General
Overview
Products
and Operations. We are an integrated wholesale coffee roaster and dealer located in the United States. Our core products can
be divided into three categories:
|
● |
Wholesale
Green Coffee: unroasted raw beans imported from around the world and sold to large and small roasters and coffee shop operators; |
|
|
|
|
● |
Private
Label Coffee: coffee roasted, blended, packaged and sold under the specifications and names of others, including supermarkets
that want to have their own brand name on coffee to compete with national brands; and |
|
|
|
|
● |
Branded
Coffee: coffee roasted and blended to our own specifications and packaged and sold under our eight proprietary and licensed
brand names in different segments of the market. |
Our
private label and branded coffee products are sold throughout the United States and certain countries in Asia to supermarkets, wholesalers,
and individually owned and multi-unit retail customers. Our unprocessed green coffee, which includes over 90 specialty coffee offerings,
is primarily sold to specialty gourmet roasters in the United states, Canada and multiple international countries.
We
conduct our operations in accordance with strict freshness and quality standards. All of our private label and branded coffees are produced
from high quality coffee beans that are deep roasted for full flavor using a slow roasting process that has been perfected utilizing
almost 50 years of experience in the coffee industry. In order to ensure freshness, our products are delivered to our customers within
72 hours of roasting. We believe that our long history has enabled us to develop a loyal customer base.
In
June 2016, we acquired substantially all of the assets of Coffee Kinetics LLC (doing business as Sonofresco) through our wholly-owned
subsidiary Sonofresco, LLC (“Sonofresco” or “SONO”), including equipment, inventory, customer lists, relationships
and accounts payable. In addition to our wholesale green coffee, private label coffee and branded coffee product offerings, we currently
sell tabletop coffee roasting equipment to our customers through Sonofresco.
On
February 23, 2017, we purchased all the outstanding common stock of Comfort Foods, Inc. (“CFI”). CFI is a medium sized regional
roaster, manufacturing both branded and private label coffee for retail and foodservice customers located predominantly in the northeast
United States marketplace.
On
April 24, 2018, pursuant to an Asset Purchase Agreement, by and among Generations Coffee Company, LLC (“GCC”) the entity
formed as a result of the Company’s joint venture with Caruso’s Coffee, Inc. and Steep & Brew, Inc. (“the Seller”)
a Wisconsin corporation and the stockholder of the Seller. GCC purchased substantially all the assets, including equipment, inventory,
customer lists and relationships of the Seller.
On
October 15, 2020, we entered into a Contribution and Equity Purchase Agreement (the “Jordre Well Agreement”) to become a
49% owner in The Jordre Well, LLC (“The Jordre Well”), a cannabidiol (“CBD”) beverage company. Under the terms
of the Jordre Well Agreement, The Jordre Well will assist us in the development and commercialization of CBD-infused line extensions
for the existing coffee brands within our portfolio, as well as launch new brands that are intended to serve consumer demand for non-coffee
CBD-infused beverages and products. We plan to infuse our brands Café Caribe Latin Espresso and Harmony Bay Gourmet coffee, with
CBD as soon as we are comfortable with our formulations. We believe CBD coffee will be a fast growing and profitable market for us and
if the legislative environment surrounding CBD products continues to improve, our plan is to offer all our customers the opportunity
to infuses their products with CBD.
We
were incorporated on October 9, 1995 under the laws of the State of Nevada under the name Transpacific International Group Corp (“Transpacific”).
On April 16, 1998, Transpacific completed a merger with Coffee Holding Co., Inc., a New York corporation. Upon the consummation of the
merger, Coffee Holding Co., Inc. was merged into Transpacific and Transpacific changed its name to Coffee Holding Co., Inc.
Our
corporate offices are located at 3475 Victory Boulevard, Staten Island, New York 10314. Our telephone number is (718) 832-0800 and our
website address is www.coffeeholding.com. The information on our website is not incorporated by reference into this Annual Report on
Form 10-K.
Our
Competitive Strengths
To
achieve our growth objectives described below, we intend to leverage the following competitive strengths:
Positioned
to Profitably Grow Through Varying Cycles of the Coffee Market. We believe that we are one of the few coffee companies to offer
a broad array of branded and private label roasted ground coffees and wholesale green coffee across the spectrum of consumer tastes,
preferences and price points. While many of our competitors engage in distinct segments of the coffee business, we sell products in each
of the following areas:
|
● |
Retail
branded coffee; |
|
|
|
|
● |
Mainstream
retail private label coffee; |
|
|
|
|
● |
Specialty
retail coffees both private label and branded; |
|
|
|
|
● |
Wholesale
specialty green and gourmet whole bean coffees; |
|
|
|
|
● |
Single
cup coffee pods; |
|
|
|
|
● |
Food
service; |
|
|
|
|
● |
Instant
coffees; |
|
|
|
|
● |
Tea;
and |
|
|
|
|
● |
Tabletop
coffee roasting equipment. |
Our
branded and private label roasted ground coffees are sold at competitive and value price levels while some of our other branded and specialty
coffees are sold predominantly at premium price levels. Premium price level coffee is high-quality gourmet coffee, such as AA Arabica
coffee, which sell at a substantial premium over traditional retail canned coffee, while competitive and value price level coffee is
mainstream or traditional canned coffee. Because of this diversification, we believe that our profitability is not dependent on any one
area of the coffee industry and, therefore, is less sensitive than our competition to potential coffee commodity price and overall economic
volatility.
