NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2017 AND 2016
(Unaudited)
NOTE
1 - BUSINESS ACTIVITIES:
Coffee
Holding Co., Inc. (the “Company”) conducts wholesale coffee operations, including manufacturing, roasting, packaging,
marketing and distributing roasted and blended coffees for private labeled accounts and its own brands, and it sells green coffee.
The Company also manufactures and sells coffee roasters. The Company’s core product, coffee, can be summarized and divided
into three product categories (“product lines”) as follows:
Wholesale
Green Coffee:
unroasted raw beans imported from around the world and sold to large and small roasters and coffee shop
operators;
Private
Label Coffee:
coffee roasted, blended, packaged and sold under the specifications and names of others, including supermarkets
that want to have their own brand name on coffee to compete with national brands; and
Branded
Coffee:
coffee roasted and blended to the Company’s own specifications and packaged and sold under the Company’s
eight proprietary and licensed brand names in different segments of the market.
The
Company’s private label and branded coffee sales are primarily to customers that are located throughout the United States
with limited sales in Canada and certain countries in Asia. Such customers include supermarkets, wholesalers, and individually-owned
and multi-unit retailers. The Company’s unprocessed green coffee, which includes over 90 specialty coffee offerings, is
sold primarily to specialty gourmet roasters and to coffee shop operators in the United States with limited sales in Australia,
Canada, England and China.
The
Company’s wholesale green, private label, and branded coffee product categories generate revenues and cost of sales individually
but incur selling, general and administrative expenses in the aggregate. There are no individual product managers and discrete
financial information is not available for any of the product lines. The Company’s product portfolio is used in one business
and it operates and competes in one business activity and economic environment. In addition, the three product lines share customers,
manufacturing resources, sales channels, and marketing support. Thus, the Company considers the three product lines to be one
single reporting segment.
NOTE
2 - BASIS OF PRESENTATION:
The
following (a) condensed consolidated balance sheet as of October 31, 2016, which has been derived from audited financial statements,
and (b) the unaudited interim condensed financial statements have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) have been
condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate
to make the information not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the Company’s latest shareholders’ annual
report on Form 10-K filed with the SEC on January 27, 2017 for the fiscal year ended October 31, 2016 (“Form 10-K”).
In
the opinion of management, all adjustments (which include normal and recurring nature adjustments) necessary to present a fair
statement of the Company’s financial position as of July 31, 2017, and results of operations for the three and nine months
ended July 31, 2017 and the cash flows for the nine months ended July 31, 2017 as applicable, have been made.
The
results of operations for the three and nine months ended July 31, 2017 are not necessarily indicative of the operating results
for the full fiscal year or any future periods.
The
condensed consolidated financial statements include the accounts of the Company, the Company’s subsidiaries, Organic Products
Trading Company, LLC (“OPTCO”), Sonofresco, LLC (“SONO”), Comfort Foods, Inc (“CFI”) and Generations
Coffee Company, LLC (“GCC”), the entity formed as a result of the Company’s joint venture with Caruso’s
Coffee, Inc. The Company owns a 60% equity interest in GCC. All significant inter-company transactions and balances have been
eliminated in consolidation.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2017 AND 2016
(Unaudited)
NOTE
3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AFFECTING THE COMPANY:
The
FASB has issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,
which changes
how deferred taxes are classified on organizations’ balance sheets. The ASU eliminates the current requirement for organizations
to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations
will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations
that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for
annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies, not-for-profit
organizations, and employee benefit plans, the amendments are effective for financial statements issued for annual periods beginning
after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The adoption of this standard
is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In
July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which applies
to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity
should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement
is unchanged for inventory that is measured using last-in, last-out (“LIFO”). This ASU is effective for annual and
interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning
of an interim or annual reporting period. The Company is currently evaluating the impact of adopting this guidance.
The
FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-01 requires that a lessee recognize the assets and liabilities that arise
from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the
lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with
a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize
lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning
of the earliest period presented using a modified retrospective approach.
Public
business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Nonpublic business entities should apply
the amendments for fiscal years beginning after December 15, 2019 (i.e., January 1, 2020, for a calendar year entity), and interim
periods within fiscal years beginning after December 15, 2020. Early application is permitted for all public business entities
and all nonpublic business entities upon issuance. The Company is currently evaluating the impact of adopting this guidance.
