Quarterly Report for Quarter Ending July 31, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note on Forward-Looking Statements

Some of the matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors" and elsewhere in this quarterly report include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements upon information available to management as of the date of this Form 10-Q and management's expectations and projections about future events, including, among other things:

	●	our dependency on a single commodity could affect our revenues and profitability;
	●	our success in expanding our market presence in new geographic regions;
	●	the effectiveness of our hedging policy may impact our profitability;
	●	our success in implementing our business strategy or introducing new products;
	●	our ability to attract and retain customers;
	●	our ability to obtain additional financing;
	●	our ability to comply with the restrictive covenants we are subject to under our current financing;
	●	the effects of competition from other coffee manufacturers and other beverage alternatives;
	●	the impact to the operations of our Colorado facility;
	●	general economic conditions and conditions which affect the market for coffee;
	●	our expectations regarding, and the stability of, our supply chain, including potential shortages or interruptions in the supply or delivery of green coffee;
	●	the macro global economic environment;
	●	the imposition of tariffs;
	●	our ability to maintain and develop our brand recognition;
	●	the impact of rapid or persistent fluctuations in the price of coffee beans;
	●	fluctuations in the supply of coffee beans;
	●	the volatility of our common stock; and
	●	other risks which we identify in future filings with the Securities and Exchange Commission (the "SEC").

In some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "predict," "potential," "continue," "expect," "anticipate," "future," "intend," "plan," "believe," "estimate" and similar expressions (or the negative of such expressions). Any or all of our forward-looking statements in this quarterly report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. In addition, we undertake no responsibility to update any forward-looking statement to reflect events or circumstances that occur after the date of this quarterly report.

Overview

We are an integrated wholesale coffee roaster and dealer primarily in the United States and one of the few coffee companies that offers a broad array of coffee products across the entire spectrum of consumer tastes, preferences and price points. As a result, we believe that we are well-positioned to increase our profitability and endure potential coffee price volatility throughout varying cycles of the coffee market and economic conditions.

Our operations have primarily focused on the following areas of the coffee industry:

	●	the sale of wholesale specialty green coffee;
	●	the roasting, blending, packaging and sale of private label coffee;
	●	the roasting, blending, packaging and sale of our eight brands of coffee; and
	●	sales of our tabletop coffee roasting equipment.

Our operating results are affected by a number of factors including:

	●	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;
	●	our hedging policy;
	●	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, and will continue to evaluate, strategic decisions to acquire and invest in measures that are expected to increase net sales.

Our sales are affected by the price of green coffee. We purchase our green coffee from dealers located primarily within the United States. The dealers supply us with coffee beans from many countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. For example, in Brazil, which produces approximately 40% of the world's green coffee, the coffee crops are historically susceptible to frost in June and July and drought in September, October and November. However, because we purchase coffee from a number of countries and are able to freely substitute one country's coffee for another in our products, price fluctuations in one country generally have not had a material impact on the price we pay for coffee. Accordingly, price fluctuations in one country generally have not had a material effect on our results of operations, liquidity and capital resources. Historically, because we generally have been able to pass green coffee price increases through to customers, increased prices of green coffee generally result in increased net sales, irrespective of sales volume.

The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. Historically, we have used, and intend to continue to use in a limited capacity, short-term coffee futures and options contracts primarily for the purpose of partially hedging the effects of changing green coffee prices. In addition, we acquired, and expect to continue to acquire, futures contracts with longer terms, generally three to four months, primarily for the purpose of guaranteeing an adequate supply of green coffee. Realized and unrealized gains or losses on options and futures contracts are reflected in our cost of sales. Gains on options and futures contracts reduce our cost of sales and losses on options and futures contracts increase our cost of sales. The use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices. We believe that, in normal economic times, our hedging policies remain a vital element to our business model not only in controlling our cost of sales, but also giving us the flexibility to obtain the inventory necessary to continue to grow our sales while trying to minimize margin compression during a time of historically high coffee prices.

However, no strategy can entirely eliminate pricing risks and we generally remain exposed to losses on futures contracts when prices decline significantly in a short period of time, and we would generally remain exposed to supply risk in the event of non-performance by the counterparties to any of our futures contracts. Although we have had net gains on options and futures contracts in the past, we have incurred significant losses on options and futures contracts during some recent reporting periods. In these cases, our cost of sales has increased, resulting in a decrease in our profitability or increase our losses. Such losses have and could in the future materially increase our cost of sales and materially decrease our profitability and adversely affect our stock price. 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.

On November 6, 2024, Second Empire, a wholly owned subsidiary of the Company, entered into a Secured Creditor Sale Agreement with Bridge Business Credit, LLC ("Seller"). The sale was a Uniform Commercial Code ("UCC") Chapter 9 sale to purchase equipment, accounts receivable and inventory of Empire Coffee Company, Inc. ("Empire Coffee Company").

