Crystal Rock Holdings, Inc. (Form: 10-Q, Received: 09/14/2016 09:03:34)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

( Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2016

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 000-31797

CRYSTAL ROCK HOLDINGS, INC.

(Exact name of registrant as specified in Its charter)

Delaware	03-0366218
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1050 Buckingham St., Watertown, CT	06795
(Address of principal executive offices)	(Zip Code)

(860) 945-0661

( Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____ Accelerated filer ___

Non-accelerated filer ___ Smaller reporting company X

(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ___ No X

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

	Shares outstanding at
Class	September 12, 2016
Common Stock, $.001 Par Value	21,358,411

CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

Table of Contents

Page

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.

	Consolidated Balance Sheets as of July 31, 2016 and October 31, 2015	3

	Consolidated Statements of Operations for the Three and Nine Months Ended July 31, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended July 31, 2016 and 2015	5

	Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2016 and 2015	6

	Notes to Consolidated Financial Statements	7-15

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	16-24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	24

Item 4.	Controls and Procedures.	25

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	26

Item 1A.	Risk Factors.	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	26

Item 3.	Defaults Upon Senior Securities.	26

Item 4.	Mine Safety Disclosures.	26

Item 5.	Other Information.	26

Item 6.	Exhibits.	26-27

SIGNATURE		28

CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	July 31,			October 31,
	2016			2015
	(Unaudited)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	5,384,273		$	3,091,471
Accounts receivable, trade - net of reserve of $269,093 and $306,140 for 2016 and 2015, respectively		8,922,932			9,215,042
Inventories		2,502,113			2,611,681
Current portion of deferred tax asset		461,550			461,550
Other current assets		836,806			888,957

TOTAL CURRENT ASSETS		18,107,674			16,268,701

PROPERTY AND EQUIPMENT - net		6,484,179			6,869,986

OTHER ASSETS:
Goodwill		12,156,790			12,156,790
Other intangible assets - net		1,664,434			2,165,234
Deferred tax asset		145,110			145,110
Other assets		39,000			39,000

TOTAL OTHER ASSETS		14,005,334			14,506,134

TOTAL ASSETS	$	38,597,187		$	37,644,821

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long term debt	$	1,599,996		$	1,599,996
Current portion of subordinated debt		1,124,982			-
Accounts payable		2,716,363			3,149,964
Accrued expenses		3,162,786			2,490,752
Current portion of customer deposits		687,973			668,472
Current portion of unrealized loss on derivatives		31,940			8,912
TOTAL CURRENT LIABILITIES		9,324,040			7,918,096

Long term debt, less current portion		8,533,342			9,733,339
Deferred tax liability		4,150,506			4,150,506
Subordinated debt, less current portion		9,000,000			9,270,000
Customer deposits, less current portion		2,688,729			2,602,891
Long term portion of unrealized loss on derivatives		17,845			-

TOTAL LIABILITIES		33,714,462			33,674,832

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, 50,000,000 authorized shares, 21,960,229 issued and 21,358,411 outstanding shares as of July 31, 2016 and October 31, 2015		21,960			21,960
Additional paid in capital		58,462,496			58,464,076
Treasury stock, at cost, 601,818 shares as of July 31, 2016 and October 31, 2015		(900,360	)		(900,360	)
Accumulated deficit		(52,671,499	)		(53,610,339	)
Accumulated other comprehensive loss		(29,872	)		(5,348	)
TOTAL STOCKHOLDERS' EQUITY		4,882,725			3,969,989

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	38,597,187		$	37,644,821

See the notes to the consolidated financial statements.

CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three months ended July 31,					Nine months ended July 31,
	2016		2015			2016			2015
	(unaudited)					(unaudited)

NET SALES	$	16,394,476	$	19,327,381		$	49,236,852		$	55,754,042

COST OF GOODS SOLD		7,560,207		10,710,465			24,584,269			30,990,601

GROSS PROFIT		8,834,269		8,616,916			24,652,583			24,763,441

OPERATING EXPENSES:
Selling, general and administrative expenses		6,933,393		7,771,306			21,032,489			24,156,224
Advertising expenses		137,247		124,164			388,708			521,435
Amortization		170,739		187,848			500,800			556,602
Gain on disposal of property and equipment		-		(1,444	)		(4,120	)		(51,265	)

TOTAL OPERATING EXPENSES		7,241,379		8,081,874			21,917,877			25,182,996

INCOME (LOSS) FROM OPERATIONS		1,592,890		535,042			2,734,706			(419,555	)

OTHER EXPENSE:
Interest expense		416,895		452,430			1,220,448			1,220,323

INCOME (LOSS) BEFORE INCOME TAXES		1,175,995		82,612			1,514,258			(1,639,878	)

INCOME TAX EXPENSE (BENEFIT)		446,878		335,546			575,418			(319,000	)

NET INCOME (LOSS)	$	729,117	$	(252,934	)	$	938,840		$	(1,320,878	)

NET INCOME (LOSS) PER SHARE - BASIC	$	0.03	$	(0.01	)	$	0.04		$	(0.06	)

NET INCOME (LOSS) PER SHARE - DILUTED	$	0.03	$	(0.01	)	$	0.04		$	(0.06	)

WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC		21,358,411		21,358,411			21,358,411			21,358,411
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED		21,358,411		21,358,411			21,358,411			21,358,411

See the notes to the consolidated financial statements.

CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three months ended July 31,					Nine months ended July 31,
	2016		2015			2016			2015
	(unaudited)					(unaudited)


NET INCOME (LOSS)	$	729,117	$	(252,934	)	$	938,840		$	(1,320,878	)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Cash Flow Hedges:
Unrealized gain (loss) on derivatives designated as cash flow hedges, net of tax		692		3,212			(24,524	)		9,271
Other Comprehensive Income (Loss), net of tax		692		3,212			(24,524	)		9,271
TOTAL COMPREHENSIVE INCOME (LOSS)	$	729,809	$	(249,722	)	$	914,316		$	(1,311,607	)

See the notes to the consolidated financial statements.

CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine months ended July 31,
	2016			2015
	(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	938,840		$	(1,320,878	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation		1,985,337			2,037,431
Provision for bad debts on accounts receivable		193,302			215,752
Amortization		500,800			556,602
Non cash interest expense on subordinated debt		854,982			-
Gain on disposal of property and equipment		(4,120	)		(51,265	)
Non cash share-based compensation		(1,580	)		2,913
Change in contingent consideration liability		-			(4,764	)
Changes in operating assets and liabilities:
Accounts receivable		98,808			(587,909	)
Inventories		109,568			(248,769	)
Other current assets		68,500			(441,849	)
Accounts payable		(433,601	)		(630,968	)
Accrued expenses		672,034			(251,964	)
Customer deposits		105,339			125,602
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		5,088,209			(600,066	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(1,611,526	)		(2,009,583	)
Proceeds from sale of property and equipment		16,116			60,918
Cash used for acquisitions		-			(66,196	)
NET CASH USED IN INVESTING ACTIVITIES		(1,595,410	)		(2,014,861	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net line of credit repayments		-			(500,000	)
Proceeds from long term debt		-			4,404,752
Principal payments on long term debt		(1,199,997	)		(2,246,066	)
Payments of debt issuance costs		-			(60,082	)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(1,199,997	)		1,598,604

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,292,802			(1,016,323	)

CASH AND CASH EQUIVALENTS - beginning of period		3,091,471			1,841,044

CASH AND CASH EQUIVALENTS - end of period	$	5,384,273		$	824,721

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid for interest	$	339,933		$	1,173,355

Cash received for income taxes	$	(54,068	)	$	(159,261	)

NON-CASH FINANCING AND INVESTING ACTIVITIES:

Notes payable issued in acquisitions	$	-		$	7,500

See the notes to the consolidated financial statements.

CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with Form 10-Q instructions and in the opinion of management contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position, results of operations, and cash flows for the periods presented. The results have been determined on the basis of generally accepted accounting principles and practices of the United States of America (“GAAP”), applied consistently with the Annual Report on Form 10-K of Crystal Rock Holdings, Inc. (the “Company”) for the year ended October 31, 2015.

Certain information and footnote disclosures normally included in audited consolidated financial statements presented in accordance with GAAP have been condensed or omitted. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2015. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

The financial statements herewith reflect the consolidated operations and financial condition of Crystal Rock Holdings, Inc. and its wholly owned subsidiary Crystal Rock LLC.

2. GOODWILL AND OTHER INTANGIBLE ASSETS

Major components of intangible assets consisted of:

	July 31, 2016								October 31, 2015
	Gross Carrying Amount			Accumulated Amortization			Wgt. Avg. Amort. Years		Gross Carrying Amount			Accumulated Amortization			Wgt. Avg. Amort. Years
Amortized Intangible Assets:
Covenants Not to Compete		$	2,536,488		$	2,427,625		1.99		$	2,536,488		$	2,382,570		2.54
Customer Lists			10,313,819			9,071,160		2.26			10,313,819			8,639,685		2.95
Other Identifiable Intangibles			608,393			295,481		23.28			608,393			271,211		24.00
Total		$	13,458,700		$	11,794,266				$	13,458,700		$	11,293,466

Amortization expense for the three month periods ending July 31, 2016 and 2015 was $170,739 and $187,848, respectively. Amortization expense for the nine month periods ending July 31, 2016 and 2015 was $500,800 and $556,602, respectively. There were no changes in the carrying amount of goodwill for the three and nine month periods ending July 31, 2016 and 2015.

3. DEBT

On May 20, 2015 the Company amended its Credit Agreement (the “Agreement”) with Bank of America to provide a senior financing facility consisting of term debt and a revolving line of credit. Under the Agreement, the Company became obligated on $12,000,000 of debt in the form of a term note to refinance the previous senior term debt and to fund repayment of a portion of its outstanding subordinated debt. Additionally, the Agreement includes a $5,000,000 revolving line of credit that can be used for the purchase of fixed assets, to fund acquisitions, to collateralize letters of credit, and for operating capital.

The Agreement amortizes the term debt over a five year period with 59 equal monthly installments of $133,333 and a final payment of $4,133,333 due in May 2020. The revolving line of credit matures in May 2018. There are various restrictive covenants under the Agreement, and the Company is prohibited from entering into other debt agreements without the bank’s consent. The Agreement also prohibits the Company from paying dividends without the prior consent of the bank.

At July 31, 2016, there was no balance outstanding on the line of credit and a letter of credit issued for $1,415,000 to collateralize the Company’s liability insurance program as of that date. Consequently, as of July 31, 2016, there was $3,585,000 available to borrow from the revolving line of credit. There was $10,133,000 outstanding on the term note as of July 31, 2016.

On September 16, 2015, the Company amended its Credit Agreement with Bank of America (as so amended, the “Amendment”), effective as of July 31, 2015. Under the Amendment, interest is paid at a rate of one-month LIBOR plus a margin based on the achievement of a specified leverage ratio. As of July 31, 2016, the margin was 3.50% for the term note and 3.25% for the revolving line of credit. The Company fixed the interest rate on a portion of its term debt by purchasing an interest rate swap as of the date of the Agreement. As of July 31, 2016, the Company had $5,066,670 of the term debt subject to variable interest rates. The one-month LIBOR was .50% on the last business day of July 2016 resulting in total variable interest rates of 4.00% and 3.75%, for the term note and the revolving line of credit, respectively, as of July 31, 2016.

The Amendment requires the Company to be in compliance with certain financial covenants at the end of each quarter. The covenants include rolling four quarter EBITDA (as defined) of $4,150,000 as of July 31, 2016 and minimum liquidity (as defined) of at least $1,000,000. The Amendment also requires specific EBITDA goals each quarter through the quarter ending October 31, 2016 and minimum liquidity (as defined) of no less than $1,000,000 through January 30, 2017. As of July 31, 2016, the Company was in compliance with these covenants and the terms of the Amendment.

Effective for the quarter ending January 31, 2017, the quarterly covenants will include senior debt service coverage as defined of greater than 1.25 to 1, total debt service coverage, as defined, of greater than 1.05 to 1, and senior debt to EBITDA of less than 2.50 to 1.

The Amendment also restricts payments of interest on Subordinated Notes and Company acquisitions until certain conditions are met.

In addition to the senior debt, as of July 31, 2016, the Company has subordinated debt owed to Henry, Peter and John Baker in the aggregate principal amount of $10,125,000 (including accrued interest described below) that is due November 20, 2020. The interest rate on each of these notes is 12% per annum. On September 16, 2015, the Company amended its Subordinated Notes held by related parties. Future interest payments on the notes will not be paid but will be added to the principal balance of the Subordinated Notes as of the date the payment is due until the following conditions are met; (1) consolidated operating cash flow to consolidated total debt service of not less than 1.2 to 1 and (2) historical consolidated EBITDA of greater than $6,000,000 for two consecutive reference periods. As of July 31, 2016, $1,125,000 of accrued interest has been added to the principal balance of the Subordinated Notes and is included as a current liability.

On September 12, 2016, the Company entered into the Second Amendment Agreement with Bank of America (as so amended, the “Second Amendment”). See Note 11, “Subsequent Event.”

4. INVENTORIES

Inventories consisted of the following at:

	July 31,		October 31,
	2016		2015
Finished Goods	$	2,345,655	$	2,453,974
Raw Materials		156,458		157,707
Total Inventories	$	2,502,113	$	2,611,681

Finished goods inventory consists of products that the Company sells such as, but not limited to, coffee, cups, soft drinks, and snack foods. Raw material inventory consists primarily of bottle caps. The amount of raw and bottled water on hand does not represent a material amount of inventory. The Company estimates that value as of July 31, 2016 and October 31, 2015 to be $51,000 and $65,000, respectively. This value includes the cost of allocated overhead. Bottles are accounted for as fixed assets.

5. ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Financial Instruments

The Company has stand-alone derivative financial instruments in the form of an interest rate swap agreement, which derives its value from underlying interest rates. This transaction involves both credit and market risk. The notional amount is an amount on which calculations, payments, and the value of the derivative are based. The notional amount does not represent direct credit exposure. Direct credit exposure is limited to the net difference between the calculated amount to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company's consolidated balance sheet as an unrealized gain or loss on derivatives.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and currently has no reason to believe that any counterparties will fail to fulfill their obligations.

This interest rate swap agreement is considered a cash flow hedge to hedge against the variability of interest rates on outstanding debt. The net unrealized loss relating to interest rate swaps was recorded in current and long term liabilities with an offset to other comprehensive income for the effective portion of the hedge. At July 31, 2016, these cash flow hedges were deemed 100% effective. The portion of the net unrealized loss in current liabilities is the amount expected to be reclassified to income within the next twelve months.

The following information pertains to the Company's outstanding interest rate swap at July 31, 2016. The pay rate is fixed and the receive rate is one month LIBOR.

Instrument		Notional Amount			Pay Rate		Receive Rate
Interest rate swap		$5,066,668			1.25%		.50%

The table below details the adjustments to other comprehensive income (loss), on a before tax and net-of tax basis, for the fiscal quarters ended July 31, 2016 and 2015.