On
March 17, 2016 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-08 that amends the guidance for
Principle versus Agent Considerations (Reporting Revenue Gross versus Net)
in ASC
2014-09,
Revenue from Contracts with Customers (Topic 606),
issued in May 2014. The ASU clarifies that the principal or
agent determination is based on whether the entity controls the goods or services before they are transferred to its customer.
Public entities must apply ASU 2016-08 to annual reporting periods beginning after December 15, 2017, including interim reporting
periods within that reporting period. Nonpublic entities will be required to adopt the amendments for annual reporting periods
beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. Earlier
application is permitted for both types of entities only as of annual reporting periods beginning after December 15, 2016, including
interim reporting periods within that reporting period. Early adoption prior to that date is not permitted. The Company is evaluating
the effect that ASU 2016-08 will have on its results of operations, financial position or cash flows.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2017 AND 2016
(Unaudited)
In
May 2014 the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which is a new standard related to revenue
recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised services or goods
in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In
addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from
customer contracts. The standard must be adopted using either a full retrospective approach for all periods presented in the period
of adoption or a modified retrospective approach. In July 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers
- Deferral of the Effective Date
, which defers the implementation of this new standard to be effective for fiscal years beginning
after December 15, 2017. Early adoption is permitted effective January 1, 2017. In March 2016, the FASB issued ASU 2016-08,
Principal
versus Agent Considerations
, which clarifies the implementation guidance on principal versus agent considerations in the new
revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued ASU 2016-10,
Identifying Performance Obligations
and Licensing
, and in May 2016, the FASB issued ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients,
which
amend certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. We are currently evaluating which transition
approach we will utilize and the impact of adopting this accounting standard on our financial statements.
In July 2017, the FASB
issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and
Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features, II. Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception” which addresses narrow issues identified as a result of the complexity associated with
applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities and equity.
Part I of this Update addresses the complexity of accounting for certain financial instruments with down round features. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this Update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in Part I of this Update change the classification analysis of
certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain
financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity
classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing
disclosure requirements for equity-classified instruments. The amendments in Part II of this Update recharacterize the indefinite
deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception.
These amendments in Part I of this update are effective for annual and interim periods beginning after December 15, 2018, early
adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in
Part I of this Update should be applied in either of the following ways: (1) Retrospectively to outstanding financial instruments
with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning
of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective. (2) Retrospectively
to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the
guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require
any transition guidance because those amendments do not have an accounting effect.
NOTE
4 - PURCHASE OF BUSINESS:
Pursuant
to the terms of a Stock Purchase Agreement dated February 23, 2017, by and among the Company, Comfort Foods, Inc., a Massachusetts
corporation (“CFI”), Stephen J. Beattie (the “Trustee”), as trustee of the Stephen J. Beattie Revocable
Trust of 2013 (the “Trust”) and Victor Janovich (together, with the Trustee on behalf of the Trust, the “Sellers”),
the Company, acquired all of the outstanding capital stock of CFI. The transaction was accounted for as a business combination
and was not a significant acquisition for the Company. The purpose of the transaction was to expand the Company’s presence
in the northeast. The Company purchased the shares of capital stock for a purchase price of $2,300,000 in cash, subject to the
holdback of $25,000 for a six month period following the consummation of the transaction to secure the Sellers’ indemnification
obligations. In addition, immediately following consummation of the transaction, the Company also paid all of the existing bank
debt of CFI, totaling approximately $605,173.
As
part of the transaction, the employees of CFI remained employees of CFI, with the exception of Stephen Beattie, CFI’s then
Chief Executive Officer. Mr. Beattie entered into an advisory agreement (the “Advisory Agreement”) with CFI, dated
as of February 23, 2017, pursuant to which Mr. Beattie agreed to provide services to CFI on an independent contractor basis, to
ensure continuity of the business and its operations in Massachusetts. The initial term of the Advisory Agreement commenced on
April 1, 2017 and was set to expire on December 31, 2017, unless terminated earlier in accordance with the terms and conditions
of the Advisory Agreement. On September 6, 2017, the Company terminated the Advisory Agreement. Pursuant to the terms of the Advisory
Agreement, Mr. Beattie was paid $5,000 per month.
