional state taxes which were not recorded in the prior
period.
Liquidity
and Capital Resources
As
of
July 31, 2006, we had working capital of $8,118,651 which represented a $155,198
decrease from our working capital of $8,273,849 as of October 31, 2005, and
total stockholders’ equity of $11,056,476, which increased by $434,854 from our
total stockholders’ equity of $10,641,622 as of October 31, 2005. Our working
capital decreased primarily due to an increase in line of credit borrowings
of
$2,499,382, a decrease in inventories of $281,694, an increase in accounts
payable and accrued expenses of $194,252 and a decrease in accounts receivable
of $91,643, offset in part by a $2,304,038 increase in cash, a $284,662 increase
in prepaid expenses and other current assets, a decrease in current income
taxes
payable of $218,864 and an increase of $176,480 due from brokers. At July 31,
2006, the outstanding balance on our line of credit was $3,562,549 compared
to
$1,063,167 at October 31, 2005. Total stockholders’ equity primarily increased
due to net income for the nine month period.
As
of
July 31, 2006, we had a financing agreement with Merrill Lynch Business
Financial Services Inc. This line of credit is for a maximum $4,000,000, expires
on October 31, 2006 and requires monthly interest payments at a rate of LIBOR
plus 2.15%. This loan is secured by a blanket lien on all of our assets.
The
credit facility contains covenants that place restrictions on our operations.
Among other things, these covenants: require us to maintain certain financial
ratios; require us to maintain a minimum net worth; and prohibit us from merging
with or into other companies, acquiring all or substantially all of the assets
of other companies, or selling all or substantially all of our assets without
the consent of the lender. These restrictions could adversely impact our ability
to implement our business plan, or raise additional capital, if needed. In
addition, if we default under our existing credit facility or if our lender
demands payment of a portion or all of our indebtedness, we may not have
sufficient funds to make such payments. As of July 31, 2006, we were in
compliance with all covenants contained in the credit facility.
For
the
nine months ended July 31, 2006, our operating activities provided net cash
of
$652,631 as compared to the nine months ended July 31, 2005 when net cash used
by operating activities was $3,761,475. The increased cash flow from operations
for the nine months ended July 31, 2006 was primarily due to increased sales
and
collections from customers and decreased inventories, partially offset by an
increase in prepaid expenses and other current assets and due from
brokers.
For
the
nine months ended July 31, 2006, our investing activities used net cash of
$846,646 as compared to the nine months ended July 31, 2005 when net cash used
by investing activities was $365,961. The increase in net cash used by investing
activities for the nine months ended July 31, 2006 was due to our investment
in
joint ventures, partially offset by a decrease in purchases of property and
equipment. We believe that our investment in the Cafe La Rica joint venture
will
enhance our prospects for long term growth by accelerating growth opportunities
in the state of Florida and that the Generations Coffee joint venture will
allow
us to bid on the private label gourmet whole bean business we have not been
equipped to pursue from an operational standpoint in the past and combine our
current canned private label business with high-end private label specialty
whole bean business. High-end specialty whole bean coffee sells for as much
as
three times more per pound than the canned coffees in which we currently
specialize.
For
the
nine months ended July 31, 2006, our financing activities provided net cash
of
$2,498,053 as compared to the nine months ended July 31, 2005 when net cash
provided by financing activities was $4,719,433. The decreased cash flow from
financing activities reflects the receipt of net proceeds of $6,434,016 from
our
public offering in May 2005 and the exercise of the underwriters over-allotment
option in June 2005. The decreased cash flow from operations also reflects
increased net cash payments under our line of credit. We expect to fund our
operations, including paying our liabilities, funding capital expenditures
and
making required payments on our debts, through the next twelve months with
cash
provided by operating activities and the use of our credit facility. In
addition, an increase in eligible accounts receivable and inventory would permit
us to make additional borrowings under our line of credit. We also believe
we
could, if necessary, obtain additional loans by mortgaging our headquarters.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, results of
operations, liquidity, capital expenditures or capital resources, that is
material to investors.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk.
Market
risks relating to our operations result primarily from changes in interest
rates
and commodity prices as further described below.
Interest
Rate Risks. We
are
subject to market risk from exposure to fluctuations in interest rates. At
July
31, 2006, our debt consisted of $3,562,549 of variable rate debt under our
revolving line of credit. At July 31, 2006, interest on the variable rate debt
was payable at 7.55% (or 2.15% above the one-month LIBOR rate) for the revolving
line of credit.