	Before-Tax			Tax Benefit			Net-of-Tax
Three Months Ended July 31, 2015
Loss on interest rate swap	$	(1,718	)	$	687		$	(1,031	)
Reclassification adjustment for loss in income		7,071			(2,828	)		4,243
Net unrealized gain	$	5,353		$	(2,141	)	$	3,212
Three Months Ended July 31, 2016
Loss on interest rate swap	$	(9,519	)	$	3,807		$	(5,712	)
Reclassification adjustment for loss in income		10,673			(4,269	)		6,404
Net unrealized gain	$	1,154		$	(462	)	$	692

The reclassification adjustments of $10,673 and $7,071 represent interest the Company paid in excess of the amount that would have been paid without the interest rate swap agreement during the quarters ended July 31, 2016 and 2015, respectively. These amounts were reclassified from accumulated other comprehensive loss and recorded in consolidated statements of operations as interest expense. No other material amounts were reclassified during the quarters ended July 31, 2016 and 2015.

The table below details the adjustments to other comprehensive income (loss), on a before tax and net-of tax basis, for the nine months ended July 31, 2016 and 2015.

	Before-Tax			Tax Benefit			Net-of-Tax
Nine Months Ended July 31, 2015
Loss on interest rate swap	$	(7,182	)	$	2,873		$	(4,309	)
Reclassification adjustment for loss in income		22,634			(9,054	)		13,580
Net unrealized gain	$	15,452		$	(6,181	)	$	9,271
Nine Months Ended July 31, 2016
Loss on interest rate swap	$	(64,461	)	$	25,784		$	(38,677	)
Reclassification adjustment for loss in income		23,588			(9,435	)		14,153
Net unrealized loss	$	(40,873	)	$	16,349		$	(24,524	)

The reclassification adjustments of $23,588 and $22,634 represent interest the Company paid in excess of the amount that would have been paid without the interest rate swap agreement during the nine months ended July 31, 2016 and 2015, respectively. These amounts were reclassified from accumulated other comprehensive loss and recorded in consolidated statements of operations as interest expense. No other material amounts were reclassified during the nine months ended July 31, 2016 and 2015.

6. FAIR VALUES OF ASSETS AND LIABILITIES

Fair Value Hierarchy

The Company’s assets and liabilities measured at fair value on a recurring basis are as follows:

	Level 1			Level 2			Level 3
Liabilities:
July 31, 2016
Unrealized loss on derivatives		$	-		$	49,785		$	-

October 31, 2015
Unrealized loss on derivatives		$	-		$	8,912		$	-

In determining the fair value, the Company uses a model that calculates a present value of the payments as they amortize through the life of the loan (float) based on the variable rate and compares them to the calculated value of the payment based on the fixed rate (fixed) defined in the swap. In calculating the present value, in addition to the term, the model relies on other data – the “rate” and the “discount factor.”

In the “float” model, the rate reflects where the market expects LIBOR to be for the respective period and is based on the Eurodollar futures market.

The discount factor is a function of the volatility of LIBOR.

Payments are calculated by applying the rate to the notional amount and adjusting for the term. Then the present value is calculated by using the discount factor.

There were no assets or liabilities measured at fair value on a nonrecurring basis.

7. INCOME (LOSS) PER SHARE AND WEIGHTED AVERAGE SHARES

The Company considers outstanding in-the-money stock options as potential common stock in its calculation of diluted earnings per share, unless the effect would be anti-dilutive, and uses the treasury stock method to calculate the applicable number of shares. The following calculation provides the reconciliation of the denominators used in the calculation of basic and fully diluted earnings per share:

	Three Months Ended July 31,					Nine Months Ended July 31,
	2016		2015			2016		2015
Net Income (Loss)	$	729,117	$	(252,934	)	$	938,840	$	(1,320,878	)
Denominator:
Basic Weighted Average Shares Outstanding		21,358,411		21,358,411			21,358,411		21,358,411
Dilutive effect of Stock Options		-		-			-		-
Diluted Weighted Average Shares Outstanding		21,358,411		21,358,411			21,358,411		21,358,411
Basic Income (Loss) Per Share	$	.03	$	(.01	)	$	.04	$	(.06	)
Diluted Income Per (Loss) Share	$	.03	$	(.01	)	$	.04	$	(.06	)

As of July 31, 2016 there were no options outstanding. As of July 31, 2015 there were 46,250 options outstanding. For the three and nine month periods ended July 31, 2015 there were no options used to calculate the effect of dilution because the Company had a net loss.

8. COMPENSATION PLANS

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide services in exchange for the award, the requisite service period (usually the vesting period). The Company provides an estimate of forfeitures at the initial date of grant.

In April 2004, the Company’s stockholders approved the 2004 Stock Incentive Plan. The plan provided for issuances of awards of up to 250,000 restricted or unrestricted shares of the Company’s common stock, or incentive or non-statutory stock options to purchase such common stock. None of the total amount of options is outstanding. As of February 18, 2014, no further options may be granted under the 2004 Plan.

In April 2014, the Company’s stockholders approved the 2014 Stock Incentive Plan. The plan provided for issuances of awards of up to 500,000 restricted or unrestricted shares of the Company’s common stock, or incentive or non-statutory stock options to purchase such common stock. Of the total amount of shares authorized under this plan, no options have been granted and 500,000 shares are available for grant at July 31, 2016.

The options issued under the plans generally vest in periods up to five years based on the continuous service of the recipient and have 10 year contractual terms. Share awards generally vest over one year. Option and share awards provide for accelerated vesting if there is a change in control of the Company (as defined in the plans).

There was one option grant, for a total of 10,000 shares, that were forfeited in the first nine months of 2016 and eight option grants, for a total of 201,500 shares that expired in the first nine months of 2015. Other than the forfeitures and expirations, there was no activity related to stock options and outstanding stock option balances during the three and nine month periods ended July 31, 2016 and 2015. The Company did not grant any equity based compensation during the nine months ended July 31, 2016 and 2015.

Compensation is determined using the Black-Scholes model and the simplified method to derive the expected term of the options and historical volatility over the past five years.

All incentive and non-qualified stock option grants had an exercise price equal to the market value of the underlying common stock on the date of grant.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the ASU to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the transition methods and the impact of the standard on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. The ASU requires entities using the first-in, first-out (FIFO) inventory costing method to subsequently value inventory at the lower of cost and net realizable value. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU requires prospective application and is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which is intended to improve financial reporting about leasing transactions. The ASU requires that leased assets be recognized as assets on the balance sheet and the liabilities for the obligations under the lease also be recognized on the balance sheet. This ASU requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The required disclosures include qualitative and quantitative requirements. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within the fiscal years beginning after December 15, 2020.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on its consolidated financial statements.

10.

SIGNIFICANT ACCOUNTING POLICIES

Uncollectible Trade Accounts Receivable - Individual accounts receivable are written off when deemed uncollectible, with any future recoveries recorded as income when received.

For more details regarding the Company’s accounts receivable polices refer to Note 2, Significant Accounting Policies, in the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2015.

11.

SUBSEQUENT EVENT

Effective September 12, 2016, the Company amended its Credit Agreement with the Bank of America. The Second Amendment requires the Company to be in compliance with certain financial covenants as follows: (i) a maximum annual limit for capital expenditures of $4,000,000 each fiscal year, (ii) consolidated adjusted operating cash flows to consolidated total debt service ratio, as defined, to be no less than 1.5 to 1 for any reference period ending on or after October 31, 2016 and (iii) senior funded debt to consolidated adjusted EBITDA, as defined, to be no greater than 2.5 to 1 as of the end of any fiscal quarter ending on or after October 31, 2016.