Wholesale
Green Coffee Market Presence. As a large roaster-dealer of green coffee, we believe that we are favorably positioned to increase
our specialty coffee sales. Since 1998, we have increased the number of our wholesale green coffee customers, including coffee houses,
single store operators, mall coffee stores and mail order sellers, by 813% from 150 to 1,370. We are a charter member of the Specialty
Coffee Association of America and one of the largest distributors of Swiss Water Processed Decaffeinated Coffees and Dattera specialty
Brazil coffees in the United States. Our almost 50 years of experience as a roaster and a dealer of green coffee allows us to provide
our roasting experience as a value added service to our gourmet roaster customers. The assistance we provide to our customers includes
training, coffee blending and market identification. We believe that our relationships with wholesale green coffee customers and our
focus on selling green coffee as a wholesaler has enabled us to participate in the growth of the specialty coffee market while mitigating
the risks associated with the competitive retail specialty coffee environment.
Diverse
Portfolio of Differentiated Branded Coffees. We have amassed a portfolio of eight proprietary name brands sold to supermarkets,
wholesalers and individually owned stores in the United States, including brands for specialty espresso, Latin espresso, Italian espresso,
100% Colombian coffee and blended and flavored coffees. In addition, we have entered into a licensing agreement with Del Monte Corporation
for the exclusive right to use the S&W trademark in the United States and other countries approved by Del Monte Corporation in connection
with the production, manufacture and sale of roasted whole bean and ground coffee for distribution to retail customers. Our existing
portfolio of differentiated brands combined with our management expertise serve as a platform to add additional name brands through acquisition
or licensing agreements which target product niches and segments that do not compete with our existing brands.
Management
Has Extensive Experience in the Coffee Industry. Andrew Gordon, our President, Chief Executive Officer, Chief Financial Officer
and Treasurer, and David Gordon, our Executive Vice President – Operations, have worked with Coffee Holding for 40 and 42 years,
respectively. During this period, the Company has successfully navigated varying cycles in both the coffee industry and macro economy.
David Gordon is an original member of the Specialty Coffee Association of America. We believe that our employees and management are dedicated
to our vision and mission, which is to produce high quality products, as well as to provide quality and responsive service to our customers.
Our
Growth Strategy
We
believe that significant growth opportunities exist by selectively pursuing strategic acquisitions and alliances, increasing penetration
with existing customers by adding new products, and developing our Harmony Bay brand and increase the number of our wholesale green coffee
customers. By capitalizing on this strategy, we hope to continue to grow our business with our commitment to quality and personalized
service to our customers. We do not intend to compete on price alone nor do we intend to expand sales at the expense of profitability.
Selectively
Pursue Strategic Acquisitions and Alliances. We have expanded our operations by acquiring coffee companies, entering into strategic
alliances and acquiring or licensing brands, which complement our business objectives and we intend to continue to seek such opportunities.
Grow
Our Cafe Caribe and Cafe Supremo Products. We believe the Latin population in the United States is the fastest growing and now
represents the largest minority demographic in the United States. We believe there is significant opportunity for our Café Caribe
and Café Supremo brands to gain market share among Latin consumers in the United States. Café Caribe, which has historically
been our leading brand by poundage, is a specialty espresso coffee that targets espresso coffee drinkers and, in particular, Latin consumers.
Café Supremo is a specialty espresso coffee which is priced for the more price sensitive Latin espresso coffee drinker.
Further
Market Penetration of Our Niche Products. We intend to capture additional market share through our existing distribution channels
by selectively adding or introducing new brand names and products across multiple price points, including:
|
● |
New
licensing agreements; |
|
|
|
|
● |
Specialty
blends and foodservice opportunities; |
|
|
|
|
● |
CBD
coffee products as legislation allows; and |
|
|
|
|
● |
Sales
of our tabletop coffee roasting equipment. |
Our
Core Products
Our
core products can be divided into three categories:
|
● |
Wholesale
Green Coffee: unroasted raw beans imported from around the world and sold to large, medium and small roasters and coffee
shop operators; |
|
|
|
|
● |
Private
Label Coffee: coffee roasted, blended, packaged and sold under the specifications and names of others, including supermarkets
that want to have their own brand name on coffee to compete with national brands; and |
|
|
|
|
● |
Branded
Coffee: coffee roasted and blended to our own specifications and packaged and sold under our eight proprietary and licensed
brand names in different segments of the market. |
Wholesale
Green Coffee. The specialty coffee market remains the fastest growing area of our industry. The number of gourmet coffee houses
have been increasing in all areas of the United States. The growth in specialty coffee sales has created a marketplace for higher quality
and differentiated products, which can be priced at a premium in the marketplace. As a large roaster-dealer of green coffee, we are favorably
positioned to increase our specialty coffee sales. We sell green coffee beans to small roasters and coffee shop operators located throughout
the United States and carry over approximately 90 different varieties. Specialty green coffee beans are sold unroasted, direct from warehouses
to small roasters and gourmet coffee shop operators, which then roast the beans themselves. We sell from as little as one bag (132 pounds)
to a full truckload (44,000 pounds) of specialty green coffee beans, depending on the size and need of the customer. We believe that
we can increase sales of wholesale green coffee without an increase in infrastructure as well as without venturing into the highly competitive
retail specialty coffee environment. We believe that by utilizing our current strategy we can be as profitable or more profitable than
our competitors in this segment by selling “one bag at a time” rather than “one cup at a time.”
Private
Label Coffee. We roast, blend, package and sell coffee under private labels for companies throughout the United States and Canada.
Our private label coffee is sold in cans, brick packages and instants in a variety of sizes. As of October 31, 2021, we supplied coffee
under approximately 21 different labels to wholesalers and retailers. We produce private label coffee for customers who desire
to sell coffee under their own name but do not want to engage in the manufacturing process. Our private label customers seek a quality
similar to the national brands at a lower cost, which represents a better value for the consumer.