The
following table summarizes the assets purchased and liabilities assumed:
Assets acquired:
|
|
|
|
|
Cash
|
|
$
|
11,898
|
|
Accounts receivable
|
|
|
584,918
|
|
Inventory
|
|
|
1,116,906
|
|
Prepaid expenses
|
|
|
32,681
|
|
Equipment
|
|
|
229,597
|
|
Customer List
|
|
|
170,000
|
|
Goodwill
|
|
|
1,359,502
|
|
Security deposit
|
|
|
26,551
|
|
Less:
liabilities assumed
|
|
|
(626,880
|
)
|
Net
assets acquired:
|
|
$
|
2,905,173
|
|
Purchase of assets funded by:
|
|
|
|
|
Cash
paid
|
|
$
|
2,905,173
|
|
The
operations of CFI have been included in the Company’s consolidated statement of operations since the date of the acquisition
on February 23, 2017. The total revenue included for the period is $1,783,986.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2017 AND 2016
(Unaudited)
NOTE
5 - PREPAID GREEN COFFEE:
The
balance represents advance payments made by OPTCO to several coffee growing cooperatives for the purchase of green coffee. Interest
is charged to the cooperatives for these advances. Interest earned was $29,377 and $30,889 for the nine months ended July 31,
2017 and 2016, respectively. The prepaid coffee balance was $280,254 at July 31, 2017 and $435,577 at October 31, 2016.
NOTE
6 - ACCOUNTS RECEIVABLE:
Trade
accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts
for estimated losses resulting from the inability of its customers to make required payments. Management considers the following
factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history
with the customer, current economic industry trends, and changes in customer payment terms. Past due balances over 60 days and
other higher risk amounts are reviewed individually for collectability. If the financial condition of the Company’s customers
were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s
assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation
allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a
charge to the valuation allowance and a credit to accounts receivable.
The
reserve for sales discounts represents the estimated discount that customers will take upon payment. The reserve for other allowances
represents the estimated amount of returns, slotting fees and volume based discounts estimated to be incurred by the Company from
its customers. The allowances are summarized as follows:
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
Allowance for doubtful accounts
|
|
$
|
65,000
|
|
|
$
|
65,000
|
|
Reserve for other allowances
|
|
|
35,000
|
|
|
|
35,000
|
|
Reserve for sales discounts
|
|
|
44,000
|
|
|
|
44,000
|
|
Totals
|
|
$
|
144,000
|
|
|
$
|
144,000
|
|
NOTE
7 - INVENTORIES:
Inventories
at July 31, 2017 and October 31, 2016 consisted of the following:
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
Packed coffee
|
|
$
|
2,255,115
|
|
|
$
|
1,804,633
|
|
Green coffee
|
|
|
11,682,840
|
|
|
|
11,434,024
|
|
Roasters and parts
|
|
|
212,007
|
|
|
|
210,007
|
|
Packaging supplies
|
|
|
1,513,757
|
|
|
|
827,626
|
|
Totals
|
|
$
|
15,663,719
|
|
|
$
|
14,276,290
|
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2017 AND 2016
(Unaudited)
NOTE
8 - COMMODITIES HELD BY BROKER:
The
Company has used, and intends to continue to use in a limited capacity, short term coffee futures and options contracts primarily
for the purpose of partially hedging and minimizing the effects of changing green coffee prices and to reduce our cost of sales.
The commodities held at broker represent the market value of the Company’s trading account, which consists of options and
future contracts for coffee held with a brokerage firm. The Company uses options and futures contracts, which are not designated
or qualifying as hedging instruments, to partially hedge the effects of fluctuations in the price of green coffee beans. Options
and futures contracts are recognized at fair value in the condensed consolidated financial statements with current recognition
of gains and losses on such positions. The Company’s accounting for options and futures contracts may increase earnings
volatility in any particular period.
The
Company has open position contracts held by the broker, which are summarized as follows:
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
Option Contracts
|
|
$
|
227,250
|
|
|
$
|
(83,753
|
)
|
Future Contracts
|
|
|
551,306
|
|
|
|
218,475
|
|
Total Commodities
|
|
$
|
778,556
|
|
|
$
|
134,722
|
|
The
Company classifies its options and future contracts as trading securities and accordingly, unrealized holding gains and losses
are included in earnings and not reflected as a net amount as a separate component of stockholders’ equity.
At
July 31, 2017, the Company held 116 futures contracts (generally with terms of three to four months) for the purchase of 4,350,000
pounds of green coffee at a weighted average price of $1.27 per pound. The fair market value of coffee applicable to such contracts
was $1.39 per pound at that date. At July 31, 2017, the Company did not have any options.
At
October 31, 2016, the Company held 22 futures contracts (generally with terms of three to four months) for the purchase of 825,000
pounds of green coffee at a weighted average price of $1.45 per pound. The fair market value of coffee applicable to such contracts
was $1.64 per pound at that date. At October 31, 2016, the Company did not have any options.