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies during the three and nine months ended July 31, 2025. Critical accounting policies and the significant estimates in accordance with such policies are regularly discussed with our Audit Committee. Those policies are discussed under "Critical Accounting Policies and Estimates" in "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in our consolidated financial statements and notes thereto, each in our 2024 10-K.

Three Months Ended July 31, 2025 Compared to the Three Months Ended July 31, 2024

Net Sales. Net sales totaled $23,910,514 for the three months ended July 31, 2025, an increase of $5,097,352, or 27%, from $18,813,162 for the three months ended July 31, 2024. The increase in net sales was due to increased sales of our private label, Cafe Caribe, Cafe Supremo brands, and green coffee beans to our wholesale and retail customers.

Cost of Sales. Cost of sales for the three months ended July 31, 2025 was $20,997,777, or 87.8% of net sales, as compared to $14,887,098, or 79.1% of net sales, for the three months ended July 31, 2024, an increase of $6,110,679. Cost of sales consists primarily of the cost of green coffee and packaging materials. The increase in cost of sales was driven by higher tariffs on imported coffee as well as a net trading loss of approximately $770,000 or 14 cents a share, related to coffee futures and options contracts, which are recorded in cost of sales in accordance with our accounting policy for commodities held by broker (see Note 5). In addition, the increase reflects higher net sales of our private label, branded products, and green wholesale coffee across both wholesale and retail channels.

Gross Profit. Gross profit for the three months ended July 31, 2025 amounted to $2,912,737 or 12.2% of net sales, as compared to $3,926,064 or 20.9% of net sales, for the three months ended July 31, 2024. The decrease in gross profits on a percentage and dollar basis was attributable to the factors listed above.

Operating Expenses. Total operating expenses increased by $801,687 to $4,007,888 for the three months ended July 31, 2025 from $3,206,201 for the three months ended July 31, 2024. The increase in selling and administrative expenses was primarily due to the acquisition of Empire Coffee Company.

Other Income (Expense). Other expense for the three months ended July 31, 2025 was $92,683, a decrease of $258,865 from other income of $166,182 for the three months ended July 31, 2024. The change was mainly attributable to a decrease in gain on extinguishment of lease of $210,567.

Income Taxes. Our expense for income taxes for the three months ended July 31, 2025 was $17,584 compared to our expense of $259,249 for the three months ended July 31, 2024. The change was primarily attributable to the difference in the income for the quarter ended July 31, 2024, versus the loss in the quarter ended July 31, 2025.

Net Income (Loss). We had net loss of $1,205,413, or ($0.21) per share basic and diluted, for the three months ended July 31, 2025, compared to a net income of $626,796, or $0.11 per share basic and diluted, for the three months ended July 31, 2024. The decrease in profitability was primarily due to higher cost of sales, which included the impact of tariffs on imported coffee and a net trading loss on coffee-related futures and options contracts (see Note 5), as well as increased operating expenses.

Nine Months Ended July 31, 2025, Compared to the Nine Months Ended July 31, 2024

Net Sales. Net sales totaled $68,535,860 for the nine months ended July 31, 2025, an increase of $11,186,383, or 20%, from $57,349,477 for the nine months ended July 31, 2024. The increase in net sales compared to the prior period was primarily attributable to higher sales of our private-label brands, Café Caribe and Café Supremo, as well as increased sales of green coffee beans to both wholesale and retail customers.

Cost of Sales. Cost of sales for the nine months ended July 31, 2025, was $55,253,979, or 80.6% of net sales, as compared to $46,239,134, or 80.6% of net sales, for the nine months ended July 31, 2024. Cost of sales consists primarily of the cost of green coffee and packaging materials and realized and unrealized gains or losses on hedging activity. The increase of $9,014,845 was primarily attributable to higher sales volumes of our private label and branded products, as well as the impact of tariffs on imported coffee. In addition, cost of sales reflects the effect of our futures and options trading activity, which resulted in a net gain of approximately $687,000 for the nine-month period ended July 31, 2025, that was recognized in cost of sales in accordance with our accounting policy for commodities held by broker (see Note 5).

Gross Profit. Gross profit for the nine months ended July 31, 2025 amounted to $13,281,881 or 19.4% of net sales, as compared to $11,110,343 or 19.4% of net sales, for the nine months ended July 31, 2024. The increase in gross profit was primarily attributable to higher sales volumes of our private-label and branded products, as well as green coffee beans, partially offset by the impact of tariffs on imported coffee. Gross profit also reflects the effect of our coffee futures and options trading activity, which resulted in a net gain of approximately $687,000 for the nine-month period ended July 31, 2025 that was recognized in cost of sales (see Note 5).