Under the Amendment, interest is paid at a rate of one-month LIBOR plus a margin based on the achievement of a specified leverage ratio. As of September 12, 2016, the margin was 2.50% for the term note and 2.25% for the revolving line of credit.

The Amendment also allows payments of interest on Subordinated Notes.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto as filed in our Annual Report on Form 10-K for the year ended October 31, 2015 as well as the consolidated financial statements and notes contained herein.

Forward-Looking Statements

The “Management’s Discussion and Analysis” (MD&A) portion of this Form 10-Q contains forward-looking statements, including statements about these topics:

	(1)	the outstanding debt levels may adversely impact the business profitability and ability to finance future expansion,
	(2)	the cost pressures related to commodities affecting our business, and
	(3)	the potential adverse effect of weather on our sales and costs.

The following factors could strain liquidity and working capital availability in MD&A about topic (1): We incorporate by reference into this paragraph the full Risk Factor on page 17 of our 2015 Form 10-K beginning “ Our Company is significantly leveraged ”.

The following factors could cause actual results to differ materially from statements in MD&A about topic (2): We incorporate by reference into this paragraph the full Risk Factor on page 18 of our 2015 Form 10-K beginning “ Fluctuations in the cost of essential raw materials and commodities ”.

The following factors could cause actual results to differ materially from statements in MD&A about topic (3): We incorporate by reference into this paragraph the full Risk Factor on page 19 of our 2015 Form 10-K beginning “Our business has been and may continue to be affected from time to time by extremes of weather”.

Results of Operations

Overview and Trends

Our strategy of improving both operating income and profit margin percentages by deemphasizing non-core products and avoiding commodity pricing, focusing sales effort on new water customers, providing value-added service, and working to operate a leaner, more efficient business continues to show encouraging results with meaningful improvement.

The first nine months of 2016 were marked by a significant increase in gross margin percentage, which improved to 50.1% from 44.4% in the corresponding period of 2015. Results were also positively affected by sharp decreases in selling, general and administrative expenses (lower by $3,124,000, or 13%) and total operating expenses (lower by $3,265,000, or 13%) when the corresponding nine-month periods are compared.

The effect of these changes was a $3,154,000 improvement in operating income, despite a 12% reduction in sales in the first nine months of 2016 compared to the corresponding period of 2015. We also improved net income by $2,260,000, to $939,000 in the first nine months of 2016.

The decline in sales and the improvement in margin percentages reflected a decision to emphasize the service aspect of our core business to a greater extent, with less emphasis on meeting the lowest prices offered on certain products by our competitors. The sales decrease was in all major product lines except water. Notably, despite a decrease in revenues of $6,517,000 in the first nine months of 2016 compared to the first nine months of 2015, our dollar gross profit declined by just $111,000. The 2016 sales mix attributable to the decrease in all product sales, except water, resulted in a much improved gross profit as a percentage of sales. Despite the loss of rental units in the past twelve months, recent sales efforts are resulting in an increase in new rental unit placements leading to more recurring sales and more sales opportunities for some of our other product lines.

Operating a leaner, more efficient business with lower operating costs more than offset the effects of slightly lower margin dollars, resulting in positive operating income and net income for the first nine months of 2016 compared to an operating loss and a net loss for the same period of 2015.

Results of Operations for the Three Months Ended July 31, 2016 (Third Quarter) Compared to the Three Months Ended July 31, 2015

Sales

Sales for the three months ended July 31, 2016 were $16,394,000 compared to $19,327,000 for the corresponding period in 2015, a decrease of $2,933,000 or 15%. Other than water, all sales categories declined. The most notable decline was that of office products. We believe that declines in certain categories could also reflect software changes made to our website that customers may have found somewhat cumbersome to navigate and use. The comparative breakdown of sales of the product lines for the respective three-month periods ended July 31, 2016 and 2015 is as follows:

Product Line	(000’s $)	2016		2015		Difference			% Diff.
Water		$	7,525	$	7,375	$	150			2	%
Coffee			2,591		3,226		(635	)		(20	%)
Refreshment			2,626		2,896		(270	)		(9	%)
Equipment Rental			1,754		1,809		(55	)		(3	%)
Office Products			1,444		3,559		(2,115	)		(59	%)
Other			454		462		(8	)		(2	%)
Total		$	16,394	$	19,327	$	(2,933	)		(15	%)

Water – Sales of water increased 2% for the third quarter 2016 as compared to the same period of 2015. The increase is attributable to an average price increase of 3% and a volume decrease of 1%.

Coffee – The decrease in sales was attributable to a decline in our traditional higher volume lines, bulk and K-cups. Bulk products sales continued to be negatively influenced by the single serve lines and K-cup sales declined as a result of ongoing commoditization.

Refreshment – Complementary coffee products, single serve drinks, small package water, cups, and vending sales all declined.

Equipment Rental – The decrease in sales was a result of a 3% decrease in number of rental units in the field. During the past twelve months the company has lost units mostly from not winning incumbent competitive bids.

Office Products – The decrease in sales was a result of implemented price increases on items previously sold at cost or near cost.

Other – The decrease is attributable to a decrease in the fees that are charged to offset energy costs for delivery and freight, raw materials, and bottling operations partially offset by an increase in the sale of equipment.

Gross Profit/Cost of Goods Sold – Despite a decrease in sales for the three months ended July 31, 2016, gross profit increased to $8,834,000 from $8,617,000 for the comparable period in 2015. As a percentage of sales, gross margin was 54% compared to 45% for the same period a year ago. The increase in water sales combined with lower fuel costs for the transportation of water also led to greater cost efficiencies in production. For the comparable three month periods, water accounted for 46% and 38% of total sales in 2016 and 2015 respectively.

Cost of goods sold includes all costs to bottle water, costs of purchasing and receiving products for resale, including freight, as well as costs associated with product quality, warehousing and handling costs, internal transfers, and the repair and service of rental equipment, but does not include the costs of distributing our product to our customers. We include distribution costs in selling, general, and administrative expense, and the amount is reported below. The reader should be aware that other companies may include distribution costs in their cost of goods sold, in which case, on a comparative basis, such other companies may have a lower gross margin as a result.

Operating Expenses and Income from Operations

Total operating expenses decreased to $7,241,000 in the third quarter of 2016 from $8,082,000 in the comparable period in 2015, a decrease of $841,000, or 10%.

Selling, general and administrative (SG&A) expenses of $6,933,000 in the third quarter of 2016 decreased $838,000, or 11%, from $7,771,000 in the comparable period in 2015. Of total SG&A expenses, route distribution costs decreased $320,000, or 9%, as a result of lower labor, truck operating and fuel costs; combined selling and marketing costs decreased $364,000, or 26%, as a result of reduced staffing; and administration costs decreased $154,000, or 5%, as a result of lower telephone, vehicle, insurance costs and reduced professional fees .

Advertising expenses were $137,000 in the third quarter of 2016 compared to $124,000 in the third quarter of 2015, an increase of $13,000, or 11%. The increase in advertising costs is primarily related to a recently launched radio advertising campaign.

Amortization decreased to $171,000 in the third quarter of 2016 from $188,000 in the comparable quarter in 2015, a decline of $17,000, or 9%. Amortization is attributable to intangible assets that were acquired as part of acquisitions. The lower amortization in 2016 is attributable to some intangible assets becoming fully amortized during 2015. We had no gains or losses from the sale of assets in the third quarter of 2016, we recognized a gain from the sale of assets of $1,000 in the third quarter of 2015. We routinely sell assets used in the normal course of business as they are replaced with newer assets.

The income from operations for the three months ended July 31, 2016 was $1,593,000 compared to $535,000 in the comparable period in 2015, an improvement of $1,058,000. The improvement was the result of a higher gross profit due to a change in product mix and lower operating expenses.