The
Company recorded realized and unrealized gains and losses respectively, on these contracts as follows:
|
|
Three
Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
Gross realized gains
|
|
$
|
323,196
|
|
|
$
|
681,200
|
|
Gross realized losses
|
|
|
(1,129,690
|
)
|
|
|
(23,379
|
)
|
Unrealized
(loss) gain
|
|
|
1,379,165
|
|
|
|
(97,521
|
)
|
Total
|
|
$
|
572,671
|
|
|
$
|
560,300
|
|
|
|
Nine
Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
Gross realized gains
|
|
$
|
1,050,844
|
|
|
$
|
1,247,113
|
|
Gross realized losses
|
|
|
(1,630,591
|
)
|
|
|
(924,507
|
)
|
Unrealized
(loss) gain
|
|
|
643,834
|
|
|
|
591,566
|
|
Total
|
|
$
|
64,087
|
|
|
$
|
914,172
|
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2017 AND 2016
(Unaudited)
NOTE
9 - LINE OF CREDIT:
On
March 10, 2015, the Company entered into a loan modification agreement (the “Modification Agreement”) with its lender
Sterling National Bank (“Sterling”) which modified the terms of the financing agreement with Sterling previously entered
into on February 17, 2009 (the “Original Financing Agreement”). Prior to the Modification Agreement, the Original
Financing Agreement, as amended, provided for a credit facility in which the Company had a revolving line of credit for a maximum
of $7,000,000 (the “Company Loan Facility”). On February 3, 2011, the Company amended the Original Financing Agreement
to create a sublimit within the revolving line of credit in the form of a $300,000 term loan for the benefit of GCC. The Original
Financing Agreement was set to expire on March 31, 2015. Pursuant to the Modification Agreement, the Original Financing Agreement
was modified to, among other things, (i) extend the term of the Original Financing Agreement until February 28, 2017; (ii) increase
the maximum amount of the Company Loan Facility from $7,000,000 to $9,000,000; (iii) reduce the interest rate on the average unpaid
balance of the line of credit from an interest rate equal to a per annum reference rate of 3.75% to an interest rate per annum
equal to the Wall Street Journal Prime Rate; and (iv) require the Company to pay, upon the occurrence of certain termination events,
a prepayment premium of 0.50% of the maximum amount of the credit facility in effect as of the date of the termination event.
The line was extended through March 31, 2017 and again through April 30, 2017.
Also
on March 10, 2015, the Company, as guarantor, and OPTCO, as borrower, entered into a new loan facility agreement with Sterling.
The OPTCO loan facility is a revolving line of credit for a maximum of $3,000,000 (the “OPTCO Financing Agreement”).
The OPTCO Financing Agreement was set to expire on February 28, 2017 but was extended through March 31, 2017 and again through
April 30, 2017.
On
April 25, 2017 the Company and OPTCO (together with the Company, collectively referred to herein as the “Borrowers”)
entered into an Amended and Restated Loan and Security Agreement (the “A&R Loan Agreement”) with Sterling, which
consolidated the Company Financing Agreement and the OPTCO Financing Agreement.
Pursuant
to the A&R Loan Agreement, the terms of each of the Company Financing Agreement and the OPTCO Financing Agreement were amended
and restated to, among other things: (i) provide for a new Maturity Date of February 28, 2018; (ii) consolidate the principal
amounts of the Company Financing Agreement and the OPTCO Financing Agreement to provide for a maximum principal amount limit of
$12,000,000 for the Borrowers, collectively,
provided that
OPTCO is limited to a $3,000,000 maximum principal amount sublimit;
(iii) expand the borrowing base to include, along with 85% of eligible accounts receivable, up to the lesser of $2,000,000 as
to the Company and $1,500,000 as to OPTCO; (iv) effective March 1, 2017, converted the interest rate on the average unpaid balance
of the A&R Loan Facility from an interest rate per annum equal to the Wall Street Journal Prime Rate to an interest rate per
annum equal to the sum of the LIBOR rate plus 2.4%; (v) require the Company and OPTCO to pay, collectively, upon the occurrence
of certain termination events, a prepayment premium of 1.0% (as opposed to the 0.5% under the OPTCO Financing Agreement) of the
maximum amount of the A&R Loan Facility in effect as of the date of the termination event; (vi) eliminate the overadvance
fee; and (vii) establish a Letter of Credit Facility (as defined in the A&R Loan Agreement) with a maximum obligation amount
of $1,000,000, and subject to other terms and conditions described therein.