Commodity
Price Risks. The
supply and price of coffee beans are subject to volatility and are influenced
by
numerous factors which are beyond our control. Historically, we have used
short-term coffee futures and options contracts primarily for the purpose of
partially hedging and minimizing the effects of changing green coffee prices,
as
further explained in Note 4 of the notes to financial statements in this report.
At July 31, 2006 we held 243 options covering an aggregate of 9,112,500 pounds
of green coffee beans at prices of $.975 and $1.10 per pound. The fair market
value of these options, which was obtained from major financial institutions,
was $487,961 at July 31, 2006. In addition, we acquire futures contracts with
longer terms (generally three to four months) primarily for the purpose of
guaranteeing an adequate supply of green coffee. At July 31, 2006, we held
58
futures contracts for the purchase of 2,175,000 pounds of coffee at prices
ranging from $.9975 to $.9930 per pound for September 2006 contracts. The market
price of coffee applicable to such contracts was $.995 per pound at that date.
The use of these derivative financial instruments has enabled us to mitigate
the
effect of changing prices although we generally remain exposed to loss when
prices decline significantly in a short period of time or remain at higher
levels, preventing us from obtaining inventory at favorable prices. We generally
have been able to pass green coffee price increases through to customers,
thereby maintaining our gross profits. However, we cannot predict whether we
will be able to pass inventory price increases through to our customers in
the
future. Increased green coffee prices cause our margins to shrink to the extent
we are unable to pass the full amount of increase through to our customers.
During the quarter, our net margins continued to be negatively impacted by
an
increase in robusta coffee prices on the London Robusta Market. While the price
of Arabica coffee on the New York Arabica Market decreased approximately 18%
from mid-April 2006 to the end of July 2006, robusta coffee prices on the London
Robusta Market have increased by approximately 26% since July 2005. As a result,
the margins on our espresso brands (Café Caribe, Café Supremo and Via Roma)
continued to be negatively impacted. The increased cost of robusta coffee could
not be offset by price increases or substitutions of other coffees in these
blends. In addition, we continued to promote these brands during the period,
which further exacerbated the situation of lower margins due to higher robusta
costs. These factors negatively affected margins on our leading brand, Café
Caribe, by approximately 16%.
Item
4. Controls
and Procedures.
Management,
including our President, Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report. Based upon that evaluation, the President, and
Chief Executive Officer, who is also the Chief Financial Officer, concluded
that
the disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports that we file and submit under the
Exchange Act is (i) recorded, processed, summarized and reported as and
when required and (ii) accumulated and communicated to the Company’s management,
including its President and Chief Executive Officer, who is also the principal
executive officer and principal financial officer, as appropriate to allow
timely discussions regarding disclosure.
There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation that occurred during our last fiscal quarter
that has materially affected, or that is reasonably likely to materially affect,
our internal control over financial reporting.
Part
II — OTHER INFORMATION
Item
1. Legal
Proceedings.
We
are a
party to various legal proceedings that, in our opinion, are routine in nature
and will not have a material adverse effect on our results of operations or
financial position in future periods.
Item
1A. Risk
Factors.
Not
applicable.
Item
2. Unregistered
Sales of Equity in Securities and Use of Proceeds.
On
May 6,
2005, we concluded the public offering of 1,400,000 shares of our common stock
at a price of $5.00 per share and on June 16, 2005 the underwriters exercised
their option to purchase an additional 210,000 shares of our common stock at
a
price of $5.00 per share. After underwriting discounts and commissions and
offering expenses, we received net proceeds of $6,436,016 in the offering,
after
giving effect to the over-allotment option. We used portions of the proceeds
to
pay down bank debt, to build up our inventories for sales expansion, to fund
our
joint ventures and for general corporate purposes, including working capital
and
capital expenditures. We also intend to use certain proceeds to implement a
branded sales and marketing campaign, to purchase equipment for our La Junta,
Colorado facility and to grow our food service distribution. As strategic
opportunities arise, we may use the proceeds of the offering to fund
acquisitions, licensing and other strategic alliances.
Item
3. Defaults
upon Senior Securities.
None.
Item
4. Submission
of Matters to a Vote of Security Holders.
During
the three months ended July 31, 2006, no matters were submitted to a vote of
security holders.
Item
5. Other
Information.
None.
Item
6. Exhibits.
11.1
|
Earnings
Per Share Calculation.
|
31.1
|
Rule
13a - 14(a)/15d - 14a Certification.
|
32.1
|
Section
1350 Certification.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
Coffee
Holding
Co.,
Inc.
|
|
(Registrant) |
|
|
|
September
8,
2006 |
By: |
/s/ Andrew
Gordon |
|
Andrew
Gordon |
|
President,
Chief
Executive Officer and Chief Financial
Officer |