Interest, Taxes, and Other Expenses

Interest expense was $417,000 for the three months ended July 31, 2016 compared to $452,000 in the three months ended July 31, 2015, a decrease of $35,000. The decrease is attributable to higher interest charges in 2015 relating to administrative fees paid to Bank of America in May of 2015 relating to the Amended and Restated Credit Agreement.

The income before income taxes was $1,176,000 for the three months ended July 31, 2016 compared to $83,000 in the corresponding period in 2015, an improvement of $1,093,000. The tax expense for the third quarter of 2016 was $447,000 compared to $336,000 in 2015. The large tax expense in fiscal 2015 compared to income before taxes is due to a change in the effective tax rate applied to the year to date loss before income taxes in the third quarter of the 2015 fiscal year.

Net Income

The net income for the three months ended July 31, 2016 was $729,000 compared to a net loss of $253,000 in the corresponding period in 2015. The improvement is attributable to a higher gross profit and reduced operating expenses despite lower sales and the change in income tax effective rate in the third quarter of 2016 as compared to the same period in fiscal year 2015.

Results of Operations for the Nine Months Ended July 31, 2016 Compared to the Nine Months Ended July 31, 2015

Sales

Sales for the nine months ended July 31, 2016 were $49,237,000 compared to $55,754,000 for the corresponding period in 2015, a decrease of $6,517,000 or 12%. Other than water revenues, all sales categories declined. The most notable decline was that of office products. We believe that declines in certain categories could also reflect software changes made to our website that customers may have found somewhat cumbersome to navigate and use.

The comparative breakdown of sales of the product lines for the respective nine-month periods ended July 31, 2016 and 2015 is as follows:

Product Line	(000’s $)		2016		2015		Difference		% Diff.
Water		$	20,579	$	20,159	$	420		2	%
Coffee			8,505		10,207		(1,702	)	(17	%)
Refreshment			7,502		8,344		(842	)	(10	%)
Equipment Rental			5,289		5,618		(329	)	(6	%)
Office Products			5,976		9,895		(3,919	)	(4	%)
Other			1,386		1,531		(145	)	(10	%)
Total		$	49,237	$	55,754	$	(6,517	)	(12	%)

Water – Sales of water increased 2% for the first nine months of 2016 as compared to the same period of 2015. The increase is attributable to an average price increase of 2% with a less than 1% volume increase.

Coffee – The decrease in sales was attributable to a decline in our traditional higher volume lines, bulk and K-cup, while Cool Beans® pods increased 5%. Bulk products sales continued to be negatively influenced by the single serve lines and K-cup sales declined as a result of ongoing commoditization. The increase in pod sales is a result of conversion of the other lines as well as new sales but the volume of the pod product, to date, has not approached that of the others.

Refreshment – Complementary coffee products, single serve drinks, small packaged water, cups, and vending sales all declined.

Equipment Rental – The decrease in sales was a result of a 2% decrease in price and 4% decrease in number of rental units in the field. During the past twelve moths the company has lost units mostly from not winning incumbent competitive bids.

Office Products – The decrease in sales was a result of implemented price increases on items previously sold at cost or near cost.

Other – The decrease is the result of a decrease in the fees that are charged to offset energy costs for delivery and freight, raw materials, and bottling operation as well as other miscellaneous revenue streams partially offset by an increase in late payment finance charges.

Gross Profit/Cost of Goods Sold – The decrease in sales for the nine months ended July 31, 2016 resulted in a gross profit decrease of $110,000 to $24,653,000 from $24,763,000 for the comparable period in 2015. As a percentage of sales, gross margin was 50% compared to 44% for the same period a year ago. Due to a changing sales mix with a reduction of lower margin sales items, the gross margin percentage increased in 2016 as compared to 2015.

Operating Expenses and Income from Operations

Total operating expenses decreased to $21,918,000 for the nine months ended July 31, 2016 from $25,183,000 in the comparable period in 2015, a decrease of $3,265,000, or 13%.

Selling, general and administrative (SG&A) expenses of $21,032,000 in the first nine months of 2016 decreased $3,124,000, or 13%, from $24,156,000 in the comparable period in 2015. Of total SG&A expenses, route distribution costs decreased $894,000, or 8%, as a result of lower labor, truck operating and fuel costs; combined selling and marketing costs decreased $1,387,000, or 33%, as a result of reduced staffing; and administration costs decreased $843,000, or 9%, as a result of lower labor, professional fees, telephone costs and vehicle costs .

Advertising expenses were $389,000 in the first nine months of 2016 compared to $521,000 in the first nine months of 2015, a decrease of $132,000, or 25%. The decrease in advertising costs is primarily related to a decrease in printed material and more reliance on social media.

Amortization decreased to $501,000 in the first nine months of 2016 from $557,000 in the comparable period in 2015, a decline of $56,000, or 10%. Amortization is attributable to intangible assets that were acquired as part of acquisitions. The lower amortization in 2016 is attributable to some intangible assets becoming fully amortized during 2015. In addition, we had a gain of $4,000, from the sale of assets in the first nine months of 2016 compared to a gain of $51,000 on similar sales in the first nine months of 2015. We routinely sell assets used in the normal course of business as they are replaced with newer assets.

The income from operations for the nine months ended July 31, 2016 was $2,735,000 compared to a loss from operations of $420,000 in the comparable period in 2015, an improvement of $3,155,000. The improvement was the result of lower operating expenses partially offset by a lower gross profit attributable to lower sales.

Interest, Taxes, and Other Expenses

Interest expense for the nine month periods ending July 31, 2016 and 2015 was $1,220,000.

The income before income taxes was $1,514,000 for the nine months ended July 31, 2016 compared to a loss before income taxes of $1,640,000 in the corresponding period in 2015, an improvement of $3,154,000. The tax expense for the first nine months of 2016 was $575,000 compared to a tax benefit of $319,000 in 2015. The expected effective tax rate in 2016 was 38%. The effective tax rate for the first nine months of 2015 was 19% based on the expected tax rate on the loss in 2015.

Net Income

The net income for the nine months ended July 31, 2016 was $939,000 compared to a net loss of $1,321,000 in the corresponding period in 2015. The improvement is attributable to reduced operating expenses partially offset by lower gross profit due to lower sales the first nine months of 2016 as compared to the same period in fiscal year 2015.

Liquidity and Capital Resources

As of July 31, 2016, we had working capital of $8,784,000 compared to $8,351,000 as of October 31, 2015, an increase of $433,000. The most significant change in working capital was due to the increase in cash of $2,293,000 during the nine month period ending July 31, 2016. The more profitable operations and the deferral of cash subordinated interest payments were significant contributors to the increase in cash. The anticipated payment of these deferred interest payments is included in current liabilities and consequently included in the calculation of working capital. Also during the nine month period, we used $1,612,000 for capital expenditures and $1,200,000 for repayment of senior debt.

Our Credit Agreement with Bank of America (the “Bank”) provides a senior financing facility consisting of term debt and a revolving line of credit. As of July 31, 2016 we had $10,133,000 outstanding on our term loan. We have no funds borrowed from our line of credit with the Bank. We have a letter of credit of $1,415,000 secured by our line of credit resulting in $3,585,000 available to borrow on the line of credit as of July 31, 2016.

Our term debt amortizes over a five year period with 59 equal monthly installments of $133,333 and a final payment of $4,133,333 due in May 2020. The revolving line of credit matures in May 2018. There are various restrictive covenants under the Agreement, and the Company is prohibited from entering into other debt agreements without the bank’s consent. The Agreement also prohibits the Company from paying dividends without the prior consent of the bank.