Also
on April 25, 2017, SONO and CFT (collectively referred to herein as the “Guarantors”), entered into a Guaranty Agreement
(the “Guaranty Agreement”) in connection with the Loan Agreement. The Guaranty Agreement was provided as an inducement
to Sterling to extend credit to Borrowers in exchange for the Guarantors’ unconditional guarantee of the payment and performance
obligations of the Borrowers under the Loan Agreement, as further defined in the Guaranty Agreement.
Each
of the Company 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 Loan Facility also requires that we maintain
a minimum working capital at all times, and the A&R Loan Agreement requires that the Borrowers, on a consolidated basis, maintain
a minimum working capital at all times and achieve a minimum net profit amount as of fiscal year end during the term of the A&R
Loan Agreement. The Company and OPTCO, as applicable were in compliance with all required financial covenants at July 31, 2017
and October 31, 2016.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2017 AND 2016
(Unaudited)
Each
of the Company Loan Facility and the A&R Loan Agreement is secured by all tangible and intangible assets of the Company. Other
than as amended and restated by the A&R Loan Agreement, the Company Financing Agreement and the OPTCO Financing Agreement
remains in full force and effect.
As
of July 31, 2017 and October 31, 2016, the outstanding balance under the bank line of credit was $7,406,325 and $6,958,375, respectively.
NOTE
10 - INCOME TAXES:
The
Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities
to be computed for temporary differences between the financial statement and tax basis of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The income tax provision or benefit is the tax incurred for the period plus or minus the change
during the period in deferred tax assets and liabilities.
The
Company adopted FASB authoritative guidance for accounting for uncertainty in income taxes. As of July 31, 2017 and October 31,
2016, the Company did not have any unrecognized tax benefits or open tax positions. The Company’s practice is to recognize
interest and/or penalties related to income tax matters in income tax expense. As of July 31, 2017 and October 31, 2016, the Company
had no accrued interest or penalties related to income taxes. The Company currently has no federal or state tax examinations in
progress.
The
Company files a U.S. federal income tax return and California, Colorado, New Jersey, New York, Kansas, Oregon, Rhode Island, South
Carolina, Rhode Island, Virginia, Connecticut, Michigan and Texas state tax returns. The Company’s federal income tax return
is no longer subject to examination by the federal taxing authority for the years before fiscal 2013. The Company’s California,
Colorado and New Jersey income tax returns are no longer subject to examination by their respective taxing authorities for the
years before fiscal 2010. The Company’s Oregon and New York income tax returns are no longer subject to examination by their
respective taxing authorities for the years before fiscal 2011.
NOTE
11 - EARNINGS PER SHARE:
The
Company presents “basic” and “diluted” earnings per common share pursuant to the provisions included in
the authoritative guidance issued by FASB, “Earnings per Share,” and certain other financial accounting pronouncements.
Basic earnings per common share were computed by dividing net income by the sum of the weighted-average number of common shares
outstanding. Diluted earnings per common share is computed by dividing the net income by the weighted-average number of common
shares outstanding plus the dilutive effect of common shares issuable upon exercise of potential sources of dilution.
The
weighted average common shares outstanding used in the computation of basic and diluted earnings per share were 5,861,777 and
5,859,918 for the nine and three months ended July 31, 2017, respectively and 6,117,610 and 6,056,420 for the nine and three months
July 31, 2016, respectively.
COFFEE
HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2017 AND 2016
(Unaudited)
NOTE
12 - ECONOMIC DEPENDENCY:
Approximately
25% of the Company’s sales were derived from four customers during the nine months ended July 31, 2017. These customers
also accounted for approximately $3,193,000 of the Company’s accounts receivable balance at July 31, 2017. Approximately
33% of the Company’s sales were derived from one customer during the nine months ended July 31, 2016. This customer also
accounted for approximately $8,588,000 of the Company’s accounts receivable balance at July 31, 2016. Concentration of credit
risk with respect to other trade receivables is limited due to the short payment terms generally extended by the Company, by ongoing
credit evaluations of customers, and by maintaining an allowance for doubtful accounts that management believes will adequately
provide for credit losses.
For
the nine months ended July 31, 2017, approximately 39% of the Company’s purchases were from eight vendors. These vendors
accounted for approximately $354,000 of the Company’s accounts payable at July 31, 2017. For the nine months ended July
31, 2016, approximately 51% of the Company’s purchases were from four vendors. These vendors accounted for approximately
$520,000 of the Company’s accounts payable at July 31, 2016. Management does not believe the loss of any one vendor would
have a material adverse effect of the Company’s operations due to the availability of many alternate suppliers.