Branded
Coffee. We roast and blend our branded coffee according to our own recipes and package the coffee at our facilities in La Junta,
Colorado, North Andover, Massachusetts and Brecksville, Ohio. We then sell the packaged coffee under our brand labels to supermarkets,
wholesalers and individually-owned stores throughout the United States.
We
hold trademarks for each of our proprietary name brands and have the exclusive right to use the S&W, IL CLASSICO brand names in the
United States in connection with the production, manufacture and sale of roasted whole bean and ground coffee for distribution at the
retail level. For further information regarding our trademark rights, see “Business—Trademarks.”
Each
of our name brands is directed at a particular segment of the coffee market. Our branded coffees are:
Cafe
Caribe, a specialty espresso coffee that targets espresso coffee drinkers and, in particular, the Latin consumer market;
Don
Manuel, is produced from the finest 100% Colombian coffee beans. Don Manuel is an upscale quality product which commands a substantial
premium compared to the more traditional brown coffee blends. We also use this known trademark in our food service business because of
the high brand quality;
S&W,
an upscale canned coffee established in 1921 and includes Premium, Premium Decaf, French Roast, Colombian, Colombian Decaf, Swiss Water
Decaf, Kona, Mellow’d Roast and IL CLASSICO lines;
Cafe
Supremo, a specialty espresso that targets espresso drinkers of all backgrounds and tastes. It is designed to introduce coffee
drinkers to the tastes of dark roasted coffee;
Via
Roma, an Italian espresso targeted at the more traditional espresso drinker;
Premier
Roasters, a line of high quality retail and foodservice products packed in composite cans and poly bags and single serve;
Harmony
Bay, an upscale line of flavored beans in 11oz and 40oz bags, along with single serve offerings in a multitude of unique flavor
profiles; and
Steep
and Brew, a premium line of specialty coffees with over 30 years brand recognition. These coffees are comprised of Single Origin,
Blended and Flavored coffees sold throughout the upper Midwest region of the United States in bulk whole bean, whole bean and ground
bags and single serve format compatible with most single serve brewers.
Other
Products
We
also offer several niche products, including:
|
● |
tea;
and |
|
|
|
|
● |
table-top
coffee roasters and grinders. |
Raw
Materials
Coffee
is a commodity traded on the Commodities and Futures Exchange subject to price fluctuations. Over the past five years, the average price
per pound of coffee beans ranged from approximately $0.92 to $2.25. The price for coffee beans on the commodities market as of October
31, 2021 and 2020 was $2.04 and $1.04 per pound, respectively. Specialty green coffee, unlike most coffee, is not tied directly to the
commodities cash markets. Instead, it tends to trade on a negotiated basis at a substantial premium over commodity coffee pricing, depending
on the origin, supply and demand at the time of purchase. We are a licensed Fair Trade dealer for Fair Trade certified coffee. Fair Trade
certified coffee helps small coffee farmers to increase their incomes and improve the prospects of their communities and families by
guaranteeing farmers a minimum price of ten cents above the current market price. Our Ohio Facility operated by Generations Coffee Company,
LLC (“GCC”), as well as our North Andover plant operated by our Comfort Foods division, are certified organic by the Organic
Crop Improvement Association (OCIA). All of our specialty green coffees, as well as all of the other coffees we import for roasting,
are subject to multiple levels of quality control.
We
purchase our green coffee from dealers located primarily within the United States. The dealers supply us with coffee beans from many
countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. For the fiscal years ended 2021 and 2020, approximately 34%
and 26% of all of our green coffee purchases were from five suppliers. One of these suppliers, Rothfos Corporation, accounted for approximately
$3.1 million, or 6%, in 2021, and $5.3 million, or 10%, in 2020, of our total product purchases. An employee of Rothfos Corporation is
one of our directors. We do not have any formalized, material agreements or long-term contracts with any of these suppliers. Rather,
our purchases are typically made pursuant to individual purchase orders. We do not believe that the loss of any one supplier, including
Rothfos, would have a material adverse effect on our operations due to the availability of alternate suppliers.
The
supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. Supply
and price can be affected by factors such as weather, politics, currency fluctuations and economics within the countries that export
coffee. Increases in the cost of coffee beans can, to a certain extent, be passed on to our customers in the form of higher prices for
coffee beans and processed coffee. Drastic or prolonged increases in coffee prices may also adversely impact our business as it could
lead to a decline in overall consumption of coffee. Similarly, rapid decreases in the cost of coffee beans may force us to lower our
sale prices before realizing cost reductions in our purchases.
We
subject all of our private unroasted green coffee to both a pre-shipment sample approval and an additional sample approval upon arrival
into the United States. Once the arrival sample is approved, we then bring the coffee to one of our facilities to roast and blend according
to our own strict specifications. During the roasting and blending process, samples are pulled off the production line and tested on
an hourly basis to ensure that each batch roasted is consistent with the others and meets the strict quality standards demanded by our
customers and us.
Our
Use of Derivatives
The
supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. Historically,
we have used, and intend to continue to use in a limited capacity, short-term coffee futures and options contracts primarily for the
purpose of partially hedging the effects of changing green coffee prices and to reduce our costs of sales. In addition, we acquired,
and expect to continue to acquire, futures contracts with longer terms, generally three to four months, primarily for the purpose of
guaranteeing an adequate supply of green coffee. Realized and unrealized gains or losses on options and futures contracts are reflected
in our cost of sales. Gains on options and futures contracts reduce our cost of sales and losses on options and futures contracts increase
our cost of sales. The use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices.