The following information pertains to the Company's outstanding interest rate swap at July 31, 2016. The pay rate is fixed and the receive rate is one month LIBOR.

Instrument		Notional Amount			Pay Rate		Receive Rate
Interest rate swap		$5,066,668			1.25%		.50%

The Amendment requires the Company to be in compliance with certain financial covenants at the end of each quarter. The covenants include rolling four quarter EBITDA, as defined, of $4,150,000 as of July 31, 2016 and minimum liquidity (as defined) of at least $1,000,000. The Amendment also requires specific EBITDA goals each quarter through the quarter ending October 31, 2016 and minimum liquidity (as defined) of no less than $1,000,000 through January 30, 2017. As of July 31, 2016, the Company was in compliance with these covenants and the terms of the Amendment.

The Amendment also restricts payments of interest on Subordinated Notes and Company acquisitions until certain conditions are met.

In addition to the senior debt, as of July 31, 2016, the Company has subordinated debt owed to Henry, Peter and John Baker in the aggregate principal amount of $10,125,000 (including the accrued interest described below) that is due November 20, 2020. The interest rate on each of these notes is 12% per annum. On September 16, 2015, the Company amended its Subordinated Notes held by related parties. Future interest payments on the notes will not be paid but will be added to the principal balance of the Subordinated Notes as of the date the payment is due until the following conditions are met; (1) consolidated operating cash flow to consolidated total debt service of not less than 1.2 to 1 and (2) historical consolidated EBITDA of greater than $6,000,000 for two consecutive reference periods. As of July 31, 2016, $1,125,000 of accrued interest has been added to the principal balance of the Subordinated Notes and is included as a current liability.

In addition to our senior and subordinated debt commitments, we have significant future cash commitments, primarily in the form of operating leases that are not reported on the consolidated balance sheet. The following table sets forth our contractual commitments in the remainder of the current year and future fiscal years as of July 31, 2016:

	Payment due by Period
Contractual Obligations (3)	Total		Remainder of 2016			2017-2018		2019-2020	After 2020
Debt (1)	$	20,258,000	$	1,525,000	$	3,200,000	$	6,533,000	$	9,000,000
Interest on Debt (2)		5,858,000		410,000		2,802,000		2,376,000		270,000
Operating Leases		7,193,000		732,000		3,986,000		2,137,000		338,000
Total	$	33,309,000	$	2,667,000	$	9,988,000	$	11,046,000	$	9,608,000

(1)

Debt payments in 2016 include payments previously deferred and added to subordinated debt totaling $1,125,000.

(2)

Interest based on 50% of outstanding senior debt at the hedged interest rate discussed above, 50% of outstanding senior debt at a variable rate of 4.00%, line of credit at a rate of 3.75%, and subordinated debt at a rate of 12%.

(3)

Customer deposits have been excluded from the table. Deposit balances vary from period to period with water sales but future increases and decreases in the balances are not accurately predictable. Deposits are excluded because, net of periodic additions and reductions, it is probable that a customer deposit balance will always be outstanding as long as the business operates.

Effective September 12, 2016, the Company amended its Credit Agreement with the Bank of America (as so amended, the “Second Amendment”). The Second Amendment requires the Company to be in compliance with certain financial covenants as follows: (i) a maximum annual limit for capital expenditures of $4,000,000 each fiscal year, (ii) consolidated adjusted operating cash flows to consolidated total debt service ratio, as defined, to be no less than 1.5 to 1 for any reference period ending on or after October 31, 2016 and (iii) senior funded debt to consolidated adjusted EBITDA, as defined, to be no greater than 2.5 to 1 as of the end of any fiscal quarter ending on or after October 31, 2016.

The Amendment also allows payments of interest on Subordinated Notes.

We have no other material contractual obligations or commitments.

Item 3. Quantitative and Qualitative Disclosures about Market Risks.

Pursuant to Regulation S-K, Item 305(e), smaller reporting companies are not required to provide this information.

Item 4. Controls and Procedures.

Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by us, including our consolidated subsidiary, in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive and Chief Financial officers, as appropriate to allow timely decisions regarding required disclosure.

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.

Changes in Internal Control over Financial Reporting.

No change in our internal control over financial reporting occurred during the nine month period ended July 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There was no change in the nine months ended July 31, 2016 from the Risk Factors reported in our Annual Report on Form 10-K for the year ended October 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit

Number Description

3.1

Certificate of Incorporation (Incorporated by reference to Exhibit B to Appendix A to our registration statement on Form S-4, File No. 333-45226, filed with the SEC on September 6, 2000)

3.2

Certificate of Amendment of Certificate of Incorporation (Incorporated by reference to Exhibit 4.2 of our current report on Form 8-K, filed with the SEC on October 19, 2000)

3.3

Certificate of Ownership and Merger of Crystal Rock Holdings, Inc. with and into Vermont Pure Holdings, Ltd. (Incorporated by reference to Exhibit 3.1 to our current report on Form 8-K, filed with the SEC on May 6, 2010)

3.4

By-laws, as amended (Incorporated by reference to Exhibit 3.2 to our report on Form 8-K, filed with the SEC on April 2, 2010)

10.1

Second Amendment Agreement dated September 12, 2016 by and among Crystal Rock Holdings, Inc., Crystal Rock LLC and Bank of America, N.A.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

Interactive Data Files regarding (a) our Consolidated Balance Sheets as of July 31, 2016 and October 31, 2015, (b) our Consolidated Statements of Operations for the Three and Nine Months Ended July 31, 2016 and 2015, (c) our Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended July 31, 2016 and 2015, (d) our Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2016 and 2015, and (e) the Notes to such Consolidated Financial Statements.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: September 14, 2016

CRYSTAL ROCK HOLDINGS, INC.

By: /s/ David Jurasek

David Jurasek

Chief Financial Officer/Treasurer

(Principal Accounting Officer and Principal Financial Officer)

Exhibits Filed Herewith

Exhibit

Number Description

10.1

Second Amendment Agreement dated September 12, 2016 by and among Crystal Rock Holdings, Inc., Crystal Rock LLC and Bank of America, N.A.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley act of 2002.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

W I T N E S S E T H:

WHEREAS , the parties hereto have agreed to amend the Credit Agreement as set forth herein.

NOW, THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

§1. Definitions. Capitalized terms that are used herein and are not defined herein have the meanings given to such terms in the Credit Agreement (after giving effect to the amendments thereof set forth herein).

§2. Representations and Warranties; Acknowledgment. To induce Bank of America to consent to this Amendment and instruct the Administrative Agent to enter into this Amendment, each of the Borrower s hereby represents and warrants to Bank of America and the Administrative Agent that:

(a) Each of the Borrowers has adequate power to execute and deliver this Amendment and each other document to which it is a party in connection herewith and to perform its obligations hereunder or thereunder. This Amendment and each other document executed in connection herewith have been duly executed and delivered by each of the Borrowers and do not contravene any law, rule or regulation applicable to any Borrower or any of the terms of any other indenture, agreement or undertaking to which any Borrower is a party. The obligations contained in this Amendment and each other document executed in connection herewith to which any of the Borrowers is a party, taken together with the Obligations under the Loan Documents, constitute the legal, valid and binding obligations enforceable against each such Borrower in accordance with their respective terms.

(b) All of the representations and warranties made by the Borrowers in the Loan Documents are true and correct on the date hereof as if made on and as of the date hereof and are so repeated herein as if expressly set forth herein, except to the extent that any such representations and warranties expressly relate by their terms to a specific prior date.

(c) No Default or Event of Default under and as defined in any of the Loan Documents has occurred and is continuing as of the date hereof.

§3. Amendments to the Credit Agreement .