Operating Expenses. Total operating expenses increased by $2,057,167 to $11,897,386 for the nine months ended July 31, 2025, from $9,840,219 for the nine months ended July 31, 2024. The year-over-year increase reflects the impact of the Second Empire Acquisition, which added approximately $2.2 million to operating expenses during the nine-month period.

Other Income (Expense). Other expense for the nine months ended July 31, 2025 was $141,848, a decrease of $151,657 from other income of $9,809 for the nine months ended July 31, 2024. The decrease was mainly attributable to a decrease in gain on extinguishment of lease of $210,538 and offset by decrease in our interest expense of $93,522, during the nine months ended July 31, 2024.

Income Taxes. Our expense for income taxes for the nine months ended July 31, 2025 totaled $650,749 compared to an expense of $323,954 for the nine months ended July 31, 2024. The change was primarily attributable to the difference in the income for the nine months ended July 31, 2025 versus the income in the nine months ended July 31, 2024.

Net (Loss) Income. We had net income of $591,898 or $0.10 per share basic and diluted, for the nine months ended July 31, 2025 compared to net income of $955,979, or $0.17 per share basic and diluted for the nine months ended July 31, 2024. The decrease in net income was primarily due to higher operating expenses associated with the Second Empire Acquisition, the impact of tariffs on imported coffee, and unrealized trading losses during the third quarter (see Note 5).

Liquidity, Capital Resources and Going Concern

As of July 31, 2025, we had working capital of $20,979,529, a decrease of $547,454 compared to $21,526,983 as of October 31, 2024. The decrease in working capital was primarily attributable to a $2,339,316 increase in accounts payable and accrued expenses, a $6,250,000 increase in borrowings under our line of credit, and a $1,115,244 increase in due to broker. The decrease was partially offset by a $5,979,428 increase in inventory, a $2,978,120 increase in due from broker, and a $717,207 increase in accounts receivable.

On June 27, 2024, the Borrowers entered into the Tenth Loan Modification Agreement with Webster which amended the A&R Loan Agreement to, among other things: (i) provide for a new loan maturity date of June 29, 2025, (ii) provide that the applicable margin requirement for any revolving loan outstanding under the A&R Loan Agreement to 2.25%, (iii) provide that the maximum facility amount shall be $10,000,000 and (iv) to adjust certain definitions and terms related to the borrowing base and leverage ratios applicable to the A&R Loan Agreement.

On April 17, 2025, the Borrowers entered into the Eleventh Loan Modification Agreement with Webster which (i) amended the A&R Loan Agreement to provide for a new loan maturity date of June 28, 2026 and (ii) provided limited consent for the Company to declare dividends to shareholders for its fiscal year ending October 31, 2025.

Each of the A&R Loan Facility and A&R Loan Agreement contains covenants, subject to certain exceptions, that place annual restrictions on the Borrowers' operations, including covenants relating to debt restrictions, capital expenditures, indebtedness, minimum deposit restrictions, tangible net worth, net profit, leverage, employee loan restrictions, dividend and repurchase restrictions (common stock and preferred stock), and restrictions on intercompany transactions. The outstanding balance on our line of credit was $6,250,000 and $0 as of July 31, 2025 and October 31, 2024, respectively.

For the nine months ended July 31, 2025, operating activities used cash of $5,396,716, compared to cash provided by operating activities of $5,209,235 for the nine months ended July 31, 2024. The decrease in operating cash flow was primarily attributable to an increase in inventory between October 31, 2024 and July 31, 2025. The increase in inventory was primarily due to higher purchasing activity to support our anticipated sales growth. Non-cash charges, including depreciation and amortization, unrealized gains and losses on commodities, amortization of right-of-use assets, and deferred income taxes, resulted in cash used of $1,102,564 in the nine months ended July 31, 2025, compared to cash used of $159,890 in the prior-year period.

For the nine months ended July 31, 2025, investing activities used cash of $1,254,535, compared to cash provided of $2,879,320 in the nine months ended July 31, 2024. The year-over-year change primarily reflects proceeds of $3,150,000 from the sale of an investment in the prior-year period, which did not recur in fiscal 2025.

For the nine months ended July 31, 2025, financing activities provided net cash of $6,250,000, compared to net cash used of $7,724,374 in the nine months ended July 31, 2024. The change was primarily due to increased borrowings under our line of credit in the current year.

We expect to fund our operations, including working capital needs, capital expenditures, and required debt service, for at least the next twelve months from the date these condensed consolidated financial statements are issued, through a combination of cash provided by operating activities and availability under 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.

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, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.