We believe that, in normal economic times, our hedging policies remain a vital element of our business
model not only in controlling our cost of sales, but also giving us the flexibility to obtain the inventory necessary to continue to
grow our sales while trying to minimize margin compression during a time of high coffee prices. However, no strategy can entirely
eliminate pricing risks and we generally remain exposed to losses on futures contracts when prices decline significantly in a short period
of time, and we would generally remain exposed to supply risk in the event of non-performance by the counterparties in any one of our
physical contracts. Although we have had net gains on options and futures contracts in the past,
we have incurred significant losses on options and futures contracts during some reporting periods. In these cases, our cost of sales
has increased, resulting in a decrease in our profitability or increase our losses. Such losses have and could in the future materially
increase our cost of sales and materially decrease our profitability and adversely affect our stock price. See “Item 1A –
Risk Factors - If our hedging policy is not effective, we may not be able to control our coffee costs, we may be forced to pay greater
than market value for green coffee and our profitability may be reduced.” Failure to properly design and implement an effective
hedging strategy may materially adversely affect our business and operating results. If the hedges that we enter do not adequately offset
the risks of coffee bean price volatility or our hedges result in losses, our cost of sales may increase, resulting in a decrease in
profitability or increased losses. As previously announced, as a result of the volatile nature of the commodities markets, we have and
are continuing to scale back our use of hedging and short-term trading of coffee futures and options contracts, and intend to continue
to use these practices in a limited capacity going forward. See “Quantitative and Qualitative Disclosures About Market Risk—Commodity
Price Risks.”
Trademarks
and Tradename
We
hold trademarks, registered with the United States Patent and Trademark Office, for all eight of our proprietary coffee brands and an
exclusive license for S&W, IL CLASSICO brands for sale in the United States. Trademark registrations are subject to periodic renewal
and we anticipate maintaining our registrations. We believe that our brands are recognizable in the marketplace and that brand recognition
is important to the success of our branded coffee business.
Customers
We
sell our private label and our branded coffee to some of the largest retail and wholesale customers in the United States (according to
Supermarket News).
Although
our agreements with wholesale customers generally contain only pricing terms, our contracts with certain customers also contain minimum
and maximum purchase obligations at fixed prices. Because our profits on a fixed-price contract could decline if coffee prices increased,
we acquire futures contracts with longer terms (generally three to four months) primarily for the purpose of guaranteeing an adequate
supply of green coffee at favorable prices. Although the use of these derivative financial instruments has generally enabled us to mitigate
the effect of changing prices, no strategy can entirely eliminate pricing risks or increased losses and we generally remain exposed to
losses on futures contracts when prices decline significantly in a short period of time, and we would generally remain exposed to supply
risk in the event of non-performance by the counterparties to any futures contracts. See “Our Use of Derivatives.”
Marketing
We
market our private label and wholesale coffee through trade shows, industry publications, face-to-face contact and through the use of
our internal sales force and non-exclusive independent food and beverage sales brokers. We also use our web site (www.coffeeholding.com)
as a method of marketing our coffee products and ourselves.
For
our private label and branded coffees, we will, from time to time in conjunction with retailers and with wholesalers, conduct in-store
promotions, such as product demonstrations, coupons, price reductions, two-for-one sales and new product launches to capture changing
consumer taste preferences for upscale canned, bagged and single cup coffees.
We
evaluate opportunities for growth consistent with our business objectives. In addition, we have established relationships with independent
sales brokers to market our products across the United States, in areas of the country where we have not had a high penetration of sales
and Canada. We utilize our in-house sales personnel to market our private label brands. We intend to capture additional market share
in our existing distribution channels by selectively adding or introducing new brand names and products across multiple price points,
including niche specialty blends, private label “value” blends and tea and our own brands, filter packages, and peripheral
products.
Charitable
Activities
We
are also a supporter of several coffee-oriented charitable organizations and during fiscal 2021 and 2020, we donated approximately $49,000
and $78,000, respectively, to charities.
|
● |
For
over 20 years, we have been members of Coffee Kids, an international non-profit organization that helps to improve the quality of
life of children and their families in coffee-growing communities in Mexico, Guatemala, Nicaragua and Costa Rica. |
|
● |
We
are members of Grounds for Health, an organization that educates, screens, and arranges treatment for women who have cancer and live
in the rural coffee growing communities of Mexico. |
|
|
|
|
● |
We
are a licensed Fair Trade dealer of Fair Trade certified coffee. Fair Trade certified coffee helps small coffee farmers to increase
their incomes and improve the prospects of their communities and families. It guarantees farmers a minimum price of $1.40 per pound
or fifteen cents above the current market price. |
|
|
|
|
● |
We
are the administrative benefactors to a non-profit organization called Cup for Education. After discovering the lack of schools,
teachers, and basic fundamental learning supplies in the poor coffee growing communities of Central and Latin America, “Cup”
was established by our employee, Karen Gordon, to help build schools, sponsor teachers, and purchase basic supplies such as books,
chalk and other necessities for a proper education. |
Competition
The
coffee market is highly competitive. We compete in the following areas:
Wholesale
Green Coffee. There are many green coffee dealers throughout the United States. Many of these dealers have greater financial
resources than we do. However, we believe that we have both the knowledge and the capability to assist small specialty gourmet coffee
roasters with developing and growing their businesses. Our over 40 years of experience as a roaster and a dealer of green coffee allows
us to provide our roasting experience as a value added service to our gourmet roaster customers. While other coffee merchants may be
able to offer lower prices for coffee beans, we market ourselves as a value-added supplier to small roasters, with the ability to help
them market their specialty coffee products and develop a customer base. The assistance we provide our customers includes training, coffee
blending and market identification. Because specialty green coffee beans are sold unroasted to small coffee shops and roasters that market
their products to local gourmet customers, we do not believe that our specialty green coffee customers compete with our private label
or branded coffee lines of business. We believe that the addition of Organic Products Trading Company, LLC (“OPTCO”), Sonofresco,
CFI and Steep & Brew as well as our external green coffee salespeople allows us to compete more effectively throughout the country
and Canada.