(a) The definition of “Seller Subordinated Debt Cash Interest Payment Conditions” appearing in Section 1.1 of the Credit Agreement is hereby deleted in its entirety.

(b) The definitions of “Applicable Margin”, “Change of Control”, “Consolidated”, “Consolidated Operating Cash Flow” , “ Consolidated Total Debt Service”, “ERISA Event”, “Federal Funds Rate”, and “Perfection Certificates” appearing in Section 1.1 of the Credit Agreement are hereby amended and restated in their entirety to read as follows:

Applicable Margin . For each period commencing on an Adjustment Date through the date immediately preceding the next Adjustment Date (each a “ Rate Adjustment Period ”), the Applicable Margin shall be the applicable margin set forth below with respect to the Total Leverage Ratio, as determined for the Reference Period of Holdings and its Subsidiaries ending on the fiscal quarter ended immediately prior to the applicable Rate Adjustment Period.

Level	Total Leverage Ratio	Base Rate Loans	Revolving Credit LIBOR Rate Loans	Letter of Credit Fees	Term Loan LIBOR Rate Loan
I	Less than 2.00:1.00	0.00%	1.25%	1.25%	1.50%
II	Greater than or equal to 2.00:1.00 but less than 2.50:1.00	0.25%	1.75%	1.75%	2.00%
III	Greater than or equal to 2.50:1.00 but less than 3.25:1.00	0.75%	2.25%	2.25%	2.50%
IV	Greater than or equal to 3.25:1.00	1.25%	2.75%	2.75%	3.00%

Notwithstanding the foregoing, (a) the determination of the Applicable Margin for any period shall be subject to the provisions of §6.3.2, (b) for the Loans outstanding and the Letter of Credit Fees payable during the period commencing on the Second Amendment Effective Date through the date immediately preceding the first Adjustment Date to occur after the fiscal quarter ending October 31, 2016, the Applicable Margin shall be the Applicable Margin set forth in Level III above, and (c) if the Borrowers fail to deliver any Compliance Certificate pursuant to §9.4(c) hereof then, for the period commencing on the next Adjustment Date to occur subsequent to such failure through the date immediately following the date on which such Compliance Certificate is delivered, the Applicable Margin shall be the highest Applicable Margin set forth above.

Change of Control . An event or series of events by which:

(a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an “option right”)), directly or indirectly, of twenty-five percent (25%) or more of Capital Stock of Holdings entitled to vote for members of the board of directors or equivalent governing body of Holdings on a fully-diluted basis (and taking into account all such securities that such “person” or “group” has the right to acquire pursuant to any option right); or

(b) during any period of twelve (12) consecutive months, a majority of the members of the board of directors or other equivalent governing body of Holdings cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body.

Consolidated or consolidated . When used with reference to financial statements or financial statement items of Holdings and its Subsidiaries or any other Person, such statements or items on a consolidated basis in accordance with the consolidation principles of GAAP.

Consolidated Operating Cash Flow . For any period, an amount equal to (a) Consolidated EBITDA of Holdings and its Subsidiaries for such period (excluding the Consolidated EBITDA of any Subsidiary (or with respect to an asset acquisition, the acquired assets) for the period prior to the acquisition of such Subsidiary (or assets) by Holdings or any of its Subsidiaries), less (b) the sum of (i) cash payments for all income taxes paid during such period, plus (ii) the aggregate amount of Distributions made by Holdings during such period.

Consolidated Total Debt Service . With respect to Holdings and its Subsidiaries and for any period, the sum, without duplication, of (a) Consolidated Total Interest Expense of Holdings and its Subsidiaries for such period plus (b) any and all scheduled repayments of principal during such period in respect of Indebtedness that become due and payable during such period pursuant to any agreement or instrument to which Holdings or any of its Subsidiaries is a party provided , however , that for the Reference Periods ending on October 31, 2016, January 31, 2017, April 30, 2017 and July 31, 2017, Consolidated Total Interest Expense of Holdings and its Subsidiaries shall be determined on a pro forma basis equal to the sum of (i) Consolidated Senior Interest Expense for such period plus (ii) $1,080,000. Demand obligations shall be deemed to be due and payable during any fiscal period during which such obligations are outstanding.

ERISA Event . (a) A Reportable Event with respect to a Pension Plan; (b) the withdrawal of any Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which such entity was a “substantial employer” as defined in Section 4001(a)(2) of ERISA or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by any Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Pension Plan amendment as a termination under Section 4041 or 4041A of ERISA; (e) the institution by the PBGC of proceedings to terminate a Pension Plan; (f) any event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (g) the determination that any Pension Plan is considered an at-risk plan or a plan in endangered or critical status within the meaning of Sections 430, 431 and 432 of the Code or Sections 303, 304 and 305 of ERISA; (h) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon any Borrower or any ERISA Affiliate; or ( i ) a failure by any Borrower or any ERISA Affiliate to meet all applicable requirements under the Pension Funding Rules in respect of a Pension Plan, whether or not waived, or the failure by any Borrower or any ERISA Affiliate to make any required contribution to a Multiemployer Plan.

Federal Funds Rate . For any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to the Administrative Agent on such day on such transactions as determined by the Administrative Agent.

Perfection Certificates . The Perfection Certificates, as defined in the Security Agreement or other Security Documents, as amended, restated and updated as of the Second Amendment Effective Date.

(c) The following new definitions are added in alphabetical order to Section 1.1 of the Credit Agreement to read as follows:

EEA Financial Institution . (a) Any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a Subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.

EEA Member Country . Any of the member states of the European Union, Iceland, Liechtenstein, and Norway.

EEA Resolution Authority . Any public administrative authority or any Person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.

Second Amendment Agreement . The Second Amendment Agreement, dated as of September 12, 2016 and effective as of the Second Amendment Effective Date, among the Borrowers, the Lenders and the Administrative Agent with respect to this Credit Agreement.

Second Amendment Effective Date . The “Amendment Effective Date” as defined in the Second Amendment Agreement.

(d) Section 8 of the Credit Agreement is hereby amended by adding the following as new Section 8.24:

8.24 EEA Financial Institution . No Loan Party nor any of its Subsidiaries is an EEA Financial Institution.

(e) Section 9.4(c) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

(c) simultaneously with the delivery of the financial statements referred to in subsections (a) and (b) above, a statement certified by the principal financial or accounting officers that are Responsible Officers of the Borrowers in substantially the form of Exhibit D hereto (a “Compliance Certificate”) and setting forth in reasonable detail computations evidencing compliance with the covenants contained in §11 and the computation of the Total Leverage Ratio and (if applicable) reconciliations to reflect changes in GAAP since the Balance Sheet Date;

(f) Section 10.8 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

10.8 Subordinated Debt . No Loan Party will, nor will it permit any of its Subsidiaries to (a) amend, supplement or otherwise modify the terms of any of the Subordinated Debt, or (b) pay or prepay any principal and/or interest on or otherwise redeem or repurchase any Subordinated Debt, except that the Borrowers may pay cash interest (including accrued and unpaid cash interest but no payments of principal) in lieu of payments in kind on the Seller Subordinated Debt at a rate per annum not to exceed 12% so long as at the time of any such payment and after giving effect thereto no Default or Event of Default shall have occurred and be continuing, whether or not the Administrative Agent or any Lender has provided any Loan Party with written notice thereof.

(g) Sections 11.1, 11.2, 11.3, 11.4 and 11.5 of the Credit Agreement are hereby amended and restated in its entirety to read as follows:

11.1 Capital Expenditures . The Loan Parties will not make or become legally obligated to make any Capital Expenditure, except for Capital Expenditures in the ordinary course of business not exceeding $4,000,000, in the aggregate for the Borrowers and their Subsidiaries during each fiscal year.