Approximately
24% of the Company’s sales were derived from four customers during the three months ended July 31, 2017. Approximately 23%
of the Company’s sales were derived from one customer during the three months ended July 31, 2016.
For
the three months ended July 31, 2017, approximately 27% of the Company’s purchases were from five vendors. For the three
months ended July 31, 2016, approximately 42% of the Company’s purchases were from four vendors.
NOTE
13 - RELATED PARTY TRANSACTIONS:
The
Company has engaged its 40% partner in GCC as an outside contractor (the “Partner”). Included in contract labor expense
are expenses incurred from the Partner during the three and nine months ended July 31, 2017 of $102,147 and $341,197, respectively,
for the processing of finished goods.
An
employee of one of the top eight vendors is a director of the Company. Purchases from that vendor totaled approximately $4,787,000
and $2,587,000 for the nine and three months ended July 31, 2017, respectively and $7,441,000 and $1,885,000 for the nine and
three months ended July 31, 2016, respectively. The corresponding accounts payable balance to this vendor was approximately $72,000
and $303,000 at July 31, 2017 and 2016, respectively.
In
January 2005, the Company established the “Coffee Holding Co., Inc. Non-Qualified Deferred Compensation Plan.” Currently,
there is only one participant in the plan: Andrew Gordon, the Company’s Chief Executive Officer. Within the plan guidelines,
this employee is deferring a portion of his current salary and bonus. The assets are held in a separate trust. The deferred compensation
payable represents the liability due to an officer of the Company. The assets are included in the Deposits and other assets in
the accompanying balance sheets. The deferred compensation asset and liability at July 31, 2017 and October 31, 2016 were $509,170
and $489,668, respectively.
NOTE
14 - STOCKHOLDERS’ EQUITY:
a.
Treasury Stock
. The Company utilizes the cost method of accounting for treasury stock. The cost of reissued shares is determined
under the last-in, first-out method. The Company did not purchase any shares during the three months ended July 31, 2017. The
Company purchased 337,269 shares for $1,754,878 during the year ended October 31, 2016.
COFFEE
HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2017 AND 2016
(Unaudited)
b.
Share Repurchase Program.
On January 24, 2014, the Company announced that the Board of Directors had approved a share repurchase
program (the “2014 Share Repurchase Program”) pursuant to which the Company may repurchase up to $1 million of its
outstanding shares of common stock from time to time on the open market and in privately negotiated transactions subject to market
conditions, share price and other factors. The 2014 Share Repurchase Program may be discontinued or suspended at any time. The
Company does not intend to make any further repurchases under the 2014 Share Repurchase Program and the 2014 Share Repurchase
Program is terminated. As of October 31, 2016, pursuant to the terms of the 2014 Share Repurchase Program, the Company had repurchased
156,415 shares of outstanding common stock in an amount equal in value to $995,729. On September 29, 2015, the Company announced
that the Board of Directors had approved a share repurchase program (the “2015 Share Repurchase Program”) pursuant
to which the Company may repurchase up to $2 million of the outstanding common stock from time to time on the open market and
in privately negotiated transactions subject to market conditions, share price and other factors. The timing and amount of any
shares repurchased will be determined based on the Company’s evaluation of market conditions and other factors. The 2015
Share Repurchase Program may be discontinued or suspended at any time. Pursuant to the terms of the 2015 Share Repurchase Program,
the Company purchased 3,384 shares during the quarter ended April 30, 2017 and the Company purchased 337,269 shares during the
year ended October 31, 2016 for $1,754,878. Also pursuant to the terms of the 2015 Share Repurchase Program, the Company had repurchased
53,687 shares of outstanding common stock in an amount equal in value to $226,850 during the year ended October 31, 2015. The
Company does not intend to make any further repurchases under the 2015 Share Repurchase Program and the 2015 Share Repurchase
Program is terminated.
NOTE
15 - SUBSEQUENT EVENTS:
On
September 13, 2017, the Company announced that the Board of Directors had approved a share repurchase program (the “2017
Share Repurchase Program”) pursuant to which the Company may repurchase up to $2 million of its outstanding shares of common
stock from time to time on the open market and in privately negotiated transactions subject to market conditions, share price
and other factors. The 2017 Share Repurchase Program may be discontinued or suspended at any time.