Private
Label Competition. There are several major producers of coffee for private label sales in the United States. Many other companies
produce coffee for sale on a regional basis. Our main competitor is the Massimo Zanetti Beverage Company. The Massimo Zanetti Beverage
Company is larger and has more financial and other resources than we do and, therefore, is able to devote more resources to product development
and marketing. We believe that we remain competitive by providing a higher level of quality and customer service. This service includes
ensuring that the coffee produced for each label maintains a consistent taste and is delivered on time and in the proper quantities.
Branded
Competition. Our proprietary brand coffees compete with many other brands that are sold in supermarkets and specialty stores,
primarily in the Northeastern United States. The branded coffee market in both the Northeast and elsewhere is dominated by two large
companies: Kraft Foods, Inc. (owner of the Maxwell House brand), and J.M. Smucker Co. (owner of the Folgers and Café Bustelo brands).
Our large competitors have greater access to capital and a greater ability to conduct marketing and promotions. We believe that, while
our competitors’ brands may be more nationally recognizable, our Café Caribe and Café Supremo brands are competitive
in the fast growing Latin demographic, our Harmony Bay has a strong regional presence in the northeast and our S&W brand has been
a popular and recognizable brand on the west coast for over 80 years.
Government
Regulation
Our
coffee roasting operations are subject to various governmental laws and regulations, which require us to obtain licenses relating to
customs, health and safety, building and land use and environmental protection. Our roasting facility is subject to state and local air-quality
and emissions regulation. If we encounter difficulties in obtaining any necessary licenses or if we have difficulty complying with these
laws and regulations, then we could be subject to fines and penalties, which could have a material adverse effect on our profitability.
In addition, our product offerings could be limited, thereby reducing our revenues.
We
believe that we are in compliance in all material respects with all such laws and regulations and that we have obtained all material
licenses and permits that are required for the operation of our business. We are not aware of any environmental regulations that have
or that we believe will have a material adverse effect on our operations.
Employees
We
have 75 full-time employees. None of our employees are represented by unions or collective bargaining agreements. Our management believes
that we maintain good working relationships with our employees. To supplement our internal sales staff, we sometimes engage independent
national and regional sales brokers as independent contractors who work on a commission basis.
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
roasting, blending, packaging and distribution of proprietary branded coffee; and |
|
|
|
|
● |
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.
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 as a result of tax reform or changes to existing trade
agreements or tax conventions, may adversely impact our business. In addition, the global macroeconomic environment could be negatively
affected by, among other things, COVID-19 or other pandemics or 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 ongoing conflict between Russian
and Ukraine 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.
The
COVID-19 pandemic has, and may continue to have, an adverse impact on our business, financial condition and results of operations. Our
business, financial condition and results of operations have been and are expected to continue to be adversely affected by the COVID-19
pandemic. The COVID-19 pandemic has affected nearly all regions of the world, and preventative measures taken to contain or mitigate
the outbreak have caused, and are continuing to cause, business slowdown or shutdown in affected areas. This has and could continue to
negatively affect the global economy, including reduced consumer spending and disruption of global supply chains. We cannot predict the
degree to which our business, financial condition and results of operations will be affected by the COVID-19 pandemic, but the effects
could be material.
In
addition to the factors above, the COVID-19 pandemic has subjected our business to additional risk, including, but not limited to:
|
● |
Disruption
to our green coffee supplier partners and vendors, including through the effects of facility closures, reductions in operating hours,
labor shortages, and changes in operating procedures; |
|
● |
Disruption
to our own distribution and general office facilities and operations, including through the effects of facility closures, reductions
in operating hours, labor shortages, and changes in operating procedures, including for additional cleaning and disinfection procedures; |
|
● |
Closure
or reduced operations of cafes, restaurants and food service stores and reductions in consumer traffic, which may adversely affect
our Private Label Coffee and Branded Coffee channels; |
|
● |
Lower
performance of customers in our wholesale channel, which may result in reduction or cancellation of future orders; |
|
● |
Reductions
in consumer spending due to macroeconomic conditions caused by the COVID-19 pandemic, including decreased disposable income and increased
unemployment, which may result in decreased sales in all of our channels. |
At
this time, we cannot assess the ultimate economic impact of the COVID-19 pandemic on our business, operations or financial performance,
which will be determined by, among other things, the duration, severity and magnitude of such circumstances and governmental responses
and requirements relating to the pandemic, nor can we predict the long-term effects of governmental and public responses to changing
conditions. The extent to which the COVID-19 pandemic will impact our operations, liquidity or financial results in subsequent periods
is uncertain, but such impact could be material. If the COVID-19 pandemic becomes prolonged, and/or more severe, it could exacerbate
the negative impacts on our business and results of operations and may also heighten many of the other risks described in this section
entitled “Risk Factors.”