11.2 Consolidated Adjusted Operating Cash Flow to Consolidated Total Debt Service . The Loan Parties will not permit the ratio of Consolidated Adjusted Operating Cash Flow (determined on a Pro Forma Basis, if applicable) for any Reference Period of the Borrowers ending on or after October 31, 2016, to Consolidated Total Debt Service for such Reference Period, to be less than 1.50 to 1.00.

11.3 Senior Funded Debt to Consolidated Adjusted EBITDA . The Loan Parties will not permit as of the end of any fiscal quarter ending on or after October 31, 2016 the ratio of Senior Funded Debt outstanding as of such date to Consolidated Adjusted EBITDA for the most recently ended Reference Period as of such date to exceed 2.50 to 1.00.

11.4 Minimum Historical Consolidated EBITDA . The Loan Parties will not permit Historical Consolidated EBITDA to be less than $4,150,000 for the Reference Period ending July 31, 2016.

11.5 Minimum Liquidity . The Loan Parties will not permit Liquidity at any time during the period commencing on July 31, 2015 and continuing through and including July 31, 2016 to be less than $1,000,000.

(h) The Credit Agreement is hereby further amended by (i) deleting Exhibit D thereto in its entirety and substituting therefor the exhibit attached hereto as Exhibit D, and (ii) deleting each of Schedule 8.7, Schedule 8.15 and Schedule 8.20 in their entirety and substituting therefor the schedules attached hereto as Schedule 8.7, Schedule 8.15 and Schedule 8.20.

§4. Ratification, etc. Except as expressly amended hereby, the Credit Agreement and the other Loan Documents are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Amendment and the Credit Agreement shall hereafter be read and construed together as a single document, and all references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended by this Amendment. For the avoidance of doubt, unless specifically modified and amended in this Amendment, the Loan Parties shall comply with all other covenants, including all affirmative, negative and financial covenants, all representations and warranties, and all other provisions of the Credit Agreement, as amended.

§5. Conditions to Effectiveness. The effectiveness of this Amendment is subject to the prior satisfaction of each of the following conditions precedent:

(a) Representations and Warranties . All of the representations and warranties made by the Borrowers herein, whether directly or incorporated by reference, shall be true and correct on the date hereof except to the extent that such representations and warranties relate expressly to an earlier date.

(b) Execution and Delivery of this Amendment . The Borrowers, the Administrative Agent and Bank of America, as the sole Lender, shall have executed and delivered this Amendment.

(c) Execution and Delivery of Confirmation Amendment . The Administrative Agent the Seller Subordinated Debt Holders and Ross S. Rapaport, not individually, but as Trustee of the Peter Baker Life Insurance Trust u/t/a dated July 7, 1992, the John Baker Insurance Trust u/t/a dated July 7, 1992 and the Joan Baker and Henry Baker Irrevocable Trust u/t/a dated December 16, 1991, shall have executed and delivered a confirmation agreement relating to Seller Subordinated Debt in form and substance satisfactory to the Administrative Agent and Bank of America.

(d) Payment of Expenses . The Borrowers shall have paid to the Administrative Agent and its counsel all amounts payable under §6 hereof.

§6. Expenses, Etc. Without limitation of the amounts payable by the Loan Parties under the Credit Agreement and other Loan Documents, the Borrowers agree to pay to the Administrative Agent upon demand an amount equal to any and all out-of-pocket costs or expenses (including reasonable legal fees and disbursements) incurred or sustained by the Administrative Agent in connection with the preparation of this Amendment and related matters.

§7. Release . To induce the Administrative Agent and Bank of America to enter into this Amendment, each of the Borrowers, on behalf of itself and its agents, attorneys, representatives, officers, directors, employees, shareholders, subsidiaries, affiliates, successors and assigns (collectively with each Borrower, “ Releasors ” and individually a “ Releasor ”) hereby releases, acquits and forever discharges each Releasee (as hereinafter defined) from any and all liabilities, claims, demands, actions or causes of action of any kind (if any there be), whether absolute or contingent, due or to become due, disputed or undisputed, liquidated or unliquidated, at law or in equity, or known or unknown (collectively, “ Claims ”) that any Releasor now has, ever had or hereafter may have against the Administrative Agent or any Lender in any capacity, or any officer, director, employee, agent, attorney, representative, subsidiary, affiliate and shareholder of the Administrative Agent or any Lender (collectively with the Administrative Agent and the Lenders, the “ Releasees ”) based on acts (other than acts of willful misconduct or gross negligence by any Releasee), transactions, or circumstances occurring on or before the date of this Amendment that relate to: (i) any Loan Documents; (ii) any transaction, action or omission contemplated thereby or concluded thereunder; or (iii) any aspect of the dealings or relationships between or among any of the Borrowers, on the one hand, and the Administrative Agent and/or any Lender, on the other hand, relating to any Loan Document or any transaction, action or omission contemplated thereby or concluded thereunder. The provisions of this §7 shall be binding upon each of the Borrowers and shall inure to the benefit of the Releasees and each of their respective representatives, officers, directors, employees, agents, attorneys, shareholders, subsidiaries, affiliates, heirs, executors, administrators, successors and assigns. Each of the Borrowers hereby covenants that it will not sue, sue further, or otherwise prosecute in any way any Claim, person, or entity released in this Amendment on account of or otherwise relating to any Claims released herein.

§8. Miscellaneous Provisions .

(a) Upon satisfaction of the conditions precedent set forth in §5, this Amendment shall become binding among the parties hereto as of the day and year set forth above (the “ Amendment Effective Date ”). Until this Amendment becomes effective, the terms of the Credit Agreement prior to its amendment hereby shall remain in full force and effect.

(b) This Amendment is intended to take effect under, and shall be construed according to and governed by, the laws of the State of New York (excluding the laws applicable to conflicts or choice of law).

(c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Administrative Agent or the Lenders under the Credit Agreement, nor constitute a waiver of any provision of the Credit Agreement. This Amendment shall constitute a Loan Document for all purposes of the Credit Agreement.

(d) This Amendment is not intended by the parties to be, and shall not be construed to be, a novation of the Credit Agreement or an accord and satisfaction in regard thereto.

(e) This Amendment shall be binding upon and inure to the benefit of the parties hereto, their respective successors, successors-in-titles, and assigns. This Amendment sets forth the entire understanding and agreement of the parties with respect to the matters set forth herein, including the amendments set forth herein, and this Amendment supersedes any prior or contemporaneous understanding or agreement of the parties as to any such amendment or waiver of the provisions of the Credit Agreement or any Loan Document, except for any such agreement that has been set forth in writing and executed by the Loan Parties, the Administrative Agent and the Required Lenders. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. A facsimile or other electronic transmission of an executed counterpart shall have the same effect as the original executed counterpart.

[Remainder of page intentionally blank; Signature Pages follow]

IN WITNESS WHEREOF, each of the parties hereto have caused this Amendment to be executed in its name and behalf by its duly authorized officer as of the date first written above.

CRYSTAL ROCK HOLDINGS, INC.

By:

/s/ Peter K. Baker

Name:

Peter K. Baker

Title:

Chief Executive Officer

CRYSTAL ROCK LLC

By:

/s/ Peter K. Baker

Name:

Peter K. Baker

Title:

Manager and Chief Executive Officer

BANK OF AMERICA, N.A ., as Administrative Agent and Lender

By:

/s/ Donald K. Bates

Name:

Donald K. Bates

Title:

Senior Vice President

Date: September 14, 2016	/s/ Peter K Baker
	Peter K. Baker, Chief Executive Officer

Date: September 14, 2016	/s/ David Jurasek
	David Jurasek, Chief Financial Officer