If
we are unable to geographically expand our branded and private label products, our growth will be impeded which could result in reduced
sales and profitability. Our business strategy emphasizes, among other things, geographic expansion of our branded and private
label products as opportunities arise. We may not be able to implement successfully this portion of our business strategy. Our ability
to implement this portion of our business strategy is dependent on our ability to:
|
● |
market
our products on a national scale; |
|
|
|
|
● |
increase
our brand recognition on a national scale; |
|
● |
enter
into distribution and other strategic arrangements with third party retailers; and |
|
|
|
|
● |
manage
growth in administrative overhead and distribution costs likely to result from the planned expansion of our distribution channels. |
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:
|
● |
such
acquisitions, licensing arrangements or other strategic alliances may divert our management’s attention from our existing operations; |
|
|
|
|
● |
we
may not be able to successfully integrate any acquired coffee companies or new coffee brands into our existing business; |
|
|
|
|
● |
we
may not be able to manage the contingent risks associated with the past operations of, and other unanticipated problems arising in,
any acquired coffee company; and |
|
|
|
|
● |
we
may not be able to control unanticipated costs associated with such acquisitions, licensing arrangements or strategic alliances. |
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 |
|
|
|
|
● |
the
recognition of significant charges for depreciation and amortization related to intangible assets. |
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:
|
● |
difficulties
in integrating acquired operations or products, including the loss of key employees from, or customers of, acquired businesses; |
|
|
|
|
● |
diversion
of management’s attention from our existing businesses; |
|
|
|
|
● |
adverse
effects on existing business relationships with suppliers and customers; |
|
|
|
|
● |
adverse
impacts of margin and product cost structures different from those of our current mix of business; and |
|
|
|
|
● |
risks
of entering distribution channels, categories or markets in which we have limited or no prior experience. |
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 2021 fiscal year. We generally do not enter long-term contracts with most of our customers,
but we do enter into one and two year agreements with most our key customers on our private label business. Accordingly, some of our
customers can stop purchasing our products at any time without penalty and are free to purchase products from our competitors. The loss
of, or reduction in sales to any of our other customers to which we sell a significant amount of our products or any material adverse
change in the financial condition of such customers would negatively affect our revenues and decrease our earnings.
If
we lose our key personnel, including Andrew Gordon and David Gordon, our revenues and profitability could suffer. Our success
depends to a large degree upon the services of Andrew Gordon, our President, Chief Executive Officer, Chief Financial Officer and Treasurer,
and David Gordon, our Executive Vice President – Operations and Secretary. We also depend to a large degree on the expertise of
our coffee roasters. We do not have employment contracts with our coffee roasters. Our ability to source and purchase a sufficient supply
of high quality coffee beans and to roast coffee beans consistent with our quality standards could suffer if we lose the services of
any of these individuals. As a result, our business and operating results would be adversely affected. We may not be successful in obtaining
and retaining a replacement for either Andrew Gordon or David Gordon if they elect to stop working for us. In addition, we do not have
key-person insurance on the lives of Andrew Gordon or David Gordon.
If
our goodwill, 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 for goodwill and indefinite lived intangible asset impairment at least
annually. In addition, we review our goodwill, 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 goodwill, 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.
The results of our review showed an impairment for the years ended October 31, 2021. We recorded impairment of two
of our trademarks totaling $1,080,000 as the carrying amount of these trademarks exceeded the respective fair values on the test date,
which was determined using a relief from royalty method.
Our
indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business downturns.
From time to time, we utilize borrowings under our credit facility in connection with operations. Outstanding debt could have
important negative consequences to the holders of our securities, including the following:
|
● |
general
domestic and global economic conditions; |
|
|
|
|
● |
a
portion of our cash flow from operations will be needed to pay debt service and will not be available to fund future operations; |
|
|
|
|
● |
we
have increased vulnerability to adverse general economic and coffee industry conditions; |
|
|
|
|
● |
we
may be vulnerable to higher interest rates because interest expense on borrowings under our revolving line of credit is based on
variable rates; and |
|
|
|
|
● |
we
may be subject to covenants that could restrict our operations. |
Our
ability to make payments on our indebtedness and to fund our operations depends on our ability to generate cash in the future. Our future
operating performance is subject to market conditions and business factors that are beyond our control. If we are unable to make payments
on our debt, we may have to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our
debt.
Our
credit facility contains covenants that place annual restrictions on our operations, including covenants relating to debt restrictions,
capital expenditures, minimum deposit restrictions, tangible net worth, net profit, leverage, employee loan restrictions, distribution
restrictions (common stock and preferred stock), dividend restrictions and restrictions on intercompany transactions. The credit facility
also requires that we maintain a minimum working capital at all times. There can be no assurance that we will be in compliance with all
covenants in the future or that we will be able to modify the terms of the credit facility should that become necessary. Failure to comply
with any of these covenants and restrictions would result in an event of default under the loan agreement.
If
we fail to promote, enhance and maintain our brands, the value of our brands could decrease and our revenues and profitability could
be adversely affected. We believe that promoting and enhancing our brands is critical to our success. If our brand-building strategy
is unsuccessful, these expenses may never be recovered, and we may be unable to increase awareness of our brands or protect the value
of our brands. If we are unable to achieve these goals, our revenues and ability to implement our business strategy could be adversely
affected.
Our
success in promoting and enhancing our brands will also depend on our ability to provide customers with high quality products and service.
Although we take measures to ensure that we sell only fresh roasted coffee, we have no control over our roasted coffee products once
they are purchased by our customers. Accordingly, wholesale customers may store our coffee for longer periods of time or resell our coffee
without our consent, in each case, potentially affecting the quality of the coffee prepared from our products. Although we believe we
are less susceptible to quality control problems than many of our competitors because our products are processed in-house under strict
quality control guidelines which have been in place for more than 40 years, if consumers do not perceive our products and service to
be of high quality, then the value of our brands may be diminished and, consequently, our operating results and ability to implement
our business strategy may be adversely affected.
Our
roasting methods are not proprietary, so competitors may be able to duplicate them, which could harm our competitive position. If our
competitive position is weakened, our revenues and profitability could be materially adversely affected. We consider
our roasting methods essential to the flavor and richness of our roasted coffee and, therefore, essential to our brands of coffee. Because
we do not hold any patents for our roasting methods, it may be difficult for us to prevent competitors from copying our roasting methods
if such methods become known. If our competitors copy our roasting methods, the value of our coffee brands may be diminished, and we
may lose customers to our competitors. In addition, competitors may be able to develop roasting methods that are more advanced than our
roasting methods, which may also harm our competitive position.
The
success of our brand also depends in part on our intellectual property. We rely on a combination of trademarks, copyrights, service marks,
trade secrets and similar rights to protect our intellectual property. The success of our growth strategy depends on our continued ability
to use our existing trademarks and service marks in order to increase brand awareness and further develop our brand in both domestic
and international markets. If our efforts to protect our intellectual property are not adequate, or if any third party misappropriates
or infringes on our intellectual property, the value of our brand may be harmed, which could have a material adverse effect on our business.
We may become engaged in litigation to protect our intellectual property, which could result in substantial costs to us as well as diversion
of management attention.
Since
we rely heavily on common carriers to ship our coffee on a daily basis, any disruption in their services or increase in shipping costs
could adversely affect our relationship with our customers, which could result in reduced revenues, increased operating expenses, a loss
of customers or reduced profitability. We rely on a number of common carriers to deliver coffee to our customers and to deliver
coffee beans to us. We have no control over these common carriers and the services provided by them may be interrupted as a result of
labor shortages, contract disputes and other factors. If we experience an interruption in these services, we may be unable to ship our
coffee in a timely manner, which could reduce our revenues and adversely affect our relationship with our customers. In addition, a delay
in shipping could require us to contract with alternative, and possibly more expensive, common carriers and could cause orders to be
cancelled or receipt of goods to be refused. Any significant increase in shipping costs could lower our profit margins or force us to
raise prices, which could cause our revenue and profits to suffer.
If
there was a significant interruption in the operation of our Colorado, Ohio or Massachusetts facilities, we may not have the capacity
to service all of our customers and we may not be able to service our customers in a timely manner, thereby reducing our revenues and
earnings. We are dependent on the continued operations of our Colorado, Ohio and Massachusetts coffee roasting and distribution
facilities. Our ability to maintain our computer and telecommunications equipment in effective working order and to protect against damage
from fire, natural disaster, power loss, telecommunications failure or similar events. In addition, growth of our customer base may strain
or exceed the capacity of our systems and lead to degradations in performance or systems failure. Although we continually review and
consider upgrades to our order fulfillment infrastructure and provide for system redundancies to limit the likelihood of systems overload
or failure, substantial damage to our systems or a systems failure that causes interruptions for a number of days could adversely affect
our business. Additionally, if we are unsuccessful in updating and expanding our order fulfillment infrastructure, our ability to grow
may be constrained. As a result, our revenues and earnings could be materially adversely affected.
There
may be limitations on the effectiveness of our internal controls, and a failure of our control systems to prevent error or fraud may
materially harm our company. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by our management
on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any
material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency,
or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material
misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
During
the year ended October 31, 2021, we identified inappropriate system access controls over the financial reporting system and we determined
that we lacked adequate controls with respect to identifying and accounting for material contracts.
In January 2023, we determined that we made certain errors in the presentation
of net sales and cost of sales in our consolidated statements of operations in our financial statements during the fiscal year ended October
31, 2020. The effect of these errors was to overstate net sales and cost of sales for the reported period. We therefore found it necessary
to restate our previously filed annual financial statements for the fiscal year ended October 31, 2020. The errors and the required restatement
had no effect on our net income or earnings per share or other items in the consolidated statement of operations as of any reporting date
and had no impact on our consolidated balance sheets, consolidated statements of changes in stockholders’ equity, or consolidated
statements of cash flows.
As
a result, we determined that there was an overstatement of net sales and cost of sales in the consolidated statement of operations of
approximately $8.3 million in our financial statements during the fiscal year ended October 31, 2020. This was due to inadequate design
and implementation of controls to evaluate and monitor the presentation and compliance with accounting principles generally accepted in
the United States of America related to the statement of operations. Accordingly, management has determined that this control deficiency
constituted a material weakness and, as a result, as part of the restatement, management concluded that, as of October 31, 2020, our internal
control over financial reporting was not effective.
Effective
internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with adequate
disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Any failure to implement required new or improved
controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. Undetected material
weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the
expense of remediation.
Moreover,
we do not expect that disclosure controls or internal control over financial reporting will prevent all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control
systems to detect or prevent error or fraud could materially adversely impact us.
Our
remediation efforts may not enable us to avoid a material weakness in our internal control over financial reporting in the future. Any
of the foregoing occurrences, should they come to pass, could negatively impact the public perception of our company, which could have
a negative impact on our stock price.
The
failure of our suppliers or customers to adhere to the quality standards that we set for our products could lead to investigations, litigation,
write-offs, recalls or boycotts of our products, which could damage our reputation and our brand, increase our costs, and otherwise adversely
affect our business. Unfavorable allegations, government investigations and legal actions surrounding our products and/or our business
could harm our reputation, impair our ability to grow or sustain our business, and adversely affect our business, financial condition
and operating results. We do not control the operations of our suppliers or customers and we cannot guarantee that our suppliers
or customers will comply with applicable laws and regulations or operate in a legal, ethical and responsible manner. Additionally, it
is possible that we may not be able to identify noncompliance by our suppliers or customers notwithstanding any precautionary measures
we implement. Violation of applicable laws and regulations by our suppliers or customers, or their failure to operate in a legal, ethical
or responsible manner, could expose us to legal risks, cause us to violate laws and regulations and reduce demand for our products if,
as a result of such violation or failure, we attract negative publicity. In addition, the failure of our suppliers and customers to adhere
to the quality standards that we set for our products could lead to government investigations, litigation, write-offs and recalls, which
could damage our reputation and our brand, increase our costs, and otherwise adversely affect our business.
We
rely on our reputation for offering great value, superior service and a broad assortment of high-quality, safe products. If we become
subject to unfavorable allegations, government investigations or legal actions involving our products or us, such circumstances could
harm our reputation and our brand and adversely affect our business, financial condition and operating results. If this negative impact
is significant, our ability to grow or sustain our business could be jeopardized.
As
disclosed further herein, we have been named as a defendant in one class action lawsuit, and we have agreed to indemnify a client named
in another class action lawsuit, alleging that our products were mislabeled and thus violate consumer protection and false advertising
statutes, among others. These lawsuits, which generally allege that our coffee products do not make the number of servings as stated
on the label, are affecting the entire coffee industry and numerous similar lawsuits have been filed against numerous private label coffee
manufacturers and retailers.
Negative
publicity surrounding product matters, including publicity about other retailers, may harm our reputation and affect the demand for our
products. In addition, if more stringent laws or regulations are adopted in the future, we may have difficulty complying with the new
requirements imposed by such laws and regulations, and in turn, our business, financial condition, and operating results could be adversely
affected. Moreover, regardless of whether any such changes are adopted, we may become subject to claims or governmental investigations
alleging violations of applicable laws and regulations. Any such matter may subject us to fines, penalties, and/or litigation. Any one
of these results could negatively affect our business, financial condition, and operating results and impair our ability to grow or sustain
our business.
Risks
related to the coffee industry
Increases
in the cost of high quality Arabica or Robusta coffee beans could reduce our gross margin and profit. Green coffee is our largest
single cost of sales. Coffee is a traded commodity and, in general, its price can fluctuate depending on:
|
● |
outside
speculative influences such as indexed and algorithmic commodity funds; |
|
|
|
|
● |
weather
patterns in coffee-producing countries; |
|
|
|
|
● |
economic
and political conditions affecting coffee-producing countries, including acts of terrorism in such countries; |
|
|
|
|
● |
foreign
currency fluctuations; |
|
|
|
|
● |
disruptions
in our supply chain; and |
|
|
|
|
● |
trade
regulations and restrictions between coffee-producing countries and the United States. |
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 as
a result of the ongoing COVID-19 pandemic. The ongoing COVID-19 pandemic has resulted in significant disruption to the operations of
certain suppliers and the related transportation of their goods to the United States that are parts of our 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
level of marketing and pricing competition from existing or new competitors in the coffee industry; |
|
|
|
|
● |
the
success of our hedging strategy; |
|
|
|
|
● |
our
ability to retain existing customers and attract new customers; and |
|
|
|
|
● |
our
ability to manage inventory and fulfillment operations and maintain gross margins. |
As
a result of the foregoing, period-to-period comparisons of our operating results may not necessarily be meaningful and those comparisons
should not be relied upon as indicators of future performance. Accordingly, our operating results in future quarters may be below market
expectations. In this event, the price of our common stock may decline.
The
Gordon family has the ability to influence action requiring stockholder approval. Members of the Gordon family, including Andrew
Gordon, our President, Chief Executive Officer, Chief Financial Officer and Treasurer, and David Gordon, our Executive Vice President
and Secretary, own, in the aggregate, approximately 15.3% of our outstanding shares of common stock. As a result, the Gordon family is
able to influence the actions that require stockholder approval, including:
|
● |
the
election of a majority of our directors; |
|
|
|
|
● |
the
amendment of our charter documents; and |
|
|
|
|
● |
the
approval of mergers, sales of assets or other corporate transactions or matters submitted for stockholder approval. |
As
a result, our other stockholders may have reduced influence over matters submitted for stockholder approval. In addition, the Gordon
family’s influence could preclude any unsolicited acquisition of us and consequently materially adversely affect the price of our
common stock.
The
market price of our common stock has been volatile over the year and may continue to be volatile. The market price and trading
volume of our common stock has been volatile over the past year and it may continue to be volatile. Over the past year, our common stock
has traded as low as $3.60 and as high as $6.48 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:
|
● |
provide
that directors may only be removed upon a vote of at least eighty percent of the shares outstanding; |
|
|
|
|
● |
establish
advance notice requirements for nominating directors and proposing matters to be voted on by shareholders at shareholder meetings; |
|
|
|
|
● |
limit
the right of our stockholders to call a special meeting of stockholders; |
|
|
|
|
● |
authorize
our board of directors to issue preferred stock and to determine the rights and preferences of those shares, which would be senior
to our common stock, without prior stockholder approval; |
|
|
|
|
● |
require
amendments to our articles of incorporation to be approved by the holders of at least eighty percent of our outstanding shares of
common stock; |
|
|
|
|
● |
a
classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership
of a majority of our board of directors; and |
|
|
|
|
● |
provide
a prohibition on stockholder action by written consent, thereby only permitting stockholder action to be taken at an annual or special
meeting of our 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.